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Table of Contents

As filed with the Securities and Exchange Commission on September 25, 2020.

Registration No.             


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM F-10
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

CURALEAF HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)

British Columbia, Canada   2833   98-1461045
(Province or other Jurisdiction of
Incorporation or Organization 		  (Primary Standard Industrial
Classification Code Number) 		  (I.R.S. Employer Identification
Number, if applicable)

666 Burrard Street, Suite 1700, Vancouver, British Columbia V6C 2X8; (781)451-0351
(Address and telephone number of Registrant's principal executive offices)

Curaleaf, Inc.
301 Edgewater Place, Suite 405
Wakefield, MA 01880
(781) 451-0351
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)

Copies to:

Christopher J. Barry
Dorsey & Whitney LLP
701 Fifth Avenue
Suite 6100
Seattle, Washington
98104-7043
(206)903-8815

Approximate date of commencement of proposed sale of the securities to the public:
As soon as practicable after this registration statement becomes effective

British Columbia, Canada
(Principal jurisdiction regulating this offering)

It is proposed that this filing shall become effective (check appropriate box below):

A.
o  upon filing with the Commission, pursuant to Rule 467(a) (if in connection with an offering being made contemporaneously in the United States and Canada).

B.
ý  at some future date (check the appropriate box below)

1.
o  pursuant to Rule 467(b) on (            ) at (            ) (designate a time not sooner than 7 calendar days after filing).

2.
o  pursuant to Rule 467(b) on (            ) at (            ) (designate a time 7 calendar days or sooner after filing) because the securities regulatory authority in the review jurisdiction has issued a receipt or notification of clearance on (            ).

3.
o  pursuant to Rule 467(b) as soon as practicable after notification of the Commission by the Registrant or the Canadian securities regulatory authority of the review jurisdiction that a receipt or notification of clearance has been issued with respect hereto.

4.
ý  after the filing of the next amendment to this Form (if preliminary material is being filed).

          If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to the home jurisdiction's shelf prospectus offering procedures, check the following box. ý

          CALCULATION OF REGISTRATION FEE

           
 
Title of Each Class of Securities
to be Registered
  Amount to be
Registered(1)
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration
Fee(2)
 

Subordinate Voting Shares

           
 

Debt Securities

           
 

Subscription Receipts

           
 

Warrants

           
 

Units

           
 

Total

  US$1,000,000,000   US$1,000,000,000   US$129,800

 

(1)
There are being registered under this registration statement such indeterminate number of Subordinate Voting Shares, Debt Securities, Subscription Receipts, Warrants to Purchase Securities and Units of the Registrant as shall have an aggregate initial offering price of US$1,000,000,000. Any securities registered by this registration statement may be sold separately or as units with other securities registered under this registration statement. The proposed maximum initial offering price per security will be determined, from time to time, by the Registrant in connection with the sale of the securities under this registration statement.

(2)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457 of the Securities Act of 1933, as amended (the "U.S. Securities Act").

          The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registration Statement shall become effective as provided in Rule 467 under the U.S. Securities Act or on such date as the Commission, acting pursuant to Section 8(a) of the U.S. Securities Act, may determine.

   

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PART I

INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the United States Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.

Information has been incorporated by reference in this preliminary short form base shelf prospectus from documents filed with securities commissions or similar authorities in Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the General Counsel of Curaleaf Holdings, Inc., at 666 Burrard Street, Suite 1700, Vancouver, British-Columbia, V6C 2X8, telephone (781) 451-0351, and are also available electronically at www.sedar.com.

PRELIMINARY SHORT FORM BASE SHELF PROSPECTUS

New Issue and/or Secondary Offering   September 25, 2020

GRAPHIC

CURALEAF HOLDINGS, INC.

US$1,000,000,000
Subordinate Voting Shares
Debt Securities
Subscription Receipts
Warrants
Units

        Curaleaf Holdings, Inc. ("Curaleaf" or the "Corporation") may from time to time offer and issue the following securities: (i) subordinate voting shares of the Corporation ("Subordinate Voting Shares"); (ii) debt securities of the Corporation ("Debt Securities"); (iii) subscription receipts ("Subscription Receipts") exchangeable for Subordinate Voting Shares and/or other securities of the Corporation; (iv) warrants exercisable to acquire Subordinate Voting Shares and/or other securities of the Corporation ("Warrants"); and (v) securities comprised of more than one of Subordinate Voting Shares, Debt Securities, Subscription Receipts and/or Warrants offered together as a unit ("Units"), or any combination thereof having an offer price of up to US$1,000,000,000 in aggregate (or the equivalent thereof, at the date of issue, in any other currency or currencies, as the case may be) at any time during the 25-month period that this short form base shelf prospectus (including any amendments hereto, the "Prospectus") remains valid. The Subordinate Voting Shares, Debt Securities, Subscription Receipts, Warrants and Units (collectively, the "Securities") offered hereby may be offered in one or more offerings, separately or together, in separate series, in amounts, at prices and on terms to be set forth in one or more prospectus supplements (collectively or individually, as the case may be, "Prospectus Supplements"). One or more securityholders of the Corporation may also offer and sell Securities under this Prospectus. See "The Selling Securityholders".

        The Securities may be sold, from time to time in one or more transactions at a fixed price or prices which may be changed or at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices, including sales in transactions that are deemed to be "at-the-market distributions" as defined in National Instrument 44-102—Shelf Distributions ("NI 44-102"), including sales made directly on the Canadian Securities Exchange (the "CSE") or other existing trading markets for the Securities, and as set forth in an accompanying Prospectus Supplement. See "Plan of Distribution".

        The issued and outstanding Subordinate Voting Shares are listed and posted for trading on the CSE under the symbol "CURA" and on the OTCQX® Best Market by OTC Markets Group (the "OTCQX") under the symbol "CURLF". On September 24, 2020, the last trading day prior to the date of this Prospectus, the closing price per Subordinate Voting Share on the CSE was CDN$9.17 and on the OTCQX was $6.87. Unless otherwise specified in the applicable Prospectus Supplement, the Debt Securities, Subscription Receipts, Warrants and Units will not be listed on any securities exchange.

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        There is no market through which these Securities, other than the issued and outstanding Subordinate Voting Shares, may be sold and purchasers may not be able to resell such Securities purchased under this Prospectus. This may affect the pricing of the Securities in the secondary market, the transparency and availability of trading prices, the liquidity of the Securities, and the extent of issuer regulation. See "Risk Factors".

        The specific terms of any offering of Securities will be set forth in the applicable Prospectus Supplement and may include, without limitation, where applicable: (i) in the case of Subordinate Voting Shares, the number of Subordinate Voting Shares being offered, the offering price, whether the Subordinate Voting Shares are being offered for cash, and any other terms specific to the Subordinate Voting Shares being offered; (ii) in the case of Debt Securities, the specific designation, aggregate principal amount, the currency or the currency unit for which the Debt Securities may be purchased, maturity, interest provisions, authorized denominations, offering price, whether the Debt Securities are being offered for cash, the covenants, the events of default, any terms for redemption or retraction, any exchange or conversion rights attached to the Debt Securities, and any other terms specific to the Debt Securities being offered; (iii) in the case of Subscription Receipts, the number of Subscription Receipts being offered, the offering price, whether the Subscription Receipts are being offered for cash, the terms, conditions and procedures for the exchange of the Subscription Receipts into or for Subordinate Voting Shares and/or other securities of the Corporation and any other terms specific to the Subscription Receipts being offered; (iv) in the case of Warrants, the number of such Warrants offered, the offering price, whether the Warrants are being offered for cash, the terms, conditions and procedures for the exercise of such Warrants into or for Subordinate Voting Shares and/or other securities of the Corporation and any other specific terms; and (v) in the case of Units, the number of Units being offered, the offering price, the terms of the Subordinate Voting Shares, Debt Securities, Subscription Receipts and/or Warrants underlying the Units, and any other specific terms.

        All shelf information permitted under applicable securities legislation to be omitted from this Prospectus will be contained in one or more Prospectus Supplements that will be delivered to purchasers together with this Prospectus, except in cases where an exemption from such delivery requirements has been obtained. Each Prospectus Supplement will be incorporated by reference into this Prospectus as at the date of such Prospectus Supplement and only for the purposes of the distribution of the Securities covered by that Prospectus Supplement. You should read this Prospectus and any applicable Prospectus Supplement carefully before you invest in any securities issued pursuant to this Prospectus. This Prospectus may not be used to sell any securities unless accompanied by a Prospectus Supplement. The offerings are subject to approval of certain legal matters on behalf of the Corporation by Stikeman Elliott LLP, with respect to matters of Canadian law.

        The Corporation and/or any selling securityholders may sell the Securities, separately or together: (i) to one or more underwriters or dealers; (ii) through one or more agents; or (iii) directly to one or more purchasers. The Prospectus Supplement relating to a particular offering of Securities will describe the terms of such offering of Securities, including: (i) the terms of the Securities to which the Prospectus Supplement relates, including the type of Security being offered, and the method of distribution; (ii) the name or names of any underwriters, dealers, agents or selling securityholders involved in such offering of Securities; (iii) the purchase price of the Securities offered thereby and the proceeds to, if any, and the expenses borne by, if any, the Corporation from the sale of such Securities; (iv) any commission, underwriting discounts and other items constituting compensation payable to underwriters, dealers or agents; and (v) any discounts or concessions allowed or re-allowed or paid to underwriters, dealers or agents. See "Plan of Distribution".

        No underwriter or dealer involved in an "at-the-market distribution" under this Prospectus, no affiliate of such an underwriter or dealer and no person or company acting jointly or in concert with such an underwriter or dealer will over-allot securities in connection with such distribution or effect any other transactions that are intended to stabilize or maintain the market price of the offered Securities.

        In connection with any offering of the Securities, subject to applicable laws and other than an "at-the-market distribution", the underwriters or agents may over-allot or effect transactions that stabilize or maintain the market price of the offered Securities at a level above that which might otherwise prevail on the open market. Such transactions, if commenced, may be interrupted or discontinued at any time. See "Plan of Distribution".

        An investment in the Securities should only be undertaken by those persons who can afford the total loss of their investment. The Securities should be considered speculative due to various factors, including the nature of the Corporation's business. A prospective purchaser should therefore review this Prospectus and the documents incorporated by reference herein in their entirety and carefully consider the risk factors described or referenced under "Risk Factors" and in the documents incorporated by reference herein prior to investing in such Securities, as well as the information under the heading "Caution Regarding Forward-Looking Statements". Potential investors are advised to consult their own legal counsel and other professional advisors in order to assess tax, legal and other aspects of an investment in Curaleaf.

        No underwriter, dealer or agent has been involved in the preparation of this Prospectus or performed any review of the contents of this Prospectus.

        The Corporation has two classes of issued and outstanding shares: the Subordinate Voting Shares and the multiple voting shares of the Corporation (the "Multiple Voting Shares"). The Subordinate Voting Shares are "restricted securities" within the meaning of such term under applicable Canadian securities laws. Each Subordinate Voting Share is entitled to one vote per Subordinate Voting Share and each Multiple Voting Share is

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currently entitled to 15 votes per Multiple Voting Share on all matters upon which the holders of Subordinate Voting Shares and Multiple Voting Shares are entitled to vote. Holders of Subordinate Voting Shares are entitled to receive, as and when declared by the board of directors of the Corporation (the "Board"), dividends in cash or property of the Corporation. Holders of Multiple Voting Shares are entitled to receive dividends, out of any cash or other assets legally available therefor, pari passu (on an as converted to Subordinate Voting Share basis, assuming conversion of all Multiple Voting Shares into Subordinate Voting Shares at the "Conversion Ratio" (as defined below)) as to dividends and any declaration or payment of any dividend on the Subordinate Voting Shares. No dividend will be declared or paid on the Multiple Voting Shares unless the Corporation simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares, and vice-versa. In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or in the event of any other distribution of assets of the Corporation among its shareholders for the purpose of winding up its affairs, the holders of Subordinate Voting Shares are, subject to the prior rights of the holders of any shares of the Corporation ranking in priority to the Subordinate Voting Shares, entitled to participate rateably along with all other holders of Subordinate Voting Shares and Multiple Voting Shares (on an as-converted to Subordinate Voting Share basis). Each Multiple Voting Share is convertible into one Subordinate Voting Share at any time at the option of the holder thereof, and automatically in certain other circumstances. The holders of Subordinate Voting Shares have certain conversion rights in the event of a take-over bid for the Multiple Voting Shares and each of the Subordinate Voting Shares benefit from contractual provisions that give them certain rights in the event of a take-over bid for the Multiple Voting Shares. See "Description of Share Capital of the Corporation" for further details.

        The directors, chief executive officer and chief financial officer of the Corporation reside outside of Canada and each has appointed SE Corporate Services Ltd., 666 Burrard Street, Suite 1700, Vancouver, British Columbia, V6C 2X8, as his agent for service of process in Canada. Purchasers are advised that it may not be possible for investors to enforce judgments obtained in Canada against any person or company that resides outside of Canada or is incorporated, continued or otherwise organized under the laws of a foreign jurisdiction, even if the party has appointed an agent for service of process.

        The Corporation's head office is located at 301 Edgewater Place, Suite 405, Wakefield, Massachusetts 01880, United States, and the Corporation's registered and records office is located at 666 Burrard Street, Suite 1700 Vancouver, British Columbia, V6C 2X8.

Note to U.S. Holders

        This offering is made by a foreign issuer that is permitted, under a multijurisdictional disclosure system ("MJDS") adopted by the United States, to prepare this Prospectus in accordance with the disclosure requirements of its home country. Prospective investors should be aware that such requirements are different from those of the United States. Financial statements included or incorporated herein, if any, have been prepared in accordance with foreign generally accepted accounting principles, and may be subject to foreign auditing and auditor independence standards, and thus may not be comparable to financial statements of United States companies.

        Prospective investors should be aware that the acquisition of the securities described herein may have tax consequences both in the United States and in Canada. Such consequences for investors who are resident in, or citizens of, the United States may not be described fully herein.

        The enforcement by investors of civil liabilities under U.S. federal securities laws may be affected adversely by the fact that the Corporation is incorporated or organized under the laws of a foreign country, that some of its officers and directors may be residents of a foreign country and that some or all of the underwriters or experts named in the registration statement may be residents of a foreign country.

        THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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        This Prospectus qualifies the distribution of securities of an entity that currently directly derives 100% of its revenues from the cannabis industry in certain U.S. states, which industry is illegal under U.S. Federal Law. As at the date hereof, 100% of the Corporation's operations are in the United States. The Corporation is directly involved (through its subsidiaries) in both the adult-use and medical cannabis industry in the States of Arizona, Arkansas, California, Colorado, Connecticut, Florida, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Utah and Vermont, as permitted within such states under applicable state law which states have regulated such industries, and has partnered with an accredited medical school and obtained a "clinical registrant" license in Pennsylvania. In addition, the Corporation is indirectly involved (through management services which include the use of the "Curaleaf" brand and retail and cultivation and production operations, human resources, finance and accounting, marketing, sales, legal and compliance support services) in both the adult-use and medical cannabis industry in the States of Maine and Massachusetts.

        The cultivation, sale and use of cannabis is illegal under United States federal law pursuant to the Controlled Substance Act (21 U.S.C. §811) (the "CSA"). The United States federal government regulates drugs through the CSA, which places controlled substances, including cannabis, in a schedule. Other than industrial hemp, cannabis is classified as a Schedule I drug. Under United States federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision. Under the CSA, the policies and regulations of the United States federal government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. The United States Food and Drug Administration has not approved cannabis as a safe and effective drug for any indication.

        Despite the current state of the federal law and the CSA, medical cannabis is currently legal in 37 states and Washington D.C., Puerto Rico and Guam for patients with certain qualifying conditions. The States of Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington, and the District of Columbia, have legalized recreational use of cannabis, although the District of Columbia has not legalized commercial sale of cannabis. In early 2018, Vermont became the first state to legalize recreational cannabis by passage in a state legislature, but does not yet allow commercial sales of recreational cannabis.

        Over half of the U.S. states have enacted legislation to legalize and regulate the sale and use of medical cannabis, provided that there are strict limits on the levels of THC. However, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions.

        Accordingly, cannabis is largely regulated at the state level. State laws that permit and regulate the production, distribution and use of cannabis for adult-use or medical purposes are in direct conflict with the CSA. Although certain states authorize medical or adult-use cannabis production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal and any such acts are criminal acts. The Supremacy Clause of the United States Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and in case of conflict between federal and state law, the federal law shall apply.

        On January 4, 2018, former U.S. Attorney General Jeff Sessions issued a memorandum to U.S. district attorneys which rescinded previous guidance from the U.S. Department of Justice specific to cannabis enforcement in the United States, including the Cole Memorandum (as defined herein). With the Cole Memorandum rescinded, U.S. federal prosecutors have been given discretion in determining whether to prosecute cannabis related violations of U.S. federal law. Mr. Sessions resigned on November 7, 2018. Following the brief tenure of Matthew Whitaker as the acting United StatesAttorney General, on December 7, 2018, President Donald Trump announced the nomination of William Barr and, on February 14, 2019, Mr. Barr was confirmed as Attorney General. The Department of Justice under Mr. Barr has not taken a formal position on federal enforcement of laws relating to cannabis. Mr. Barr has stated publicly that his preference would be to have a uniform federal rule against cannabis, but, absent such a uniform rule, his preference would be to permit the existing federal approach of leaving it up to the states to make their own decisions. Attorney General William Barr's statements are not official declarations of the U.S. Department of Justice ("DOJ") policy, are not binding on the DOJ, on any U.S. Attorney, or on the federal courts. Attorney General William Barr may clarify, retract, or contradict these statements. There is no guarantee that the position of the Department of Justice will not change. If the Department of Justice policy was to aggressively pursue financiers or equity owners of cannabis-related business, and United States Attorneys followed such Department of Justice policies through pursuing prosecutions, then the Corporation could face (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries, and (ii) the arrest of its employees, directors, officers, managers and investors, who could face charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the CSA by virtue of providing financial support to state-licensed or permitted cultivators, processors, distributors, and/or retailers of cannabis. Additionally, as has recently been affirmed by U.S. Customs and Border Protection, employees, directors, officers, managers and investors of the Corporation who are not U.S. citizens face the risk of being barred from entry into the United States for life.

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        On February 15, 2019, President Donald Trump signed the 2019 Fiscal Year Appropriations Bill which included the Rohrabacher-Farr Amendment, which prohibits the funding of federal prosecutions with respect to medical cannabis activities that are legal under state law, extending its application until September 30, 2019. Thereafter, as part of the Congressional omnibus-spending bill, Congress renewed, through September 30, 2020, the Rohrabacher-Farr Amendment. There can be no assurances that the Rohrabacher-Farr Amendment will be included in future appropriations bills or budget resolutions. See "United States Regulatory Environment" for additional information.

        The Corporation's objective is to capitalize on the opportunities presented as a result of the changing regulatory environment governing the cannabis industry in the United States. Accordingly, there are a number of significant risks associated with the business of the Corporation. Unless and until the United States Congress amends the CSA with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a significant risk that federal authorities may enforce current U.S. federal law, and the business of the Corporation may be deemed to be producing, cultivating, extracting, or dispensing cannabis or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of federal law in the United States. If the U.S. federal government begins to enforce U.S. federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Corporation's business, results of operations, financial condition and prospects would be materially adversely affected.

        In light of the political and regulatory uncertainty surrounding the treatment of United States cannabis-related activities, on February 8, 2018, the Canadian Securities Administrators published CSA Staff Notice 51-352—(Revised) Issuers with U.S. Marijuana-Related Activities ("Staff Notice 51-352") setting out the Canadian Securities Administrator's disclosure expectations for specific risks facing issuers with cannabis-related activities in the United States. Staff Notice 51-352 includes additional disclosure expectations that apply to all issuers with United States cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the United States cannabis industry.

        For these reasons, the Corporation's investments in the United States cannabis market may subject the Corporation to heightened scrutiny by regulators, stock exchanges, clearing agencies and other United States and Canadian authorities. There are a number of risks associated with the business of the Corporation. See sections entitled "Risk Factors" and "United States Regulatory Environment" in this Prospectus and in the AIF (as hereinafter defined).

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ABOUT THIS SHORT FORM BASE SHELF PROSPECTUS

  1

MEANING OF CERTAIN REFERENCES AND CURRENCY PRESENTATION

 
1

MARKET AND INDUSTRY DATA

 
1

TRADEMARKS AND TRADENAMES

 
2

NON-IFRS AND OTHER MEASURES

 
2

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

 
3

ADDITIONAL INFORMATION

 
4

DOCUMENTS INCORPORATED BY REFERENCE

 
5

DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT

 
7

THE CORPORATION

 
8

RECENT DEVELOPMENTS

 
11

THE SELLING SECURITYHOLDERS

 
16

DESCRIPTION OF SHARE CAPITAL OF THE CORPORATION

 
17

DESCRIPTION OF DEBT SECURITIES

 
22

DESCRIPTION OF SUBSCRIPTION RECEIPTS

 
24

DESCRIPTION OF WARRANTS

 
25

DESCRIPTION OF UNITS

 
26

PLAN OF DISTRIBUTION

 
26

PRIOR SALES

 
28

TRADING PRICE AND VOLUME

 
28

DIVIDENDS

 
28

USE OF PROCEEDS

 
28

CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

 
28

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 
29

EARNINGS COVERAGE RATIO

 
29

CONSOLIDATED CAPITALIZATION

 
29

UNITED STATES REGULATORY ENVIRONMENT

 
30

CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

 
51

RISK FACTORS

 
51

PROMOTER

 
78

MATERIAL CONTRACTS

 
79

LEGAL MATTERS

 
79

AUDITORS, TRANSFER AGENT AND REGISTRAR

 
79

EXEMPTIONS

 
79

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ABOUT THIS SHORT FORM BASE SHELF PROSPECTUS

        An investor should rely only on the information contained in this Prospectus (including the documents incorporated by reference herein) and is not entitled to rely on parts of the information contained in this Prospectus (including the documents incorporated by reference herein) to the exclusion of others. The Corporation has not authorized anyone to provide investors with additional or different information. The Corporation takes no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give readers of this Prospectus. Information contained on, or otherwise accessed through, the Corporation's website shall not be deemed to be a part of this Prospectus (or of any applicable Prospectus Supplement) and such information is not incorporated by reference herein.

        The Corporation is not offering to sell the Securities in any jurisdictions where the offer or sale of the Securities is not permitted. The information contained in this Prospectus (including the documents incorporated by reference herein) is accurate only as at the date of this Prospectus or as at the date that is otherwise set out herein (or as at the date of the document incorporated by reference herein or as at the date that is otherwise set out in such document) and investors should not assume that the information contained in this Prospectus is accurate as of any other date, regardless of the time of delivery (if applicable) of this Prospectus or any sale of the Subordinate Voting Shares, Debt Securities, Subscription Receipts, Warrants and/or Units. The business, financial condition, capital, results of operations and prospects of the Corporation may have changed since those dates. The Corporation does not undertake to update the information contained or incorporated by reference herein, except as required by applicable Canadian securities laws.

        This Prospectus shall not be used by anyone for any purpose other than in connection with an offering of Securities as described in one or more Prospectus Supplements.

        The documents incorporated or deemed to be incorporated by reference herein contain meaningful and material information relating to the Corporation and readers of this Prospectus should review all information contained in this Prospectus, the applicable Prospectus Supplement and the documents incorporated or deemed to be incorporated by reference herein and therein.


MEANING OF CERTAIN REFERENCES AND CURRENCY PRESENTATION

        References to dollars and "$" or "US$" are to United States dollars unless otherwise indicated. All references to "CDN$" and "C$" refer to Canadian dollars. On September 24, 2020, the daily exchange rate for the United States dollar in terms of Canadian dollars, as quoted by the Bank of Canada, was US$1.00 = CDN$1.3374.

        Unless the context otherwise requires, all references in this Prospectus to "Curaleaf", the "Corporation" and "we", "us" and "our" refer to Curaleaf Holdings, Inc., its direct and indirect subsidiary entities on a consolidated basis, and other entities consolidated other than on the basis of ownership.


MARKET AND INDUSTRY DATA

        The Corporation has obtained the market and industry data and forecasts presented in this Prospectus (including the documents incorporated by reference herein) from a combination of internal surveys, third party information and the estimates of the Corporation's management. There are limited sources that report on the Corporation's markets and industries. As such, much of the market and industry data presented in this Prospectus (including the documents incorporated by reference herein) is based on internally generated management estimates, including estimates based on extrapolations from third party surveys and forecasts of the industries in which the Corporation competes. Actual outcomes may vary materially from those forecast in the reports or publications referred to herein, and

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the prospect for material variation can be expected to increase as the length of the forecast period increases. While the Corporation believes internal surveys, third party information and estimates of the Corporation's management are reliable, the Corporation has not verified them, nor have they been verified by any independent sources and the Corporation has no assurance that the information contained in third party websites is current and up-to-date. While the Corporation is not aware of any misstatements regarding the market and industry data presented in this Prospectus (including the documents incorporated by reference herein), such data involves risks and uncertainties and are subject to change based on various factors, including those factors discussed under "Forward-Looking Statements" and "Risk Factors".


TRADEMARKS AND TRADENAMES

        This Prospectus, any applicable Prospectus Supplement and the documents incorporated herein by reference include references to the Corporation's trademarks, including, without limitation, the "Curaleaf" trademark on the face page of this Prospectus, which are protected under applicable intellectual property laws and are the Corporation's property. The Corporation's trademarks and trade names referred to in this Prospectus, any applicable Prospectus Supplement and the documents incorporated herein by reference may appear without the ® or ™ symbol, but references to the Corporation's trademarks and trade names in the absence of such symbols are not intended to indicate, in any way, that the Corporation will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names. All other trademarks and trade names used in this Prospectus, any applicable Prospectus Supplement or in documents incorporated herein by reference are the property of their respective owners.


NON-IFRS AND OTHER MEASURES

        The Corporation prepares its financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee in effect as of and for the year ended December 31, 2019.

        This Prospectus and the documents incorporated or deemed to be incorporated by reference herein may make reference to certain non-IFRS measures. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing a further understanding of the Corporation's results of operations from management's perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Corporation's financial information reported under IFRS. The Corporation uses non-IFRS measures to provide investors with supplemental measures of the Corporation's operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. The Corporation also believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. The Corporation's management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess its ability to meet future debt service, capital expenditure and working capital requirements, and in the determination of components of management compensation. Because other companies may calculate these non-IFRS measures differently than the Corporation does, these metrics are not comparable to similarly titled measures reported by other companies.

        Certain calculations included in tables and other figures in this Prospectus and any tables and other figures in this Prospectus and any applicable Prospectus Supplement may have been rounded for clarity of presentation.

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CAUTION REGARDING FORWARD-LOOKING STATEMENTS

        This Prospectus and in the documents incorporated by reference in this Prospectus contain "forward-looking information" and "forward-looking statements" within the meaning of Canadian securities laws and United States securities laws. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on management's beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions of the Corporation. Forward-looking statements contained in certain documents incorporated by reference in this Prospectus are based on the key assumptions described in such documents. In addition, the Corporation may make or approve certain statements in future filings with Canadian securities regulatory authorities, in press releases, or in oral or written presentations by representatives of the Corporation that are not statements of historical fact and may also constitute forward-looking statements. All statements, other than statements of historical fact, made by the Corporation that address activities, events or developments that the Corporation expects or anticipates will or may occur in the future are forward-looking statements, including, but not limited to, statements preceded by, followed by or that include words such as "may", "will", "would", "could", "should", "believes", "estimates", "projects", "potential", "expects", "plans", "intends", "anticipates", "targeted", "continues", "forecasts", "designed", "goal", or the negative of those words or other similar or comparable words and includes, among others, information regarding: expectations for the effects and potential benefits of any transactions; expectations for the effects of the pandemic of the novel coronavirus ("COVID-19") on the business' operations and financial condition; statements relating to the business and future activities of, and developments related to, the Corporation after the date of this Prospectus, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Corporation's business, operations and plans; expectations that planned acquisitions will be completed; expectations that licenses applied for will be obtained; potential future legalization of adult-use and/or medical cannabis under U.S. federal law; expectations of market size and growth in the U.S. and the states in which the Corporation operates; expectations for other economic, business, regulatory and/or competitive factors related to the Corporation or the cannabis industry generally; the ability for U.S. holders of securities of the Corporation to sell them on the Canadian Securities Exchange ("CSE"); and other events or conditions that may occur in the future. Forward-looking statements may relate to future financial conditions, results of operations, plans, objectives, performance or business developments. These statements speak only as at the date they are made and are based on information currently available and on the then current expectations.

        Readers are cautioned that forward-looking statements are not based on historical facts but instead are based on reasonable assumptions and estimates of management of the Corporation at the time they were provided or made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Corporation, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, including, but not limited to, risks and uncertainties related to: business structure risks; legal and regulatory risks inherent in the cannabis industry; financing risks related to additional financing and restricted access to banking; general regulatory and legal risks including risk of civil asset forfeiture, anti-money laundering laws and regulations, lack of access to U.S. bankruptcy protections, heightened scrutiny by regulatory authorities; risk of legal, regulatory or political change, general regulatory and licensing risks, limitations on ownership of licenses, regulatory action and approvals from the Food and Drug Administration and risks of litigation; environmental risks including environmental regulation and unknown environmental risks; general business risks including risks related to COVID-19 pandemic, failure to complete acquisitions, risks related to the Term Loan Facility (as herein defined), unproven business strategy, service providers, enforceability of contracts, resale of the Subordinate Voting Shares on the CSE, reliance on management, risks inherent in an agricultural business, unfavorable publicity or consumer perception, product liability, product recalls, results of future clinical research, difficulty attracting and retaining personnel, dependence on suppliers, reliance

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on inputs, limited market data and difficulty to forecast, intellectual property risks, constraints on marketing products, fraudulent or illegal activity by employees, contractors and consultants, information technology systems and cyber-attacks, security breaches, business disruptions or dislocations due to natural disasters, civil unrest, riots, acts of terrorism or otherwise, unionization of employees at the Corporation's facilities, reliance on management services agreements with subsidiaries and affiliates, website accessibility, high bonding and insurance coverage, risks of leverage, future acquisitions or dispositions, management of growth, performance not indicative of future results and financial projections may prove materially inaccurate or incorrect, conflict of interest; tax risks as well as those risk factors discussed under the heading "Risk Factors" and elsewhere in this Prospectus, any Prospectus Supplement and the documents incorporated by reference herein and therein and as described from time to time in documents filed by the Corporation with Canadian securities regulatory authorities.

        The purpose of forward-looking statements is to provide the reader with a description of management's expectations, and such forward-looking statements may not be appropriate for any other purpose. In particular, but without limiting the foregoing, disclosure in this Prospectus and in the documents incorporated by reference herein as well as statements regarding the Corporation's objectives, plans and goals, including future operating results and economic performance may make reference to or involve forward-looking statements. Although the Corporation believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. In particular, investors are cautioned that the Corporation's forward-looking statements are subject to the ongoing and developing circumstances related to the COVID-19 pandemic, which may have a material adverse effect on the Corporation's business, operations and future financial results. Certain of the forward-looking statements and other information contained herein concerning the cannabis industry, its medical, adult-use and hemp-based CBD markets, and the general expectations of the Corporation concerning the industry and the Corporation's business and operations are based on estimates prepared by the Corporation using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which the Corporation believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Corporation is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry involves risks and uncertainties that are subject to change based on various factors.

        Readers are cautioned that the above list of cautionary statements is not exhaustive. A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. You should not place undue reliance on forward-looking statements contained in this Prospectus. Such forward-looking statements are made as at the date of this Prospectus, or in the case of documents incorporated by reference herein, as at the date of each such document. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The Corporation's forward-looking statements contained in this Prospectus, any Prospectus Supplement and the documents incorporated by reference herein and therein are expressly qualified in their entirety by this cautionary statement. Holders of the Securities should read this entire Prospectus, and each applicable Prospectus Supplement, and consult their own professional advisors to ascertain and assess the tax and legal risks and other aspects associated with holding Securities.


ADDITIONAL INFORMATION

        The Corporation will be filing with the United States Securities and Exchange Commission (the "SEC") a registration statement on Form F-10 of which this Prospectus forms a part. This Prospectus does not contain all the information set out in the registration statement. For further information about the Corporation and the Securities, please refer to the registration statement, including the exhibits to the registration statement.

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        The Corporation is currently subject to the information requirements under Canadian securities laws and, upon the effectiveness of the registration statement, the Corporation will become subject to certain information requirements of the United States Securities Exchange Act of 1934, as amended (the "U.S. Exchange Act"). Consequently, the Corporation files reports and other information with the securities regulatory authorities of the provinces and territories of Canada and will file reports and other information with the SEC. Under the MJDS, the Corporation may generally prepare these reports and other information in accordance with the disclosure requirements of Canada. These requirements are different from those of the United States. As a "foreign private issuer" (as defined under United States securities laws), the Corporation is exempt from the rules under the U.S. Exchange Act prescribing the furnishing and content of proxy statements, and officers, directors and principal shareholders of the Corporation are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the U.S. Exchange Act. In addition, the Corporation is not required to publish financial statements as promptly as United States companies.

        The SEC maintains a website (www.sec.gov) that makes available reports and other information that the Corporation files electronically with it, including the registration statement that the Corporation has filed with respect hereto.

        Copies of reports, statements and other information that the Corporation files with the applicable Canadian provincial and territorial securities regulatory authorities are available electronically on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com under the Corporation's profile.


DOCUMENTS INCORPORATED BY REFERENCE

        Information has been incorporated by reference in this Prospectus from documents filed with the securities commissions or similar regulatory authorities in Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the General Counsel of the Corporation, at 666 Burrard Street, Suite 1700, Vancouver, British Columbia V6C 2X8, (781) 451-0351, and are also available electronically on SEDAR under the Corporation's profile at www.sedar.com.

        As at the date hereof, the following documents (or the sections or sub-sections thereof set out below), filed with the various securities commissions or similar authorities in each of the provinces and territories of Canada, are specifically incorporated by reference into and form an integral part of this Prospectus:

    1.
    the annual information form of the Corporation dated September 25, 2020 for the fiscal year ended December 31, 2019 (the "AIF");

    2.
    the audited consolidated financial statements of the Corporation as at and for the years ended December 31, 2019 and 2018 together with the notes attached thereto and the independent auditor's report attached thereto (the "Annual Financial Statements");

    3.
    the management's discussion and analysis of the financial conditions and results of operations of the Corporation for the years ended December 31, 2019 and 2018 (the "Annual MD&A");

    4.
    the unaudited condensed interim consolidated financial statements of the Corporation as at and for the three and six months ended June 30, 2020 and 2019, together with the notes attached thereto (the "Interim Financial Statements");

    5.
    the management's discussion and analysis of financial conditions and results of operations of the Corporation for the three and six months ended June 30, 2020 (the "Interim MD&A");

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    6.
    the management information circular of the Corporation dated October 10, 2019 prepared in connection with the annual general meeting of the shareholders of the Corporation, held on November 21, 2019 (the "2019 Circular");

    7.
    the material change report relating to the execution of an amended and restated agreement for the acquisition of GR Companies, Inc. ("Grassroots"), filed on SEDAR on July 7, 2020;

    8.
    the material change report relating to the announcement of a private placement (the "2020 Private Placement") of 4,383,698 Subordinate Voting Shares for aggregate gross proceeds of approximately CDN$34,056,007, filed on SEDAR on July 7, 2020;

    9.
    the material change report relating to the closing of the 2020 Private Placement and the acquisition of Grassroots, filed on SEDAR on July 31, 2020; and

    10.
    the business acquisition report (the "Business Acquisition Report") relating to the completion of the acquisition of Cura Partners, Inc. ("Cura Partners");

        Any document of the type required by National Instrument 44-101—Short Form Prospectus Distributions to be incorporated by reference into a short form prospectus, including any annual information forms, material change reports (except confidential material change reports), business acquisition reports, interim financial statements, annual financial statements and the auditor's report thereon, management's discussion and analysis and information circulars of the Corporation filed by the Corporation with securities commissions or similar authorities in Canada after the date of this Prospectus and prior to the completion or withdrawal of any offering under this Prospectus shall be deemed to be incorporated by reference into this Prospectus.

        To the extent that any document or information incorporated by reference into this Prospectus is included in any report on Form 6-K, Form 8-K, Form 40-F or Form 20-F (or any respective successor form) that is filed with or furnished to the SEC after the date of this Prospectus, such document or information shall be deemed to be incorporated by reference as an exhibit to the registration statement on Form F-10 of which this Prospectus forms a part. In addition, the Corporation may incorporate by reference into this Prospectus, or the registration statement on Form F-10 of which it forms part, other information from documents that the Corporation will file with or furnish to the SEC pursuant to Section 13(a) or 15(d) of the U.S. Exchange Act if and to the extent expressly provided therein.

        Upon a new interim financial report and related management's discussion and analysis of the Corporation being filed with the applicable securities regulatory authorities during the currency of this Prospectus, the previous interim financial report and related management's discussion and analysis of the Corporation most recently filed shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder. Upon new annual financial statements and related management's discussion and analysis of the Corporation being filed with the applicable securities regulatory authorities during the currency of this Prospectus, the previous annual financial statements and related management's discussion and analysis and the previous interim financial report and related management's discussion and analysis of the Corporation most recently filed shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder. Upon a new annual information form of the Corporation being filed with the applicable securities regulatory authorities during the currency of this Prospectus, the following documents shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder: (i) the previous annual information form, if any; (ii) material change reports filed by the Corporation prior to the end of the financial year in respect of which the new annual information form is filed; (iii) business acquisition reports filed by the Corporation for acquisitions completed prior to the beginning of the financial year in respect of which the new annual information form is filed; and (iv) any information circular of the Corporation filed by the Corporation prior to the beginning of the financial year in respect of which

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the new annual information form is filed. Upon a new information circular of the Corporation prepared in connection with an annual general meeting of the Corporation being filed with the applicable securities regulatory authorities during the currency of this Prospectus and any previous information circular of the Corporation, if prepared in connection with solely an annual general meeting of the Corporation, shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder.

        A Prospectus Supplement to this Prospectus containing the specific variable terms in respect of an offering of the Securities will be delivered to purchasers of such Securities together with this Prospectus, unless an exemption from the prospectus delivery requirements has been granted or is otherwise available, and will be deemed to be incorporated by reference into this Prospectus as at the date of such Prospectus Supplement only for the purposes of the offering of the Securities covered by such Prospectus Supplement.

        In addition, certain marketing materials (as that term is defined in applicable Canadian securities legislation) may be used in connection with a distribution of Securities under this Prospectus and the applicable Prospectus Supplement(s). Any "template version" of "marketing materials" (as those terms are defined in applicable Canadian securities legislation) pertaining to a distribution of Securities, and filed by the Corporation after the date of the Prospectus Supplement for the distribution and before termination of the distribution of such Securities, will be deemed to be incorporated by reference in that Prospectus Supplement for the purposes of the distribution of Securities to which the Prospectus Supplement pertains.

        Notwithstanding anything herein to the contrary, any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded, for purposes of this Prospectus, to the extent that a statement contained herein or in any other subsequently filed document incorporated or deemed to be incorporated by reference herein modifies or supersedes such prior statement. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes. The making of a modifying or superseding statement shall not be deemed an admission for any purpose that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. Any statement so modified or superseded shall thereafter neither constitute, nor be deemed to constitute, a part of this Prospectus, except as so modified or superseded.

        The Corporation has not provided or otherwise authorized any other person to provide investors with information other than as contained or incorporated by reference in this Prospectus or any Prospectus Supplement. If an investor is provided with different or inconsistent information, such investor should not rely on it.


DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT

        The following documents have been or will be filed with the SEC as part of the registration statement of which this Prospectus forms a part: (i) the documents referred to in "Documents Incorporated by Reference"; (ii) the consents of auditors, counsel and any experts identified herein, if applicable; (iii) powers of attorney of the directors and officers of the Corporation; and (iv) a copy of the form of indenture for Debt Securities. A copy of the form of any applicable warrant agreement, warrant indenture, subscription receipt agreement or statement of eligibility of trustee on Form T-1, as applicable, will be filed by post-effective amendment or by incorporation by reference to documents filed or furnished with the SEC under the U.S. Exchange Act.

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THE CORPORATION

Corporate Structure

        The Corporation, formerly known as Lead Ventures Inc. ("LVI"), was incorporated under the laws of the Province of British Columbia, pursuant to the Business Corporations Act (British Columbia), on November 13, 2014 and is a vertically-integrated medical and wellness cannabis operator in the U.S. Prior to the completion of the Business Combination (as defined below), the Corporation was a junior mineral exploration company engaged in the business of acquiring, exploring and evaluating natural resource properties.

        On October 25, 2018, the Corporation and Curaleaf, Inc. (formerly PalliaTech, Inc.) completed the combination of their respective businesses (the "Business Combination") that resulted in the reverse takeover of the Corporation by the securityholders of Curaleaf, Inc. The Business Combination was structured as a series of transactions, including a Canadian three-cornered amalgamation transaction and a series of U.S. merger and reorganization steps (further described below). At the Corporation's annual general and special meeting of shareholders held on October 12, 2018, the shareholders of the Corporation approved all of the resolutions in connection with the Business Combination. As part of the Business Combination, the Corporation changed its name from "Lead Ventures Inc." to "Curaleaf Holdings, Inc.", and restructured its existing share capital to, among other things, reclassify its existing common shares as Subordinate Voting Shares, create a class of Multiple Voting Share, eliminate the class of preferred shares and add certain provisions, including a redemption right in favour of the Corporation to ensure that the Corporation complies with applicable licensing regulations (the "Share Terms Amendment").

        Immediately prior to the Business Combination, 1177687 B.C. Ltd. ("Curaleaf FinCo"), a special purpose corporation, completed a brokered and a non-brokered subscription receipt financing for aggregate gross proceeds of approximately CDN$520 million (the "Private Placement"). As part of the Business Combination, the Corporation, Curaleaf FinCo and 1177679 B.C. Ltd., a wholly-owned subsidiary of the Corporation, were parties to a three-cornered amalgamation (the "Amalgamation") pursuant to which the shareholders of Curaleaf FinCo (being the investors in the Private Placement after automatic conversion of their subscription receipts into common shares of Curaleaf FinCo (the "Curaleaf FinCo Shares")) received Subordinate Voting Shares in exchange for their Curaleaf FinCo Shares. Concurrently with the Amalgamation, Curaleaf MergerCo Inc., a wholly-owned subsidiary of the Corporation, merged with and into Curaleaf, Inc., with Curaleaf, Inc. continuing as the surviving corporation and becoming a wholly-owned subsidiary of the Corporation.

        In connection with the Business Combination, Gociter Holdings Ltd., a corporation of which Mr. Boris Jordan, the Executive Chairman of the Corporation, is the beneficial owner, made a contribution of 3,734,965 shares of common stock of Curaleaf, Inc. and cash to the Corporation in exchange for 122,170,705 Multiple Voting Shares, representing 100% of the issued and outstanding Multiple Voting Shares as of closing of the Business Combination.

        The table below lists the principal subsidiaries of the Corporation as at the date hereof, the percentage of votes attaching to all voting securities of each subsidiary beneficially owned, or controlled or directed, directly or indirectly, by the Corporation, and the jurisdiction of organization of each such subsidiary. The Corporation has other subsidiaries, but the assets and revenues of such subsidiaries

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individually did not exceed 10%, and in the aggregate did not exceed 20%, of the Corporation's assets or consolidated revenues.

Subsidiaries
  Percentage of Voting
Securities Owned 		  Jurisdiction
Where Organized

Curaleaf, Inc.

    100%   Delaware

CLF AZ Management, LLC

    100%   Arizona

Curaleaf Florida, LLC

    100%   Florida

Curaleaf Massachusetts, Inc.

    100%   Massachusetts

Curaleaf NJ II, Inc.

    100%   Delaware

Cura Partners, Inc.

    100%   Oregon

Cura CA, LLC

    100%   California

GR Companies, Inc.

    100%   Delaware

Summary Description of the Business

        Curaleaf is a leading vertically integrated medical and wellness cannabis operator in the U.S. Headquartered in Wakefield, Massachusetts, the Corporation operates in 23 States, and, as at the date hereof, operates 92 dispensaries, 22 cultivation sites and 30 processing sites with a focus on highly populated, limited license states, including New York, New Jersey, Florida, Illinois, Pennsylvania and Massachusetts. The Corporation leverages its extensive research and development capabilities to distribute cannabis products with the highest standard for safety, effectiveness, consistent quality and customer care. The Corporation is committed to leading the industry in education and advancement through research and advocacy. The Corporation markets to medical and adult-use customers through brand strategies intended to build trust and loyalty.

        The Corporation was one of the first professionally managed companies to enter the U.S. legal cannabis industry, which is one of the fastest growing industries in the U.S. and still in its early stages of maturity. Formed in 2010, the Corporation started in the state of New Jersey, and was the first to develop and patent a medical cannabis vaporizing unit capable of delivering single metered doses of cannabis medicine to patients.

        Currently, the Corporation is a diversified holding company dedicated to delivering market-leading products and services while building trusted national brands within the legal cannabis industry. Through its team of physicians, pharmacists, medical experts and industry innovators, the Corporation has developed a portfolio of branded cannabis-based therapeutic offerings in multiple formats and a strategic network of branded retail dispensaries. Exemplifying its commitment to quality, Curaleaf's Florida operations were the first in the cannabis industry to receive the Safe Quality Food certification under the Global Food Safety Initiative, setting a new standard of excellence.

        The Corporation is operated by an executive team that has significant experience in the cannabis industry and a robust operational and acquisition track-record as to all facets of the Corporation's operations, which has executed its business plan to rapidly scale its business. The Corporation has approximately 3,700 employees as of August 31, 2020, across its operating jurisdictions.

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        The Corporation currently operates in the United States as more specifically described in the below table. For further details on the Corporation's operations in the United States, see the "United States Regulatory Environment" section of this Prospectus.

Curaleaf Operations Overview(1)

 
   
  Dispensaries   Production(2)   Cultivation  
 
   
  Licensed   Operating   Processing   Cultivation   Facility SF  
 

1

  Arizona     9     8     Y     Y     119 424  
 

2

 

Arkansas

   
1 		   
1 		                   
 

3

 

California

               
Y 		   
Y 		   
190 000 		 
 

4

 

Colorado

               
Y 		             
 

5

 

Connecticut

   
4 		   
4 		   
Y 		   
Y 		   
60 000 		 
 

6

 

Florida(3)

   
40 		   
31 		   
Y 		   
Y 		   
352 200 		 
 

7

 

Illinois(4)

   
10 		   
7 		   
Y 		   
Y 		   
70 000 		 
 

8

 

Kentucky(5)

               
Y 		             
 

9

 

Maine(6)

   
4 		   
2 		   
Y 		   
Y 		   
43 070 		 
 

10

 

Maryland

   
4 		   
4 		   
Y 		   
Y 		   
22 000 		 
 

11

 

Massachusetts(7)

   
4 		   
4 		   
Y 		   
Y 		   
157 000 		 
 

12

 

Michigan

   
4 		   
4 		   
Y 		   
Y 		       
 

13

 

Missouri(8)

               
Y 		             
 

14

 

Nevada(9)

   
3 		   
3 		   
Y 		   
Y 		   
278 800 		 
 

15

 

New Jersey

   
3 		   
1 		   
Y 		   
Y 		   
153 150 		 
 

16

 

New York

   
4 		   
4 		   
Y 		   
Y 		   
72 000 		 
 

17

 

North Dakota

   
4 		   
4 		   
Y 		   
Y 		   
33 000 		 
 

18

 

Ohio(10)

   
2 		   
2 		   
Y 		   
Y 		   
32 000 		 
 

19

 

Oklahoma(11)

               
Y 		             
 

20

 

Oregon

   
1 		   
1 		   
Y 		   
Y 		   
37 000 		 
 

21

 

Pennsylvania(12)

   
18 		   
9 		   
Y 		   
Y 		   
75 000 		 
 

22

 

Utah

   
1 		   
1 		   
Y 		             
 

23

 

Vermont

   
4 		   
2 		   
Y 		   
Y 		   
13 000 		 
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
 

  Total     120     92     30     22     1 707 644  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Notes:

(1)
Licensed operations of the Corporation's subsidiaries that are consolidated based on ownerhsip, management agreement or similar contractual relationships.

(2)
The Corporation has multiple production licenses and/or facilities in certain states.

(3)
Caps on the number of dispensaries one company can open in Florida expired in April 2020. As such, the 40 Florida licensed dispensaries listed in this table only includes the number of locations Curaleaf has secured or is actively pursuing as of the date hereof.

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(4)
In Illinois, the Corporation is awaiting regulatory approval to acquire five dispensary licenses, which permit the holder to open up to ten total dispensaries, seven of which are currently operational. Ownership of the Illinois dispensaires is subject to receipt of regulatory approval.

(5)
Kentucky has not legalized medical cannabis, but does permit hemp cultivation and processing. In Kentucky, the Corporation holds a hemp processor/handler license issued by the Kentucky Department of Agriculture and operates out of a 74,000 square foot facility.

(6)
The Corporation's two adult-use dispensaries have received local approval for their locations, and their state licenses application are pending receipt of regulatory approval.

(7)
Of the four licensed dispensaries in Massachusetts, one is medical-cannabis-only.

(8)
While the Corporation, its subsidiaries, or affiliates, may have rights to certain dispensary licenses in Missouri, these are not included above since the Corporation, its subsidiaries, or affiliates do not intend to operationalize these licenses.

(9)
Nevada licensed dispensary count excludes rights held by a Grassroots subsidiary to acquire certain dispensary licenses in the state. These licenses are excluded since the Corporation has not realized these rights at this time.

(10)
Acquisition of the Ohio dispensaries is subject to receipt of regulatory approval.

(11)
Oklahoma operations exclude certain dispensary licenses held by an affiliate of Grassroots, one of which is currently operational as of the date hereof. These licenses are not included above since the Corporation intends to close the one operational location and does not intend to operationalize the remaining licenses.

(12)
Pennsylvania licenses are held by affiliates of the Corporation and not directly by the Corporation.

        More detailed information regarding the business of the Corporation as well as its operations, assets, products and services, and properties can be found in the AIF and other documents incorporated by reference herein, as supplemented by the disclosure herein. See "Documents Incorporated by Reference", "Acquisition of GR Companies, Inc." and "Additional Recent Developments".


RECENT DEVELOPMENTS

COVID-19 Pandemic

        The novel coronavirus commonly referred to as "COVID-19" was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

        The Corporation has taken responsible measures with respect to the COVID-19 pandemic to maximize the safety of staff working at its facilities. This includes reorganizing physical layouts, adjusting schedules to improve social distancing, implementing health screening measures for employees and applying rigorous standards for personal protective equipment. Certain markets, such as Massachusetts and Nevada experienced a greater impact on sales due to prolonged business closures and reduced foot traffic in certain locations. Other markets, such as Florida and New York have not been significantly impacted by COVID-19 and in some cases, stores in those markets have generated increased sales. The Corporation's facilities continue to be operational and the Corporation is working

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closely with the authorities to ensure it is following or exceeding the stated guidelines related to COVID-19. For instance, the Corporation has modified store operations in certain locations, with an increased focus on direct-to-consumer delivery and enabling a curbside pickup option for its customers.

        See "Risk Factors—Risks Related to the COVID-19 Pandemic" for more information.

Sale and Leaseback Transaction

        In August 2020, the Corporation closed on a sale and leaseback transaction (the "Sale and Leaseback Transaction") at its Mount Dora, Florida cultivation facility. In the transaction, the Corporation sold leasehold improvements with a gross value of $44.94 million for $41 million and entered into a new 15-year lease on the entire property with the new owner. Net of transaction costs and security deposits, the Corporation received $39.07 million at closing.

Private Placement of Subordinate Voting Shares

        On July 20, 2020, Curaleaf completed the private placement offering previously announced on July 2, 2020 (the "Offering"). Pricing of the initial tranche of the Offering was set on July 2, 2020. Under the initial tranche, subscribers purchased an aggregate of 3,541,429 Subordinate Voting Shares for aggregate gross proceeds of approximately CDN$27.27 million. Subsequent to setting the initial tranche, the Corporation secured a second tranche investment, which was part of the Offering which closed on July 20, 2020. Under the second tranche, a subscribed purchased 842,269 Subordinate Voting Shares for gross proceeds of approximately CDN$6.79 million. In aggregate, the Offering generated approximately CDN$34.06 million in gross proceeds for the Corporation in exchange for 4,383,698 Subordinate Voting Shares. The Offering was being conducted in connection with the closing of the Grassroots Transaction. Net proceeds of the Offering will be used to fund Grassroots's high-return expansion projects, replenish its working capital as well as for general corporate purposes.

        Further information about the Offering can be found in the Corporation's material change reports dated July 31, 2020 and July 7, 2020, copies of which are available on SEDAR under the Corporation's profile at www.sedar.com.

Curaleaf PA, LLC

        On February 21, 2020, the Corporation announced it had been approved as a Clinical Registrant in Pennsylvania by the Commonwealth's Department of Health, Office of Medical Marijuana. Under this designation, the Corporation will be permitted to open a cultivation and processing facility and up to six dispensaries, under the Commonwealth's medical marijuana research program. As a Clinical Registrant, Curaleaf will support research initiatives into the potential medical benefits of cannabis by providing medical cannabis expertise and distribution to patients participating in studies.

Recent Acquisitions

PalliaTech Florida LLC

        On August 17, 2020, the Corporation acquired the remaining 11.4% equity interest in PalliaTech Florida LLC ("PT Florida") from certain minority equity holders for consideration of 2,375,000 Subordinate Voting Shares. In connection with the foregoing, the Corporation also agreed to the repayment of certain secured promissory notes in the amount of $1.75 million. Another 11.4% equity interest in PT Florida was acquired by the Corporation on January 10, 2020 from certain other minority equity holders for consideration of $2.5 million paid in cash and 1,772,062 Subordinate Voting Shares. Upon completion, PT Florida became an indirect wholly-owned subsidiary of Curaleaf.

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GR Companies, Inc. ("Grassroots")

        On July 17, 2019, Curaleaf announced that it had signed a definitive agreement to acquire Grassroots (the "Grassroots Transaction"). On June 22, 2020, Curaleaf entered into an Amended and Restated Agreement and Plan of Merger (the "Grassroots Merger Agreement") which amended and restated the original definitive agreement and amended certain terms of the Grassroots Transaction.

        Closing of the Grassroots Transaction occurred on July 23, 2020. At closing, the Corporation issued (i) 103,455,816 Subordinate Voting Shares to the benefit of the former holders of common stock of Grassroots, and (ii) 12,851,005 Subordinate Voting Shares to be held in escrow in accordance with the terms of the Grassroots Merger Agreement. The total consideration paid in connection with the Grassroots Transaction does not include a cash component. In addition, the parties have resolved that certain Grassroots assets in Illinois, Ohio and Maryland are designated for sale to comply with local limitations on license ownership. Curaleaf also agreed to issue 2,119,864 Subordinate Voting Shares to partially offset the dilution to the holders of common stock of Grassroots caused by the conversion of certain debentures of Grassroots into equity of Grassroots immediately prior to the closing of the Grassroots Transaction. The transaction price remains subject to usual working capital and other adjustments.

        Effective upon closing of the Grassroots Transaction, Curaleaf has appointed Mitchell Kahn, co-founder and CEO of Grassroots, to the Board. With the appointment of Mr. Kahn, the Board was expanded from five to six members.

        Further information about the Grassroots Transaction can be found in the Corporation's material change reports dated July 31, 2020, July 7, 2020 and July 17, 2019, copies of which are available on SEDAR under the Corporation's issuer profile at www.sedar.com. A copy of the Grassroots Merger Agreement is also available on SEDAR under the Corporation's issuer profile at www.sedar.com.

Virginia's Kitchen, LLC ("Blue Kudu")

        In February 2020, the Corporation signed a definitive agreement to acquire 100% of Blue Kudu, a Colorado-licensed processor and producer of cannabis edibles, operating an 8,400 square foot facility in Denver, Colorado (the "Blue Kudu Transaction"). The consideration consisted of 322,580 Subordinate Voting Shares, $1.38 million payable in cash at closing of the transaction and a 5% note of up to $500,000 due ten and a half months from closing. The Blue Kudu Transaction closed in July 2020.

Curaleaf New Jersey, Inc. ("Curaleaf NJ")

        In February 2011, the Corporation entered into a Management Services Agreement (the "NJ MSA") with Curaleaf NJ (formerly Compassionate Sciences ATC Inc.) As required under state law, Curaleaf NJ was formed as a New Jersey nonprofit corporation without shareholders acting through its governing body, the Board of Trustees ("NJ Board"). Curaleaf NJ operated medical dispensary, processing, and cultivation facilities as permitted by the state of New Jersey. Under the NJ MSA, the Corporation acted as an independent contractor providing services in the areas of cultivation, extraction, and other consulting services. The Corporation recognized management fee income for services rendered under the NJ MSA. In addition to the NJ MSA, the Corporation entered into a Conditionally Convertible Promissory Note ("NJ Note"). The NJ Note allowed the Corporation to acquire Curaleaf NJ when the regulations in New Jersey changed to allow the conversion of non-profit corporations to for-profit corporations.

        In July 2019, New Jersey Governor Murphy signed an amendment to the New Jersey Compassionate Use Medical Marijuana Act, known as the Jake Honig Compassionate Use Medical Cannabis Act (the "Jake Honig Act"). The Jake Honig Act authorized the New Jersey non-profit corporations that hold Alternative Treatment Center Permits ("ATC Permits") to sell or transfer their permits and other assets to for-profit entities Due to changes in New Jersey regulations, Curaleaf NJ

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received approval from the state of New Jersey for the transfer of the ATC Permit to a Curaleaf NJ II, Inc, a wholly owned subsidiary of the Corporation. In conjunction with the transfer of the ATC Permit, the Corporation entered into an Asset Purchase Agreement ("CLNJ APA"). As part of the CLNJ APA, Curaleaf NJ agreed to sell and transfer the ATC Permit and substantially all of its other assets to Curaleaf NJ II. This transaction closed in July 2020. As a result of the close of the sale and transfer of the assets, the $82.23 million balance of the NJ Note was applied to the purchase price under the CLNJ APA with the remainder written off.

Primary Organic Therapy, Inc. (d/b/a Maine Organic Therapy) ("MEOT")

        MEOT owns and operates a duly licensed registered medical marijuana and cultivation facility in the state of Maine. In January 2017, the Corporation entered into a Management Services Agreement with MEOT ("MEOT MSA") under which the Corporation provided services in the areas of financial services, compliance consulting, and human resources management. Under the MEOT MSA, MEOT maintained exclusive control and possession, and was solely responsible for final decision-making regarding all aspects of the business and the Corporation acted solely in an advisory capacity. The Corporation recognized management fee income for services rendered under the MEOT MSA.

        The MEOT MSA was terminated in July 2020 and MEOT entered into a new MSA agreement ("Verdure MSA") with Verdure, Inc. ("Verdure"), an entity in which the Corporation's CEO, Joseph Lusardi had a 50% ownership interest. The Corporation acquired Verdure in July 2020 for $8 million in cash and a cash earn-out of $2 million based on MEOT's achievement of certain earnings targets. Current Maine regulations require that licensed medical marijuana dispensaries be owned by residents of Maine. However, under the Verdure MSA, the Corporation has acquired operational control and substantially all of the economic benefit of MEOT's business. The acquisition of Verdure resulted in the Corporation controlling MEOT in accordance with IFRS 10. The Corporation retains a right to acquire MEOT for nominal value at such time as the residency requirement for ownership is lifted. See "United States Regulatory Overview—Regulation of Cannabis in the United States Federally—Maine Operations" section.

Arrow Alternative Care Inc., Arrow Alternative Care #2 Inc. and Arrow Alternative Care #3 Inc. (collectively, "Arrow")

        On April 6, 2020, Curaleaf announced the closing of the acquisition of three Arrow dispensaries in Stamford, Hartford and Milford, in the State of Connecticut (the "Arrow Transaction"). The Arrow dispensary licenses in Stamford and Hartford were transferred on April 6, 2020 and the transfer of the Arrow dispensary license in Milford occurred on August 3, 2020, although the Corporation assumed management and economic control of the Milford dispensary along with the other dispensaries as at April 6, 2020. The fair value of the aggregate consideration paid was $38 million, including 3,194,149 Subordinate Voting Shares having a fair value of approximately $21.38 million. Certain "top-up" shares are now due as additional consideration in connection with the Hartford dispensary.

Remedy Compassion Center, Inc. ("Remedy")

        In February 2020, Remedy which operated until then as a Maine non-profit corporation, converted to a for-profit corporation as approved by their independent Board of Directors when changes in Maine regulations allowed for such change. In connection with the conversion, the management services agreement entered among the Corporation and Remedy in October 2016 was terminated and the Corporation entered into a Registered Dispensary Management Agreement (the "Remedy Operating Agreement"). Current Maine regulations require that licensed medical marijuana dispensaries be owned by residents of Maine. However, under the Remedy Operating Agreement, the Corporation has acquired operational control and substantially all of the economic benefit of Remedy's business, which allows the Corporation to control Remedy in accordance with IFRS 10 definitions. The Corporation retains a right to acquire Remedy for nominal value at such time as the residency

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requirement for ownership is lifted. The total consideration paid included the forgiveness of approximately $2.34 million of debt. See "United States Regulatory Overview—Regulation of Cannabis in the United States Federally—Maine Operations" section.

Cura Partners, Inc.

        On February 1, 2020, the Corporation announced the closing of the acquisition of Cura Partners (the "Cura Transaction"), owners of the Select brand ("Select"). At Closing, pursuant to the terms of the Amended and Restated Agreement and Plan of Merger dated October 30, 2019 (the "Cura Merger Agreeement"), Curaleaf issued 55,000,000 Subordinate Voting Shares to the benefit of the former Select equity holders. 40,555,556 Subordinate Voting Shares will be payable to the former Select equity holders contingent upon Curaleaf achieving certain calendar year 2020 revenue targets based on Select branded retail extract sales beginning at a target of $130 million with maximum achievement at $250 million. In addition, the former Select equity holders are also eligible to receive an earn out of up to $200 million from the issuance of additional Subordinate Voting Shares, contingent upon Curaleaf exceeding $300 million in calendar year 2020 revenue for Select branded retail extract sales.

        In connection with the Cura Transaction, Curaleaf announced the appointment of Dr. Jaswinder Grover, MD., as a new member of the Board. This appointment was made effective concurrently with the closing of the Cura Transaction on February 1, 2020.

        Further information about the Cura Transaction can be found in the Corporation's material change reports dated May 10, 2019 and November 8, 2019, as well as the Business Acquisition Report, copies of which are available on SEDAR under the Corporation's issuer profile at www.sedar.com. A copy of the Cura Merger Agreement is also available on SEDAR under the Corporation's issuer profile at www.sedar.com.

Acres Cultivation, LLC and Acres Medical, LLC (collectively, "Acres")

        On January 3, 2020, the Corporation announced the closing of the acquisition of Acres for a total consideration of $47.59 million, of which $15 million was paid in cash upon signing, $9.5 million was paid upon receiving regulatory approval of the license transfer for the dispensary in January 2020, as well as a $500,000 holdback. Total consideration also included $12.86 million which was settled through the issuance of 3,108,183 Subordinate Voting Shares, $8.57 million which was settled through the issuance of 2,039,062 Subordinate Voting Shares upon receiving regulatory approval of the license transfer for the dispensary in January 2020, and $1.17 million of contingent which is payable if certain financial targets are met.

Voluntary Lock Up

        On January 22, 2020, the Corporation announced that all shareholders holding individually more than 1% of Curaleaf's shares outstanding and all Cura Partners shareholders agreed to an amended lock-up agreement in connection with the closing of the Cura Transaction, with a lock-up release schedule providing for a release of 5% of each participant's holding on the last day of each calendar quarter starting with March 31, 2020.

Senior Secured Financing

        On December 20, 2019, the Corporation announced that it had received commitments from a syndicate of lenders for a $275 million senior secured term loan facility (the "Term Loan Facility"), bearing interest at a rate of 13.0% per annum, payable quarterly in arrears, pursuant to a financing agreement by and between Curaleaf, Inc., as borrower, the Corporation, as parent, certain subsidiaries of Curaleaf Inc., as guarantors, the Lenders (as defined therein) and Glass Trust Company, LLC, as agent (the "Financing Agreement"). On January 15, 2020, the Corporation amended the Financing Agreement, pursuant to an amendment no. 1 to the Financing Agreement (the "Financing Agreement

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Amendment"), to among other things, increase the Term Loan Facility with additional commitments of $25 million, for a total commitment of $300 million. The Term Loan Facility, as amended, closed on January 15, 2020 and is due in January of 2024. This debt financing constituted a broadly syndicated institutional deal led by sophisticated and long-term investors.

        The Term Loan Facility is secured by a guarantee of all the whollyowned direct and indirect subsidiaries of the Corporation, as well as a pledge on the assets of the Corporation and each such guarantor. While the Term Loan Facility is outstanding, the Corporation is subject to certain negative covenants, including restrictions on its ability to pay dividends, to conduct transactions with affiliates, to modify any organizational documents, to invest in non-wholly owned entities and to incur subordinated and non-subordinated debt and certain covenant tests. Further, the Term Loan Facility imposes certain financial covenants, including minimum annual cash earnings and maintenance of unrestricted cash and cash equivalents. The Term Loan Facility is non-callable in the first two years and from year 2 to 3 is payable at par + 1/2 coupon, from year 3 to 31/2 at par + 1/4 coupon and at par from year 31/2 to maturity. The proceeds of the Term Loan Facility were used to refinance existing senior debt, satisfy transaction fees and expenses from previously announced acquisitions, fund capital expenditures and for general corporate purposes. See "Risk Factors".

        Further information about the Term Loan Facility can be found in the Corporation's material change report dated December 31, 2019, a copy of which is available on SEDAR under the Corporation's issuer profile at www.sedar.com. Copies of the Financing Agreement, as well as the Financing Agreement Amendment, have been filed on SEDAR on December 31, 2019 and January 17, 2020, respectively, and are available thereto under the heading "Other material contracts", under the Corporation's issuer profile at www.sedar.com.

Utah Operations

        On January 6, 2020, Curaleaf announced that it had received a Notice of Intent to Award a medical cannabis retail license from the Utah Department of Health. Curaleaf won one of 14 licenses to open a medical cannabis dispensary in Utah, from more than 130 applications and 60 different companies. The Corporation's license is for Region 3, which includes Utah, Wasatch, Daggett, Duchesne, Uintah, Carbon, Emery, Grand and San Juan Counties. Following this announcement, on January 14, Curaleaf announced that it had received preliminary approval for a processing license by the Utah Department of Agriculture and Food ("UDAF"). The notice grants Curaleaf permission to begin the build out of its processing facility, which is scheduled to open in mid-September, in North Salt Lake City. The Corporation also opened its first retail location in the Utah market with a new pharmacy in Lehi on August 31, 2020..


THE SELLING SECURITYHOLDERS

        Securities may be sold under this Prospectus by way of secondary offering by or for the account of certain of the Corporation's securityholders. The Prospectus Supplement that the Corporation will file in connection with any offering of Securities by selling securityholders will include the following information:

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DESCRIPTION OF SHARE CAPITAL OF THE CORPORATION

        Curaleaf's authorized share capital consists of (i) an unlimited number of Multiple Voting Shares; and (ii) an unlimited number of Subordinate Voting Shares. As of August 31, 2020, 93,970,705 Multiple Voting Shares and 564,198,417 Subordinate Voting Shares were issued and outstanding. All of the issued and outstanding Multiple Voting Shares are held by Gociter, a corporation of which Mr. Boris Jordan, the Executive Chairman of the Corporation, is the beneficial owner.

        As of August 31, 2020, the Subordinate Voting Shares represented approximately 28.6% of the voting rights attached to outstanding securities of the Corporation and the Multiple Voting Shares represented approximately 71.4% of the voting rights attached to outstanding securities of the Corporation.

        The Subordinate Voting Shares are "restricted securities" within the meaning of such term under applicable Canadian securities laws. The Corporation has complied with the requirements of Part 12 of National Instrument 41- 101—General Prospectus Requirements ("NI 41-101") to be able to file a prospectus under which the Subordinate Voting Shares or securities that are, directly or indirectly, convertible into, or exercisable or exchangeable for, the Subordinate Voting Shares are distributed, as the Corporation received the requisite prior majority approval of shareholders of the Corporation, at the annual and special meeting of shareholders held on October 12, 2018, in accordance with applicable law, including Section 12.3 of NI 41-101, for the Share Terms Amendment. The Share Terms Amendment constituted a "restricted security reorganization" within the meaning of such term under applicable Canadian securities laws.

        The following is a summary of the rights, privileges, restrictions and conditions attached to the Subordinate Voting Shares and the Multiple Voting Shares, but does not purport to be complete. Reference should be made to the articles of the Corporation and the full text of their provisions for a complete description thereof, which are available under the Corporation's profile on SEDAR at www.sedar.com.

Subordinate Voting Shares

Restricted Shares   The Subordinated Voting Shares are "restricted securities" within the meaning of such term under applicable Canadian securities laws.

Right to Notice and Vote
 
Holders of Subordinate Voting Shares are entitled to notice of and to attend any meeting of the shareholders of the Corporation, except a meeting of which only holders of another particular class or series of shares of the Corporation have the right to vote. At each such meeting, holders of Subordinate Voting Shares are entitled to one vote in respect of each Subordinate Voting Share held.

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Class Rights   As long as any Subordinate Voting Shares remain outstanding, the Corporation will not, without the consent of the holders of the Subordinate Voting Shares by separate special resolution, prejudice or interfere with any right attached to the Subordinate Voting Shares. Holders of Subordinate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Corporation.

Dividends
 
Holders of Subordinate Voting Shares are entitled to receive as and when declared by the directors of the Corporation, dividends in cash or property of the Corporation. No dividend will be declared or paid on the Subordinate Voting Shares unless the Corporation simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Multiple Voting Shares. In the event of the payment of a dividend in the form of shares, holders of Subordinate Voting Shares will receive Subordinate Voting Shares, unless otherwise determined by the Board.

Participation
 
In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or in the event of any other distribution of assets of the Corporation among its shareholders for the purpose of winding up its affairs, the holders of Subordinate Voting Shares will, subject to the prior rights of the holders of any shares of the Corporation ranking in priority to the Subordinate Voting Shares, be entitled to participate rateably along with all other holders of Subordinate Voting Shares and Multiple Voting Shares (on an as-converted to Subordinate Voting Share basis).

Changes
 
No subdivision or consolidation of the Subordinate Voting Shares or Multiple Voting Share will occur unless, simultaneously, the Subordinate Voting Shares and Multiple Voting Shares are subdivided or consolidated in the same manner, so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Except as described below, the Subordinate Voting Shares cannot be converted into any other class of shares.

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Conversion Upon an Offer   In the event that an offer is made to purchase Multiple Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules of the Toronto Stock Exchange if the stock exchange on which the shares of the Corporation are listed has not implemented any rules with respect to "coattail" protections, or if the Multiple Voting Shares are not then listed, to be made to all or substantially all the holders of Multiple Voting Shares in a given province or territory of Canada to which these requirements apply, each Subordinate Voting Share will become convertible at the option of the holder into Multiple Voting Shares at the inverse of the Conversion Ratio (as defined below) then in effect at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Multiple Voting Shares pursuant to the offer, and for no other reason. In such event, the Corporation will deposit or cause the Corporation's transfer agent to deposit the resulting Multiple Voting Shares on behalf of the holder. Should the Multiple Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by shareholders or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Multiple Voting Shares resulting from the conversion will be automatically reconverted, without further intervention on the part of the Corporation or on the part of the holder, into Subordinate Voting Shares at the Conversion Ratio then in effect.

Multiple Voting Shares
 
 

Right to Notice and Vote
 
Holders of Multiple Voting Shares are entitled to notice of and to attend at any meeting of the shareholders of the Corporation, except a meeting of which only holders of another particular class or series of shares of the Corporation have the right to vote. At each such meeting, holders of Multiple Voting Shares are entitled to 15 votes per Multiple Voting Share.

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Class Rights   As long as any Multiple Voting Shares remain outstanding, the Corporation will not, without the consent of the holders of the Multiple Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Multiple Voting Shares. Additionally, consent of the holders of a majority of the outstanding Multiple Voting Shares is required for any action that authorizes or creates shares of any class having preferences superior to or on a parity with the Multiple Voting Shares. In connection with the exercise of the voting rights in respect of any such approvals, each holder of Multiple Voting Shares have one vote in respect of each Multiple Voting Share held. The holders of Multiple Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, bonds, debentures or other securities of the Corporation not convertible into Multiple Voting Shares.

Dividends
 
The holders of the Multiple Voting Shares are entitled to receive such dividends as may be declared and paid to holders of the Subordinate Voting Shares in any financial year as the Board may by resolution determine, on an as-converted to Subordinate Voting Share basis, assuming conversion of all Multiple Voting Shares into Subordinate Voting Shares at the Conversion Ratio. No dividend will be declared or paid on the Multiple Voting Shares unless the Corporation simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Multiple Voting Shares and Subordinate Voting Shares. In the event of the payment of a dividend in the form of shares, holders of Multiple Voting Shares will receive Multiple Voting Shares, unless otherwise determined by the Board.

Participation
 
In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or in the event of any other distribution of assets of the Corporation among its shareholders for the purpose of winding up its affairs, the holders of Multiple Voting Shares will, subject to the prior rights of the holders of any shares of the Corporation ranking in priority to the Multiple Voting Shares, be entitled to participate rateably along with all other holders of Multiple Voting Shares (on an as-converted to Subordinate Voting Shares basis) and Subordinate Voting Shares.

Changes
 
No subdivision or consolidation of the Subordinate Voting Shares or Multiple Voting Shares will occur unless, simultaneously, the Subordinate Voting Shares and Multiple Voting Shares are subdivided or consolidated in the same manner, so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

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Conversion   The Multiple Voting Shares are convertible into Subordinate Voting Shares on a one-for-one basis (the "Conversion Ratio") at any time at the option of the holder.

Automatic Conversion
 
The Multiple Voting Shares structure will terminate automatically on October 25, 2021. It will also terminate automatically upon the occurrence of the following events: (i) transfer or disposition of the Multiple Voting Shares by Mr. Boris Jordan to one or more third parties (which are not Permitted Holders, as defined under the articles of the Corporation) and (ii) Mr. Jordan or his Permitted Holders (as defined under the articles of the Corporation) no longer beneficially owning, directly or indirectly and in the aggregate, at least 5% of the issued and outstanding Subordinate Voting Shares and Multiple Voting Shares. Upon termination, the Multiple Voting Shares will automatically convert into Subordinate Voting Shares pursuant to the Conversion Ratio.

Conversion Upon an Offer
 
In the event that an offer is made to purchase Subordinate Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules of the Toronto Stock Exchange if the stock exchange on which the Subordinate Voting Shares are listed has not implemented any rules with respect to "coattail" protections, to be made to all or substantially all the holders of Subordinate Voting Shares in a given province or territory of Canada to which these requirements apply, each Multiple Voting Share will become convertible at the option of the holder into Subordinate Voting Shares pursuant to the Conversion Ratio at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Multiple Voting Shares for the purpose of depositing the resulting Subordinate Voting Shares pursuant to the offer, and for no other reason. In such event, the Corporation will deposit or cause the Corporation's transfer agent to deposit the resulting Subordinate Voting Shares on behalf of the holder. Should the Subordinate Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by shareholders or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Subordinate Voting Shares resulting from the conversion will be automatically reconverted, without further intervention on the part of the Corporation or on the part of the holder, into Multiple Voting Shares at the inverse of the Conversion Ratio then in effect.

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Coattail Agreement

        The Corporation, Odyssey Trust Company, as trustee for the benefit of the holders of Subordinate Voting Shares (in such capacity, the "Trustee") and Mr. Boris Jordan have entered into a coattail agreement dated October 25, 2018 (the "Coattail Agreement") under which Mr. Jordan, as the only holder of Multiple Voting Shares, is prohibited from selling, directly or indirectly, any Multiple Voting Shares pursuant to a takeover bid, if applicable securities legislation would have required the same offer to be made to holders of Subordinate Voting Shares had the sale been a sale of Subordinate Voting Shares rather than Multiple Voting Shares. The prohibition does not apply if a concurrent offer is made to purchase Subordinate Voting Shares if: (i) the price per Subordinate Voting Share under such concurrent offer is at least as high as the price to be paid pursuant to the take-over bid for the Multiple Voting Shares, (ii) the percentage of outstanding Subordinate Voting Shares to be taken up (exclusive of shares owned immediately prior to the offer by the offeror or persons acting jointly or in concert with the offeror) is at least as high as the percentage of Multiple Voting Shares to be sold; (iii) such concurrent offer has no condition attached, other than the right not to take up and pay for any Subordinate Voting Shares tendered if no Multiple Voting Shares are purchased; and (iv) such concurrent offer is in all other material respects identical to the offer for Multiple Voting Shares. The Coattail Agreement does not apply to prevent the sale or transfer of Multiple Voting Shares by any shareholder to a Permitted Holder (as defined in the articles of the Corporation), provided such transfer or sale is not or would not have been subject to the requirements to make a take-over bid or constitute or would constitute an exempt take-over bid (as defined under applicable securities laws). If the holders of Subordinate Voting Shares representing not less than 10% of the then outstanding Subordinate Voting Shares determine that Mr. Jordan or the Corporation have breached or intend to breach any provision of the Coattail Agreement, they may by written requisition require the Trustee to take such action as is specified in the requisition in connection with the breach or intended breach, and the Trustee is to forthwith take such action or any other action it considers necessary to enforce its rights under the Coattail Agreement on behalf of the holders of Subordinate Voting Shares. The obligation of the Trustee to take such action on behalf of the holders of Subordinate Voting Shares is conditional upon the provision to the Trustee of such funds and indemnity as it may reasonably require in respect of any costs or expenses it may incur in connection with such action. Holders of Subordinate Voting Shares may not institute any action or proceeding, or exercise any other remedy to enforce rights under the Coattail Agreement unless they have submitted such a requisition, and provided such funds and indemnity, to the Trustee, and the Trustee shall have failed to act within 30 days of receipt thereof.

        The Coattail Agreement provides that it may not be amended, and no provision thereof may be waived, unless, prior to giving effect to such amendment or waiver, the following have been obtained: (a) the consent of any applicable securities regulatory authority in Canada and (b) the approval of at least two-thirds of the votes cast by holders of Subordinate Voting Shares excluding votes attached to Subordinate Voting Shares held by Mr. Jordan and his Permitted Holders (as defined in the articles of the Corporation) on terms which would constitute a sale for purposes of the Coattail Agreement other than as permitted thereby.


DESCRIPTION OF DEBT SECURITIES

        The following sets forth certain general terms and provisions of the Debt Securities. The particular terms and provisions of the Debt Securities offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement, which particular terms and provisions of such Debt Securities may differ from the general terms and provisions described below in some or all respects.

        The Corporation may issue Debt Securities, separately or together, with Subordinate Voting Shares, Subscription Receipts, Warrants or Units or any combination thereof, as the case may be. The Debt Securities will be issued in one or more series under an indenture (the "Indenture") to be

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entered into between the Corporation and one or more trustees (the "Trustee") that will be named in a Prospectus Supplement for a series of Debt Securities. To the extent applicable, the Indenture will be subject to and governed by the United States Trust Indenture Act of 1939, as amended. A copy of the form of the Indenture to be entered into has been or will be filed with the SEC as an exhibit to the registration statement and will be filed with the securities commissions or similar authorities in Canada when it is entered into. The description of certain provisions of the Indenture in this section do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the provisions of the Indenture. Terms used in this summary that are not otherwise defined herein have the meaning ascribed to them in the Indenture. The particular terms relating to Debt Securities offered by a Prospectus Supplement will be described in the related Prospectus Supplement. This description may include, but may not be limited to, any of the following, if applicable:

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        If the Corporation denominates the purchase price of any of the Debt Securities in a currency or currencies other than United States dollars or a non-United States dollar unit or units, or if the principal of and any premium and interest on any Debt Securities is payable in a currency or currencies other than United States dollars or a non-United States dollar unit or units, we will provide investors with information on the restrictions, elections, general tax considerations, specific terms and other information with respect to that issue of Debt Securities and such non-United States dollar currency or currencies or non-United States dollar unit or units in the applicable Prospectus Supplement.

        Each series of Debt Securities may be issued at various times with different maturity dates, may bear interest at different rates and may otherwise vary.

        The terms on which a series of Debt Securities may be convertible into or exchangeable for Subordinate Voting Shares or other securities of the Corporation will be described in the applicable Prospectus Supplement. These terms may include provisions as to whether conversion or exchange is mandatory, at the option of the holder or at the option of the Corporation, and may include provisions pursuant to which the number of Subordinate Voting Shares or other securities to be received by the holders of such series of Debt Securities would be subject to adjustment.

        To the extent any Debt Securities are convertible into Subordinate Voting Shares or other securities of the Corporation, prior to such conversion the holders of such Debt Securities will not have any of the rights of holders of the securities into which the Debt Securities are convertible, including the right to receive payments of dividends or the right to vote such underlying securities.


DESCRIPTION OF SUBSCRIPTION RECEIPTS

        The following sets forth certain general terms and provisions of the Subscription Receipts. The particular terms and provisions of the Subscription Receipts offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement, which particular terms and provisions of such Subscription Receipts may differ from the general terms and provisions described below in some or all respects.

        The Corporation may issue Subscription Receipts that may be exchanged by the holders thereof for Subordinate Voting Shares and/or other Securities of the Corporation upon the satisfaction of certain conditions. The Corporation may offer Subscription Receipts separately or together with Subordinate Voting Shares, Debt Securities, Warrants or Units, as the case may be. The Corporation will issue Subscription Receipts under one or more subscription receipt agreements. Under each subscription receipt agreement, a purchaser of Subscription Receipts will have a contractual right of rescission following the issuance of the Subordinate Voting Shares and/or other Securities of the Corporation, as the case may be, to such purchaser upon exchange of Subscription Receipts, entitling the purchaser to receive the amount paid for the Subscription Receipts upon surrender of the Subordinate Voting Shares and/or other Securities of the Corporation, as the case may be, if this Prospectus, the relevant Prospectus Supplement, and any amendment thereto, contains a misrepresentation, provided such remedy for rescission is exercised within 180 days of the date the Subscription Receipts are issued.

        Any Prospectus Supplement will contain the terms and conditions and other information relating to the Subscription Receipts being offered including:

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        Prior to the exchange of their Subscription Receipts, holders of Subscription Receipts will not have any of the rights of holders of the securities issuable on the exchange of the Subscription Receipts.


DESCRIPTION OF WARRANTS

        The following sets forth certain general terms and provisions of the Warrants. The particular terms and provisions of the Warrants offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement, which particular terms and provisions of such Warrants may differ from the general terms and provisions described below in some or all respects.

        The Corporation may issue Warrants for the purchase of Subordinate Voting Shares and/or other Securities of the Corporation. Warrants may be issued independently or together with Subordinate Voting Shares, Debt Securities and Subscription Receipts offered by any Prospectus Supplement and may be attached to, or separate from, any such offered Securities. Warrants will be issued under one or more warrant agreements entered into between the Corporation and a warrant agent named in the applicable Prospectus Supplement.

        Selected provisions of the Warrants and the warrant agreements are summarized below. This summary is not complete. The statements made in this Prospectus relating to any warrant agreement and Warrants to be issued thereunder are summaries of certain anticipated provisions thereof and are subject to, and are qualified in their entirety by reference to, all provisions of the applicable warrant agreement.

        Any Prospectus Supplement will contain the terms and other information relating to the Warrants being offered including:

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        Prior to the exercise of their Warrants, holders of Warrants will not have any of the rights of holders of the Securities subject to the Warrants.


DESCRIPTION OF UNITS

        Units are a security comprised of more than one of the other Securities described in this Prospectus offered together as a "Unit". A Unit is typically issued so the holder thereof is also the holder of each Security included in the Unit. As a result, the holder of a Unit will have the rights and obligations of a holder of each Security comprising the Unit. The agreement, if any, under which a Unit is issued may provide that the Securities comprising the Unit may not be held or transferred separately at any time or at any time before a specified date.

        The particular terms and provisions of the Units offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement, which particular terms and provisions of such Units may differ from the general terms and provisions described below in some or all respects. This description will include, where applicable: (i) the designation and terms of the Units and of the Securities comprising the Units, including whether and under what circumstances those Securities may be held or transferred separately; (ii) any provisions for the issuance, payment, settlement, transfer or exchange of the Units or of the Securities comprising the Units; (iii) whether the Units will be issued in registered or global form; and (iv) any other material terms and conditions of the Units.


PLAN OF DISTRIBUTION

        The Corporation and/or any selling securityholders may sell the Securities, separately or together: (i) to one or more underwriters or dealers; (ii) through one or more agents; or (iii) directly to one or more purchasers. The Prospectus Supplement relating to a particular offering of Securities will describe the terms of such offering of Securities, including: (i) the terms of the Securities to which the Prospectus Supplement relates, including the type of Security being offered, and the method of distribution; (ii) the name or names of any underwriters, dealers, agents or selling securityholders involved in such offering of Securities; (iii) the purchase price of the Securities offered thereby and the proceeds to, if any, and the expenses borne by, if any, the Corporation from the sale of such Securities; (iv) any commission, underwriting discounts and other items constituting compensation payable to underwriters, dealers or agents; and (v) any discounts or concessions allowed or re-allowed or paid to underwriters, dealers or agents.

        The Securities may be sold, from time to time in one or more transactions at a fixed price or prices which may be changed or at market prices prevailing at the time of sale, at prices related to such

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prevailing market prices or at negotiated prices, including sales in transactions that are deemed to be "at-the-market distributions" as defined in NI 44-102, including sales made directly on the CSE or other existing trading markets for the Securities, and as set forth in an accompanying Prospectus Supplement. The prices at which the Securities may be offered may vary as between purchasers and during the period of distribution. If, in connection with the offering of Securities at a fixed price or prices, the underwriters have made a bona fide effort to sell all of the Securities at the initial offering price fixed in the applicable Prospectus Supplement, the public offering price may be decreased and thereafter further changed, from time to time, to an amount not greater than the initial public offering price fixed in such Prospectus Supplement, in which case the compensation realized by the underwriters will be decreased by the amount that the aggregate price paid by purchasers for the Securities is less than the gross proceeds paid by the underwriters to the Corporation and/or any selling securityholders.

        Only underwriters, dealers or agents so named in the Prospectus Supplement are deemed to be underwriters, dealers or agents in connection with the Securities offered thereby. If underwriters are used in an offering, the Securities offered thereby may be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The obligations of the underwriters to purchase Securities will be subject to the conditions precedent agreed upon by the parties and the underwriters will be obligated to purchase all Securities under that offering if any are purchased. If agents are used in an offering, unless otherwise indicated in the applicable Prospectus Supplement, such agents will be acting on a "best efforts" basis for the period of their appointment. Any public offering price and any discounts or concessions allowed or re-allowed or paid to underwriters, dealers or agents may be changed from time to time.

        Underwriters, dealers and agents who participate in the distribution of Securities may be entitled under agreements to be entered into with the Corporation and/or any selling securityholders to indemnification by the Corporation and/or such selling securityholders against certain liabilities, including liabilities under securities legislation, or to contribution with respect to payments which such underwriters, dealers or agents may be required to make in respect thereof. Such underwriters, dealers and agents may be customers of, engage in transactions with, or perform services for, the Corporation and/or any selling securityholders in the ordinary course of business.

        Any offering of Debt Securities, Subscription Receipts, Warrants or Units will be a new issue of securities with no established trading market. Unless otherwise specified in the applicable Prospectus Supplement, the Debt Securities, Subscription Receipts, Warrants or Units will not be listed on any securities exchange. Unless otherwise specified in the applicable Prospectus Supplement, there is no market through which the Debt Securities, Subscription Receipts, Warrants or Units may be sold, and purchasers may not be able to resell Debt Securities, Subscription Receipts, Warrants or Units purchased under this Prospectus or any Prospectus Supplement. This may affect the pricing of the Debt Securities, Subscription Receipts, Warrants or Units in the secondary market, the transparency and availability of trading prices, the liquidity of the Securities, and the extent of issuer regulation. Subject to applicable laws, certain dealers may make a market in these Securities, but will not be obligated to do so and may discontinue any market making at any time without notice. No assurance can be given that any dealer will make a market in these Securities or as to the liquidity of the trading market, if any, for these Securities.

        In connection with any offering of the Securities, subject to applicable laws and other than an "at-the-market distribution", the underwriters or agents may over-allot or effect transactions that stabilize or maintain the market price of the offered Securities at a level above that which might otherwise prevail on the open market. Such transactions, if commenced, may be interrupted or discontinued at any time.

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        No underwriter or dealer involved in an "at-the-market distribution" under this Prospectus, no affiliate of such an underwriter or dealer and no person or company acting jointly or in concert with such an underwriter or dealer will over-allot securities in connection with such distribution or effect any other transactions that are intended to stabilize or maintain the market price of the offered Securities.


PRIOR SALES

        Information in respect of prior sales of the Subordinate Voting Shares or other Securities distributed under this Prospectus and for securities that are convertible or exchangeable into Subordinate Voting Shares or such other Securities within the previous 12-month period will be provided, as required, in a Prospectus Supplement with respect to the issuance of the Subordinate Voting Shares or other Securities pursuant to such Prospectus Supplement.


TRADING PRICE AND VOLUME

        The Subordinate Voting Shares are currently listed on the CSE under the trading symbol "CURA" and quoted on the OTCQX under the trading symbol "CURLF". The trading prices and volumes of the Subordinate Voting Shares will be provided, as required, in each Prospectus Supplement.


DIVIDENDS

        Curaleaf has never paid any dividends on its Subordinate Voting Shares. While Curaleaf is not restricted from paying dividends other than pursuant to certain solvency tests prescribed under the Business Corporations Act (British Columbia), Curaleaf does not intend to pay dividends on any of its Subordinate Voting Shares in the foreseeable future.


USE OF PROCEEDS

        Unless otherwise specified in a Prospectus Supplement, the net proceeds from the sale of Securities by the Corporation will be used for general corporate purposes (including funding ongoing operations and/or working capital requirements), to repay indebtedness outstanding from time to time, discretionary capital programs and potential future acquisitions. Each applicable Prospectus Supplement will contain specific information concerning the use of proceeds from that sale of Securities by the Corporation. The Corporation will not receive any proceeds from any sale of any Securities by selling securityholders.


CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

        Owning any of the Securities may subject holders to tax consequences. The applicable Prospectus Supplement may describe certain Canadian federal income tax consequences to an investor of acquiring, owning and disposing of any of the Securities offered thereunder. Prospective investors should consult their own tax advisors prior to deciding to purchase any of the Securities.

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

        Owning any of the Securities may subject holders to tax consequences. The applicable Prospectus Supplement may describe certain U.S. federal income tax consequences of the acquisition, ownership and disposition of any of the Securities offered thereunder by an initial investor who is a U.S. person (within the meaning of the U.S. Internal Revenue Code of 1986, as amended (the "Code")), including, to the extent applicable, any such consequences relating to the Securities payable in a currency other than the U.S. dollar, issued at an original issue discount for U.S. federal income tax purposes or containing early redemption provisions or other special items. Prospective investors should consult their own tax advisors prior to deciding to purchase any of the Securities.


EARNINGS COVERAGE RATIO

        The applicable Prospectus Supplement will provide, as required by applicable Canadian securities laws, the earnings coverage ratios with respect to the issuance of Securities pursuant to such Prospectus Supplement.


CONSOLIDATED CAPITALIZATION

        The applicable Prospectus Supplement will describe any material change in, and the effect of such material change on, the share and loan capitalization of the Corporation that will result from the issuance of Securities pursuant to such Prospectus Supplement.

        Since June 30, 2020, the date of the Corporation's most recently filed consolidated financial statements, there have been no material changes to the Corporation's share capitalization on a consolidated basis, other than the issuance of an aggregate of (i) 4,383,698 Subordinate Voting Shares issued pursuant to the 2020 Private Placement; and (ii) an aggregate of 122,198,820 Subordinate Voting Shares issued in connection with the Arrow Transaction, the Blue Kudu Transaction, the Grassroots Transaction and PT Florida. See "Recent Developments—Recent Acquisitions".

        The following table summarizes the share capital of the Corporation (i) as of June 30, 2020, and (ii) as of June 30, 2020, after giving effect to material changes to the share capital since such date up to August 31, 2020:

 
  Amount Outstanding as of
June 30, 2020 		  Amount Outstanding as of
June 30, 2020 after
Giving Effect to Material
Changes to the Share
Capital since Such Date 		 

Curaleaf Holdings, Inc.

             

Subordinate Voting Shares

    439,915,251     564,198,417  

Multiple Voting Shares

    93,970,705     93,970,705  

Options to purchase Subordinate Voting Shares

    29,146,736 (1)   29,146,736  

Restricted Stock Units

    3,246,105     3,246,105  

Note:

(1)
Includes options to purchase Subordinate Voting Shares issued to certain employees of Cura Partners in replacement of options to purchase common stock of Cura Partners.

        Since June 30, 2020, the date of the Corporation's most recently filed consolidated financial statements, there have not been any material changes in the consolidated loan capitalization of the Corporation, other than the closing of the Grassroots Transaction and the Sale and Leaseback Transaction. As of June 30, 2020, as set out in Interim Financial Statements, the Corporation had total notes payable of $273.56 million and total lease liabilities of $81.87 million.

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        As of June 30, 2020, Grassroots had indebtedness outstanding in the aggregate amount of $187.91 million, comprised of $83.15 million in convertible debt and of $104.76 million in total lease liabilities. Pursuant to the terms and conditions of the Grassroots Transaction, the convertible debt was converted into equity of Grassroots prior to the Closing of the Grassroots Transaction. After giving effect to the material changes to the loan capital of the Corporation since June 30, 2020, the Grassroots Transaction and the Sale and Leaseback Transaction, the Corporation has total notes payable of $279.85 million and total lease liabilities of approximately $267.44 million.


UNITED STATES REGULATORY ENVIRONMENT

Federal Regulatory Environment

        The United States federal government regulates drugs through the Controlled Substances Act (the "CSA"), which places controlled substances, including cannabis, in one of five different schedules. Cannabis is classified as a Schedule I drug. As a Schedule I drug, the federal Drug Enforcement Agency ("DEA") considers marijuana to have a high potential for abuse; no currently accepted medical use in treatment in the United States; and a lack of accepted safety for use of the drug under medical supervision1. The classification of marijuana as a Schedule I drug is inconsistent with what the Corporation believes to be many valuable medical uses for marijuana accepted by physicians, researchers, patients, and others. As evidence of this, the federal Food and Drug Administration ("FDA"). on June 25, 2018 approved Epidiolex (cannabidiol) ("CBD") oral solution with an active ingredient derived from the cannabis plant for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. This is the first FDA-approved drug that contains a purified drug substance derived from the cannabis plant. In this case, the substance is CBD, a chemical component of marijuana that does not contain the intoxication properties of tetrahydrocannabinol ("THC"), the primary psychoactive component of marijuana. The Corporation believes the CSA categorization as a Schedule I drug is not reflective of the medicinal properties of marijuana or the public perception thereof, and numerous studies show cannabis is not able to be abused in the same way as other Schedule I drugs, has medicinal properties, and can be safely administered2.

        The federal position is also not necessarily consistent with democratic approval of marijuana at the state government level in the United States. Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of marijuana under the Cannabis Act (Canada), marijuana is largely regulated at the state level in the United States. State laws regulating cannabis conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use cannabis production

   

1
21 U.S.C. 812(b)(1).

2
See Lachenmeier, DW & Rehm, J. (2015). Comparative risk assessment of alcohol, tobacco, cannabis and other illicit drugs using the margin of exposure approach. Scientific Reports, 5, 8126. doi: 10.1038/srep08126; see also Thomas, G & Davis, C. (2009). Cannabis, Tobacco and Alcohol Use in Canada: Comparing risks of harm and costs to society. Visions Journal, 5. Retrieved from http://www.heretohelp.bc.ca/sites/default/files/visions_cannabis.pdf; see also Jacobus et al. (2009). White matter integrity in adolescents with histories of marijuana use and binge drinking. Neurotoxicology and Teratology, 31, 349-355. https://doi.org/10.1016/j.ntt.2009.07.006; Could smoking pot cut risk of head, neck cancer? (2009 August 25). Retrieved from https://www.reuters.com/article/us-smoking-pot/could-smoking-pot-cut-risk-of-head-neck-cancer-idUSTRE57O5DC20090825; Watson, SJ, Benson JA Jr. & Joy, JE. (2000). Marijuana and medicine: assessing the science base: a summary of the 1999 Institute of Medicine report. Arch Gen Psychiatry Review, 57, 547-552. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/10839332; see also Hoaken, Peter N.S. & Stewart, Sherry H. (2003). Drugs of abuse and the elicitation of human aggressive behavior. Addictive Behaviours, 28, 1533-1554. Retrieved from http://www.ukcia.org/research/AgressiveBehavior.pdf; and see also Fals-Steward, W., Golden, J. & Schumacher, JA. (2003). Intimate partner violence and substance use: a longitudinal day-to-day examination. Addictive Behaviors, 28, 1555-1574. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/14656545.

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and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts. Although the Corporation's activities are compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis may neither absolve the Corporation of liability under United States federal law nor provide a defense to federal criminal charges that may be brought against the Corporation. The Supremacy Clause of the United States Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and State law, federal law shall apply.

        Nonetheless, 37 states and the District of Columbia in the United States have legalized some form cannabis for medical use, while 11 states and the District of Columbia have legalized the adult use of cannabis for recreational purposes. As more and more states legalized medical and/or adult-use marijuana, the federal government attempted to provide clarity on the incongruity between federal prohibition under the CSA and these state-legal regulatory frameworks. Notwithstanding the foregoing, marijuana remains illegal under U.S. federal law, with marijuana listed as a Schedule I drug under the CSA. Until 2018, the federal government provided guidance to federal law enforcement agencies and banking institutions through a series of United States Department of Justice ("DOJ") memoranda. The most recent such memorandum was drafted by former Deputy Attorney General James Cole on August 29, 2013 (the "Cole Memorandum")3. The Cole Memorandum offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states.

        The Cole Memorandum offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states, and instructed federal law enforcement agencies not to prosecute violation of federal drug laws related to cannabis where the activity is permitted and regulated under cannabis laws of the relevant state.

        The Cole Memorandum put forth eight prosecution priorities:

    1.
    Preventing the distribution of marijuana to minors;

    2.
    Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

    3.
    Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;

    4.
    Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

    5.
    Preventing the violence and the use of firearms in the cultivation and distribution of marijuana;

    6.
    Preventing the drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

    7.
    Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

    8.
    Preventing marijuana possession or use on federal property.

        The Cole Memorandum was seen by many state-legal marijuana companies as a safe harbor—albeit an imperfect one—for their licensed operations that were conducted in full compliance with all applicable state and local regulations.

   

3
See James M. Cole, Memorandum for all United States Attorneys re: Guidance Regarding Marijuana Enforcement (Aug. 29, 2013), available at https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf.

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        On January 4, 2018, former United States Attorney General Jeff Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United States Attorneys (the "Sessions Memorandum"). Rather than establish national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana activity was legal under state law, the Sessions Memorandum instructs that "[i]n deciding which marijuana activities to prosecute... with the DOJ's finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions." Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.

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

        Former United States Attorney General Sessions resigned on November 7, 2018. He was replaced by William Barr on February 14, 2019. It is unclear what specific impact this development will have on U.S. federal government enforcement policy. However, in a written response to questions from U.S. Senator Cory Booker made as a nominee, Attorney General Barr stated "I do not intend to go after parties who have complied with state law in reliance on the Cole Memorandum."4 Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law.

        The Corporation believes it is too soon to determine if any prosecutorial effects will be undertaken by the rescission of the Cole Memorandum, or if Attorney General Barr will reinstitute the Cole Memorandum or a similar guidance document for United States attorneys. The sheer size of the cannabis industry, in addition to participation by State and local governments and investors, suggests that a largescale enforcement operation would possibly create unwanted political backlash for the DOJ and the Trump administration.

        As an industry best practice, despite the recent rescission of the Cole Memorandum, the Corporation abides by the following standard operating policies and procedures to ensure compliance with the guidance provided by the Cole Memorandum:

    1.
    ensure that its operations are compliant with all licensing requirements as established by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions;

    2.
    ensure that its cannabis related activities adhere to the scope of the licensing obtained (for example: in the states where cannabis is permitted only for adult-use, the products are only sold to individuals who meet the requisite age requirements);

    3.
    implement policies and procedures to ensure that cannabis products are not distributed to minors;

   

4
Questions for the Record William P. Barr Nominee to be United States Attorney General, available at https://www.judiciary.senate.gov/imo/media/doc/Barr%20Responses%20to%20Booker%20QFRs1.pdf.

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    4.
    implement policies and procedures to ensure that funds are not distributed to criminal enterprises, gangs or cartels;

    5.
    implement an inventory tracking system and necessary procedures to ensure that such compliance system is effective in tracking inventory and preventing diversion of cannabis or cannabis products into those states where cannabis is not permitted by state law, or across any state lines in general;

    6.
    ensure that its state-authorized cannabis business activity is not used as a cover or pretense for trafficking of other illegal drugs, is engaged in any other illegal activity or any activities that are contrary to any applicable anti-money laundering statutes; and

    7.
    ensure that its products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving.

        In addition, the Corporation conducts background checks to ensure that the principals and management of its operating subsidiaries are of good character, have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in cultivation, manufacturing or distribution of cannabis. The Corporation will also conduct ongoing reviews of the activities of its cannabis businesses, the premises on which they operate and the policies and procedures that are related to possession of cannabis or cannabis products outside of the licensed premises, including the cases where such possession is permitted by regulation. See "Risk Factors".

        Although the Cole Memorandum has been rescinded, one legislative safeguard for the medical marijuana industry remains in place: Congress has passed a so-called "rider" provision in the FY 2015, 2016, 2017, 2018, 2019 and 2020 Consolidated Appropriations Acts to prevent the federal government from using congressionally appropriated funds to enforce federal marijuana laws against regulated medical marijuana actors operating in compliance with state and local law. The rider is known as the "Rohrabacher-Farr" Amendment after its original lead sponsors (it is also sometimes referred to as the "Rohrabacher-Blumenauer" or "Joyce-Leahy" Amendment, but it is referred to in this Prospectus as "Rohrabacher-Farr Amendment"). Most recently, the Rohrabacher-Farr Amendment was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019. In signing the Act, President Trump issued a signing statement noting that the Act "provides that the DOJ may not use any funds to prevent implementation of medical marijuana laws by various States and territories," and further stating "I will treat this provision consistent with the President's constitutional responsibility to faithfully execute the laws of the United States." While the signing statement can fairly be read to mean that the executive branch intends to enforce the CSA and other federal laws prohibiting the sale and possession of medical marijuana, the president did issue a similar signing statement in 2017 and no major federal enforcement actions followed. On September 27, 2019 the Rohrbacher-Farr Amendment was temporarily renewed through a stopgap spending bill and was similarly renewed again on November 21, 2019. The fiscal year 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrbacher-Farr Amendment effective through September 30, 2020. In signing the spending bill, President Trump again released a statement similar to the ones he made May 2017 and February 2019 regarding the Rohrbacher-Farr Amendment.

        There is a growing consensus among marijuana businesses and numerous congressmen and congresswomen that guidance is not law and temporary legislative riders, such as the Rohrabacher-Farr Amendment, are an inappropriate way to protect lawful medical marijuana businesses. Numerous bills have been introduced in Congress in recent years to decriminalize aspects of state-legal marijuana trades. For fiscal year 2019, the strategy amongst the bipartisan Congressional Marijuana Working Group in Congress, has been to introduce numerous marijuana-related appropriations amendments in

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the Appropriations Committee in both the House and Senate, similar to the strategy employed in Fiscal 2018. The amendments included protections for marijuana-related businesses in states with medical and adult-use marijuana laws, as well as protections for financial institutions that provide banking services to state-legal marijuana businesses. The Corporation also has observed that each year more congressmen and congresswomen sign on and cosponsor marijuana legalization bills. These include the CARERS Act, REFER Act and others. While there are different perspectives on the most effective route to end federal marijuana prohibition, Congressman Blumenauer and Senator Wyden have introduced the three-bill package, Path to Marijuana Reform, which would fix the so-called Internal Revenue Service 280E provision that provides tax burdens for marijuana businesses, eliminate civil asset forfeiture and federal criminal penalties for marijuana businesses complying with state law, reduce barriers to banking, de-schedule marijuana from the federal list of controlled substances, and tax and regulate marijuana.5

        Senator Booker has also introduced the Marijuana Justice Act, which would de-schedule marijuana, and in 2018 Congresswoman Barbara Lee introduced the House companion. Colorado Republican Senator Cory Gardner has reportedly secured a probable assurance from President Trump that he would sign a bill to allow states to legalize and regulate marijuana without federal intervention.6

        In light of all of this, it was anticipated that the federal government will eventually repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit regulated cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco. Given current political trends, however, the Corporation considers these developments unlikely in the near-term. For the time being, marijuana remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor its rescission nor the continued passage of the Rohrabacher-Farr Amendment has altered that fact. The federal government of the United States has always reserved the right to enforce federal law regarding the sale and disbursement of medical or adult-use marijuana, even if state law sanctions such sale and disbursement. If the United States federal government begins to enforce United States federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Corporation's business, results of operations, financial condition and prospects could be materially adversely affected.

        Additionally, under United States federal law, it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of any Schedule I controlled substance. Due to the CSA categorization of marijuana as a Schedule I drug, federal law makes it illegal for financial institutions that depend on the Federal Reserve's money transfer system to take any proceeds from marijuana sales as deposits. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses under the United States Currency and Foreign Transactions Reporting Act of 1970 (the "Bank Secrecy Act"). Therefore, under the Bank Secrecy Act, 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 charged with money laundering or conspiracy.

        On September 26, 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (commonly known as the "SAFE Banking Act"), which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the

   

5
Wyden, Blumenauer. (2017 March 30). Wyden, Blumenauer announce bipartisan path to marijuana reform. Retrieved from https://blumenauer.house.gov/media-center/press-releases/wyden-blumenauer-announce-bipartisan-path-marijuana-reform.

6
Mark. K. Matthews, Donald Trump would "probably" support legalizing Colorado's marijuana industry—through bid by Cory Gardner and Elizabeth Warren, THE DENVER POST (June 8, 2018), available at https://www.denverpost.com/2018/06/08/coloradomarijuana-industry-sanctioning-donald-trump/.

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Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass the SAFE Banking Act, the Corporation's inability, or limitations on the Corporation's ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Corporation to operate and conduct its business as planned or to operate efficiently.

        While there has been no change in U.S. federal banking laws to accommodate businesses in the large and increasing number of U.S. states that have legalized medical and/or adult-use marijuana, in 2014, the Department of the Treasury Financial Crimes Enforcement Network ("FinCEN") issued guidance to prosecutors of money laundering and other financial crimes (the "FinCEN Guidance") and notified banks that it would not seek enforcement of money laundering laws against banks that service cannabis companies operating under state law, provided that strict due diligence and reporting standards are met. The FinCEN Guidance advised prosecutors not to focus their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses so long as that business is legal in their state and none of the federal enforcement priorities referenced in the Cole Memorandum are being violated (such as keeping marijuana away from children and out of the hands of organized crime). The FinCEN Guidance also clarifies how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, including thorough customer due diligence, but makes it clear that they are doing so at their own risk. The customer due diligence steps include:

    1.
    Verifying with the appropriate state authorities whether the business is duly licensed and registered;

    2.
    Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;

    3.
    Requesting from state licensing and enforcement authorities available information about the business and related parties;

    4.
    Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus adult use customers);

    5.
    Ongoing monitoring of publicly available sources for adverse information about the business and related parties;

    6.
    Ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and

    7.
    Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

        With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

        Because most banks and other financial institutions are unwilling to provide any banking or financial services to marijuana businesses, these businesses can be forced into becoming "cash-only" businesses. While the FinCEN Guidance decreased some risk for banks and financial institutions considering serving the industry, in practice it has not increased banks' willingness to provide services to marijuana businesses, and most banks continue to decline to operate under the strict requirements provided under the FinCEN Guidance. This is because, as described above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions

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to undertake time-consuming and costly due diligence on each marijuana business they accept as a customer.

        The few state-chartered banks and/or credit unions that have agreed to work with marijuana businesses are limiting those accounts to small percentages of their total deposits to avoid creating a liquidity risk. Since, theoretically, the federal government could change the banking laws as it relates to marijuana businesses at any time and without notice, these credit unions must keep sufficient cash on hand to be able to return the full value of all deposits from marijuana businesses in a single day, while also keeping sufficient liquid capital on hand to serve their other customers. Those state-chartered banks and credit unions that do have customers in the marijuana industry charge marijuana businesses high fees to pass on the added cost of ensuring compliance with the FinCEN Guidance. Unlike the Cole Memorandum, however, the FinCEN Guidance from 2014 has not been rescinded.

        The Secretary of the U.S. Department of the Treasury, Stephen Mnuchin, has publicly stated that the Department was not informed of any plans to rescind the Cole Memorandum. Secretary Mnuchin stated that he does not have a desire to rescind the FinCEN Guidance.7 As an industry best practice and consistent with its standard operating procedures, the Corporation adheres to all customer due diligence steps in the FinCEN Guidance.

        In the United States, a bill has been tabled in Congress to grant banks and other financial institutions immunity from federal criminal prosecution for servicing marijuana-related businesses if the underlying marijuana business follows state law. This bill, the Secure and Fair Enforcement (SAFE) Banking Act, passed the U.S. House of Representatives in September 2019 and is currently awaiting consideration in the U.S. Senate. There can be no assurance with that the bill will be passed in its current form or at all. In both Canada and the United States, transactions involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Legislative changes could help to reduce or eliminate these challenges for companies in the cannabis space and would improve the efficiency of both significant and minor financial transactions.

        An additional challenge to marijuana-related businesses is that the provisions of the Code Section 280E are being applied by the IRS to businesses operating in the medical and adult-use marijuana industry. Section 280E prohibits marijuana businesses from deducting 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 marijuana 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.

        CBD is a product that often is derived from hemp, which contains only trace amounts of THC, the psychoactive substance found in marijuana. On December 20, 2018, President Trump signed the Agriculture Improvement Act of 2018 (popularly known as the "2018 Farm Bill") into law.8 Until the 2018 Farm Bill became law, hemp and products derived from it, such as CBD, fell within the definition of "marijuana" under the CSA and the DEA classified hemp as a Schedule I controlled substance because hemp is part of the cannabis plant.

        The 2018 Farm Bill defines hemp as the plant Cannabis sativa L. and any part of the plant with a delta-9 THC concentration of not more than 0.3 percent by dry weight and removes hemp from the CSA. The 2018 Farm Bill also allows states to create regulatory programs allowing for the licensed cultivation of hemp and production of hemp-derived products. Hemp and products derived from it,

   

7
Angell, Tom. (2018 February 6). Trump Treasury Secretary Wants Marijuana Money In Banks, available at https://www.forbes.com/sites/tomangell/2018/02/06/trump-treasury-secretary-wants-marijuana-money-in-banks/#2848046a3a53; see also Mnuchin: Treasury is reviewing cannabis policies. (2018 February 7), available at http://www.scotsmanguide.com/News/2018/02/Mnuchin—Treasury-is-reviewing-cannabis-policies/.

8
H.R.2—115th Congress (2017-2018): Agriculture Improvement Act of 2018, Congress.gov (2018), https://www.congress.gov/bill/115th-congress/house-bill/2/text.

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such as CBD, may then be sold into commerce and transported across state lines provided that the hemp from which any product is derived was cultivated under a license issued by an authorized state program approved by the U.S. Department of Agriculture and otherwise meets the definition of hemp removed from the CSA. The introduction of hemp and products derived from it, such as CBD, in foods, beverages, and dietary supplements has not—been approved by the FDA. The FDA expects to engage in rulemaking on this subject.

        As at the date hereof, the Corporation believes that each of its licensed operating entities (a) holds all applicable licenses to cultivate, manufacture, possess, and/or distribute cannabis in its respective state, and (b) is in good standing and in material compliance with its respective state's cannabis regulatory program. The Corporation is in material compliance with its obligations under state law related to its cannabis cultivation, processing and dispensary licenses, other than minor violations that would not result in a material fine, suspension or revocation of any relevant license.

        The Corporation uses reasonable commercial efforts to ensure that its business is in material compliance with laws and applicable licensing requirements and engages in the regulatory and legislative process nationally and in every State it operates through the Corporation's compliance department, government relations department, outside government relations consultants, cannabis industry groups and legal counsel.

        The compliance department consists of Chief Compliance Officer Jim Shorris, Vice President Keisha Brice and local compliance officers in our subsidiaries. Compliance officers in each operating subsidiary are charged with knowing the local regulatory process and monitoring developments with their governing bodies. Each compliance officer regularly reports regulatory developments and ongoing developments to the Corporation's VP of Compliance, through written and oral communications and are charged with the creation and implementation of plans regarding all regulatory developments. The Corporation's Chief Compliance Officer and VP of Compliance work with external legal advisors in the states in which the Corporation operates to ensure that the Corporation is in on-going compliance with applicable state laws.

        The government relations department, consisting of Senior Vice President and Vice President, work closely with Curaleaf management to develop relationships with local and state regulators, industry groups, and elected officials in order to effectively monitor and engage in the regulatory and legislative processes. The Corporation's Government Relations Department develops strategies, engages legislative consultant's, directly lobbies and works with third party groups to protect the Corporation's right to operate and to advocate for legislation, regulations and oversight under which it can be successful.

State by State Regulatory Environment

        The following sections describe the legal and regulatory landscape in the states in which the Corporation currently operates.

        Nonetheless, for the reasons described above and the risks further described under "Risk Factors" herein and in the AIF, there are significant risks associated with the businesses of the Corporation. Readers are strongly encouraged to carefully read all of the risk factors contained herein, in the AIF and other documents incorporated or deemed to be incorporated by reference herein, the applicable Prospectus Supplement and the documents incorporated or deemed to be incorporated by reference therein.

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Arizona Operations

        Arizona's medical cannabis program was introduced in November 2010 when voters approved the Proposition 203 "Arizona Medical Marijuana Initiative" ballot measure that legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

        The Arizona Department of Health Services has allocated 130 medical cannabis dispensary certificates. Each dispensary certificate permits the license holder to open one dispensary and gives the license holder the option to open one cultivation facility and/or one processing facility. Cultivation and processing sites can be located anywhere in the state and are not restricted based on where the license holder's dispensary is located. Dispensaries are limited to their district for their first three years of operation. All dispensaries must be not-for-profit. Extracted oils, edibles, and flower products are permitted. Wholesale transactions are permitted. In June 2018, an Arizona appeals court ruled that extracted cannabis oils such as vaporizer cartridges were illegal. In January 2019, the Arizona Supreme Court agreed to review the legality of medical marijuana extracts such as vaporizer cartridges. In May 2019, the Arizona Supreme Court unanimously ruled that medical marijuana extracts are legal, meaning dispensaries can continue to sell oil-based formulations such as vaporizer cartridges.

        In April 2018, the Corporation acquired Swell Farmacy, a holding company that operated four licensed dispensaries through Master Service Agreements ("MSAs"). The dispensaries are located in the Phoenix area, which boasts 173,000 of the state's 260,000 patients. In May 2018, the Corporation entered into a 10-year lease to operate a 100,000 square foot indoor cultivation facility, 50,000 square feet of which is already constructed for cultivation on a 68-acre plot of land with the prospect of further expansion, including greenhouse and outdoor grows. In November 2018, the Corporation acquired Midtown Roots, a holding company operating the only dispensary located in downtown Phoenix. In May 2019, the Corporation acquired the exclusive rights to operate the Emerald dispensary, the only dispensary in the town of Gilbert, which is located in the Metro Phoenix area. In June 2019, the Corporation announced two separate acquisitions, Glendale Greenhouse, a vertically integrated cannabis business operating a cultivation and processing facility, as well as a dispensary, and Phytotherapeutics Management Services, LLC, which operates a dispensary that was subsequently moved to a newly developed, flagship dispensary located at 2175 N 83rd Avenue, which has close access to the I-10 Freeway. The Corporation may acquire additional dispensaries in this market, which is one of the biggest programs in the U.S.

        In February 2020, the Corporation closed the acquisition of Cura Partners, owners of the Select brand. Select is a leading wholesale brand in Arizona, among other states.

        In July 2020, the Corporation acquired a medical cannabis dispensary license in Arizona. The Corporation expects to open this new dispensary location in the metro-Phoenix area in early 2021.

Arkansas Operations

        Arkansas's medical cannabis program was introduced in November 2016 when 53% of voters approved Issue 6, the "Medical Marijuana Amendment," which legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in May 2019.

        The Arkansas Department of Health ("AR DOH") is the regulatory agency that oversees the program. The market is divided into two main classes of licenses: cultivation/processing and dispensary. The AR DOH has awarded 5 cultivation/processing licenses and 32 dispensary licenses. As of June 30, 2020, there were 24 operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-State operator in Arkansas, among other States, which manages one medical cannabis dispensary license in Arkansas. The dispensary is operational and is located in Little Rock, Arkansas.

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California Operations

        California's medical cannabis program was introduced in 1996 when voters passed the Proposition 215 ballot initiative, that allowed patients with a valid doctor's recommendation to possess and cultivate cannabis for personal medical use. In October 2015, Governor Brown signed the Medical Cannabis Regulation and Safety Act into law, which provided a regulatory framework around the longstanding, though unregulated, medical cannabis industry. In November 2016, voters approved Proposition 64, the Adult Use of Marijuana Act, with 57% of the vote, legalizing adult-use cannabis in the state. Dispensaries began selling to customers 21 years of age and older in January 2018.

        The Medicinal and Recreational Cannabis Regulation and Safety Act creates the general framework for the regulation of commercial medicinal and adult-use cannabis in California. Three state agencies are responsible for licensing and regulating each aspect of the industry: the Bureau of Cannabis Control regulates retailers, distributors, testing labs, microbusinesses, and temporary cannabis events; the Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, regulates manufacturers of cannabis-infused edibles for both medical and nonmedical use; and the California Department of Food and Agriculture regulates cultivators of medicinal and adult-use cannabis.

        Permitted products include oil-based formulations, edibles, and flower. Wholesaling and home delivery are permitted.

        In December 2018, the Corporation received a manufacturing, distribution, and mobile dispensing license from the City of Davis, California. In January 2019, the Corporation received its California state licenses for manufacturing and distribution. In April 2019, the Corporation acquired Eureka Investment Partners, LLC, a Monterey County, California, based operator with a cultivation facility in the Salinas Valley. In February 2020, the Corporation closed the acquisition of Cura Partners, owners of the Select brand. Select is a leading wholesale brand in California, among other states.

Colorado Operations

        Colorado's medical cannabis program was introduced in November 2000, when 54% of voters approved "Amendment 20". Colorado became the first state in the nation to legalize adult-use cannabis when 55% of voters approved "Amendment 64" in November 2012. The first adult-use dispensaries opened in January 2014.

        The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

        In February 2020, the Corporation signed a definitive agreement to acquire Blue Kudu, a Colorado-licensed processor and producer cannabis edibles, operating an 8,400 square feet facility in Denver, Colorado. The transaction was completed on July 10, 2020. See "Recent Developments—Recent Acquisitions".

        In February 2020, the Corporation closed the acquisition of Cura Partners, a wholesale brand in Colorado, among other states.

Connecticut Operations

        Connecticut's medical cannabis program was introduced in May 2012 when the General Assembly passed legislation PA 12-55 'An Act Concerning the Palliative Use of Marijuana.' The program is divided into two classes of licenses: producers and dispensaries. Producers cultivate and process medicinal cannabis and wholesale to dispensaries. Dispensaries sell cannabis directly to patients and must have a pharmacist on staff.

        The program launched with six dispensary licensees and four producer licensees. The first dispensaries sold to patients in September 2014.

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        In January 2016, the Connecticut Department of Consumer Protection ("CTDCP"), the agency that oversees the program, approved three additional dispensary licenses. In December 2018, the CTDCP issued nine additional dispensary licenses, bringing the total to 18 licensed dispensaries in the state. As of at the date hereof, all 18 of these dispensaries were operational.

        Extracted oils and flower products are permitted. Edibles are permitted with the exception of confectionaries.

        Curaleaf holds one of the four approved producer licenses in the state. The Corporation began wholesaling in October 2014 and now sells to all 18 of the state's operational dispensaries. Curaleaf previously operated a 40,000 square foot facility but has recently moved to a new 60,000 square foot facility which includes cultivation space, extraction, purification facilities, and a commercial kitchen for the production of edibles.

        In April 2020, the Corporation acquired Arrow Alternative Care, the largest dispensary chain in the state with three dispensaries operating across the metro areas of Stamford, Milford and Hartford.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator with one medical cannabis dispensary license in Connecticut, among other states. The dispensary is operational and is located in Groton, Connecticut.

Florida Operations

        Florida's medical cannabis program was introduced in June 2014 when the Florida Legislature passed the Compassionate Medical Cannabis Act of 2014 ("CMCA"). The CMCA permitted low-THC cannabis oils to be dispensed and purchased by patients suffering from cancer and epilepsy. Under this program, six organizations called Medical Marijuana Treatment Centers ("MMTCs") were licensed to dispense low-THC cannabis to patients.

        In November 2016, Florida voters approved the Amendment 2 "Expand Medical Marijuana" ballot measure with 71% of the vote. This constitutional amendment expanded the program by legalizing cannabis oils for individuals with specific debilitating diseases or conditions, including chronic pain, as determined by a licensed state physician. In June 2018, Governor Scott signed Senate Bill 8-A: "Medical Use of Marijuana," which outlined how patients can qualify and receive medical cannabis under the state's constitutional amendment. The bill also increased the number of available MMTC licenses to 17, with 14 of these licenses issued as of year end 2018. In April 2019, as the result of a joint settlement, the state awarded additional licenses, and as at the date hereof, a total of 22 licenses have been granted in the state.

        A single MMTC license allows for the cultivation, processing, and dispensing of cannabis products. Originally, each MMTC was permitted to open up to 25 dispensaries statewide. With each additional 100,000 qualified patients, the dispensary cap increased by five for each MMTC. However, the limit on dispensaries no longer applies, as it expired on April 1, 2020.

        Permitted products originally included oil-based formulations. Rules permitting the sale of edible medical cannabis products are under development. In May 2018, a district court judge ruled that Florida's medical cannabis constitutional amendment requires the Department of Health to permit sales of smokable medical cannabis flower. Smokable flower was introduced as a permitted form factor in March 2019, shortly after Governor DeSantis signed a bill that repealed the state's ban on smokable medical cannabis flower.

        Each MMTC is required to cultivate and process all medical cannabis products they dispense. Wholesale transactions are permitted on a case by case basis to alleviate shortages. Home delivery is permitted.

        The Corporation holds one of the original six vertically-integrated medical cannabis licenses issued in the state. In October 2016, Curaleaf's Florida business became the third license holder to begin sales

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to patients. As at the date hereof, Curaleaf operated a 24,000 square foot indoor growing facility, a 278,000 square foot greenhouse growing facility, a 50,000 square-foot indoor growing facility, and 29 dispensaries, with plans to open additional dispensaries in 2020.

Illinois Operations

        In 2013, the Illinois General Assembly passed the Compassionate Use of Medical Cannabis Pilot Program Act (410 ILCS 130), Public Act 98-0122 (the "Illinois Act"), which was signed into law by the Governor on August 1, 2013 and went into effect on January 1, 2014. The Illinois Act allows an individual who is diagnosed with a debilitating condition to register with the state to obtain cannabis for medical use. The program currently allows 60 Dispensing Organizations (each, a "DO") and 22 cultivation centers state-wide; all separately registered in a non-vertically integrated model. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower. Overall, the program is administered by the Illinois Department of Public Health (the "IDPH"), the Illinois Department of Financial and Professional Regulations (the "IDFPR") is the regulatory agency overseeing the medical marijuana program for DOs and the Illinois Department of Agriculture (the "IDOA") is the regulatory agency overseeing the medical marijuana program for cultivation centers.

        In June 2019, Illinois governor signed legislation legalizing marijuana for recreational use. The Cannabis Regulation and Tax Act, legalizing and regulating marijuana for recreational use, went into effect on June 25, 2019, however recreational sales of marijuana began in the state on January 1, 2020. The adult use program allowed existing medical marijuana license holders to apply for Early Approval Adult Use Dispensing Organization ("EAAUDO") licenses to be able to sell adult use product at existing medical marijuana dispensaries (known as "co-located" or "same site" dispensaries) on January 1, 2020, and to have the privilege of opening a secondary adult use only retail site for every medical marijuana dispensary location the DO already had in its portfolio. All EAAUDO license holders were also required to commit to the state's groundbreaking Social Equity program either through a financial contribution, grant agreement, donation, incubation program, or sponsorship program. IDFPR will also be issuing an additional 75 Adult Use Dispensing Organization ("AUDO") licenses in 2020. IDFPR is also expected to issue an additional 110 AUDO licenses by December 21, 2021. No single person or entity can have direct or indirect financial interest in more than 10 adult use dispensary licenses.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator in Illinois, among other states. Grassroots owns a cultivation and processing facility in Illinois and its acquisition of five dispensary licenses from associated individuals is currently pending receipt of regulatory approval. Five dispensaries currently operate under those licenses, which permit up to ten dispensaries to be operated.

Kentucky Operations

        Kentucky's hemp program was introduced in 2013 when the Kentucky state legislature passed Senate Bill 50, "An Act Relating to Industrial Hemp." The program is regulated by the Kentucky Department of Agriculture. The market is divided into two main classes of licenses: growers, and processor/handlers. As of July 2020, there were 970 licensed growers, and 170 licensed processor/handlers.

        Curaleaf holds a hemp processor/handler license in Kentucky and leases a 74,000 square foot facility in Lexington. This industrial scale manufacturing facility distributes hemp-derived products, mainly cannabinoids such as CBD and CBG, at wholesale quantities to certain Curaleaf licensed medical cannabis facilities in other states, as permitted by applicable federal and state regulations. In addition, this facility serves as a centralized hub for key equipment and supplies to support Curaleaf's

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national operations. During the early onset of the Covid-19 pandemic, the facility also produced and distributed hand sanitizer to Curaleaf facilities across the U.S.

Maine Operations

        Maine's medical cannabis program was introduced in November 1999 when voters approved Question 2, the 'Maine Medical Marijuana for Specific Illnesses Initiative,' with 61% of the vote. This program permitted qualified patients, or their designated caregiver, to grow and consume cannabis, but did not create a licensing structure whereby entities could apply to cultivate, process, and/or dispense cannabis.

        In November 2009, Maine voters expanded the medical program by passing Question 5, the 'Maine Medical Marijuana Initiative,' with 59% of the vote, which established a licensing structure in which eight vertically-integrated, not-for-profit dispensaries could sell cannabis directly to registered patients. The first dispensary opened to patients in October 2010. Medical dispensaries are vertically-integrated and cultivate, process, and dispense products to patients. Wholesaling is only permitted in emergency situations. Extracted oils, edibles, and flower products are permitted.

        In November 2016, Maine voters approved Question 1, the 'Maine Marijuana Legalization Measure,' which legalized adult-use cannabis sales in the state. In May 2018, the Maine legislature overrode a veto by Governor LePage to formally approve the cannabis legalization legislation that lays the groundwork for the adult-use market. The law passed in May 2018 establishes separate classes of licenses (dispensaries, cultivators, processors) with no caps in place on the number of licenses that can be issued. In February 2019, the Department of Administrative and Financial Services, which oversees both the medical and adult-use programs, selected a consultant to write the rules and regulations for the adult-use program. Draft rules were released in April 2019, finalized and signed by the Governor in June 2019. The Office of Marijuana Policy is now accepting and processing adult-use applications and have issued 31 conditional adult-use licenses to date with the expectation the first adult-use stores will open in June 2020; however, the current timetable is unclear due to the impacts of the COVID-19 pandemic.

        Each medical licensee is permitted to open one dispensary. In July 2018, the Maine legislature overrode yet another veto by Governor LePage to formally approve a sweeping medical marijuana reform bill that regulates caregiver operations and approves the issuance of six new dispensary licenses. The bill also removes the requirement that medical cannabis license holders operate as not-for-profit entities, paving the way for the conversion of existing license holders to for-profit corporations. This bill went into effect in December 2018, though rules around the issuance of new medical licenses are still under development. As of June 30, 2020, there were still eight vertically-integrated medical dispensaries in Maine.

        The Corporation plans to open adult-use locations in Maine, and is actively applying for adult-use licenses and identifying adult-use locations so it can participate in the adult-use market once sales begin.

        The Corporation provides management services to two of the eight integrated medical cannabis licensees in the state: MEOT and Remedy. MEOT operates a 30,000 square foot indoor grow facility and a dispensary. Remedy operates a small grow facility and a dispensary and obtains most of its product wholesale via MEOT. MEOT and Remedy have both been serving patients since 2010.

        In February 2020, the management services agreement entered among the Corporation and Remedy in October 2016 was terminated, and the Corporation entered into the Remedy Operating Agreement. Under the Remedy Operating Agreement, the Corporation has acquired operational control and substantially all of the economic benefit of Remedy's business. The entering into of the Remedy Operating Agreement resulting in the Corporation controlling Remedy in accordance with

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IFRS 10. The Corporation retains a right to acquire Remedy for nominal value at such time as the residency requirement for ownership is lifted.

        In July 2020, the original management agreement entered into by the Corporation with MEOT in January 2017 was terminated, and MEOT entered into a new management agreement with Verdure, an entity in which the Corporation's CEO, Joseph Lusardi had a 50% ownership interest. The Corporation acquired Verdure in July 2020, allowing the Corporation to acquire operational control and substantially all of the economic benefit of the MEOT's business. The acquisition of Verdure resulted in the Corporation controlling MEOT in accordance with IFRS 10. The Corporation retains a right to acquire MEOT for nominal value at such time as the residency requirement for ownership is lifted.

Maryland Operations

        Maryland's medical cannabis program was introduced in May 2013 when then Governor O'Malley signed House Bill 1101 into law. The Maryland Medical Cannabis Commission issued preliminary licenses to 102 dispensaries, 15 cultivators, and 15 processors in 2016. The first dispensaries opened to patients in December 2018.

        The market is divided into three classes of licenses: dispensaries, cultivators, and processors. Wholesaling occurs between cultivators and processors, cultivators and dispensaries, and processors and dispensaries. Originally, no one company could directly control multiple licenses of the same class, but this restriction was changed in May 2019 when Governor Hogan signed a bill that permitted a single company to own up to four dispensaries. Dispensary locations are tied to the Senate District in which they were awarded, with the exception of dispensary licenses that were awarded to applicants who also were awarded a cultivation license—these dispensaries can be located at the discretion of the license holder. Permitted products include oil-based formulations and flower. Edibles are prohibited.

        In April 2018, the Maryland House and Senate approved a bill, which was later signed by Governor Hogan, that expanded the license pool, adding seven additional cultivation licenses, for a total of 22, and 13 additional processing licenses, for a total of 28. As of June 30, 2020, there were approximately 92 operational dispensaries, 17 operational cultivators, and 18 operational processors.

        Curaleaf received one of 102 preliminary medical cannabis dispensary licenses in December 2016. The Corporation launched its dispensary in the first quarter of 2018, shortly after the market launched in December 2017. The Corporation also acquired a company holding a cannabis processing license, which began operations in the first quarter of 2018.

        In January 2019, the Corporation completed a convertible debt financing with the owners of the HMS/MI Businesses which consist of one cultivation, one processing, and two dispensaries. Concurrently with completion of the convertible debt financing, the Corporation entered into supply, offtake, branding and services agreements with the HMS/MI Businesses. Conversion of the debt into the equity of the HMS/MI Businesses is expected, subject to regulatory approval, when the licenses become subject to transfer under current law, starting in August 2020. The Corporation also announced in January 2019 that it had entered into an option purchase agreement to purchase all of Town Center Wellness, LLC, subject to regulatory approval, which operates the Elevate Takoma dispensary located in Takoma Park, Maryland, that was subsequently rebranded as Curaleaf Takoma.

        In May 2019, Maryland passed legislation allowing for the sale of edibles in the market, and the Corporation has constructed a processing and manufacturing facility at Curaleaf's Frederick facility in anticipation of the implementation of these rules.

        In February 2020, the Corporation closed the acquisition of Cura Partners, a recently-launched wholesale brand in Maryland, among other states.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator. In connection with the acquisition, the Corporation acquired the right to purchase entities

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affiliated with certain former Grassroots shareholders that own a cultivation, a processing facility and a dispensary in Maryland and that manage another dispensary.

        As at the date hereof, the Corporation has been exploring the sale of HMS Health, LLC, cultivation operations and HMS Processing, LLC (together with HMS Health, LLC, the "HMS Assets"), processing operations. Such a sale would enable the Corporation to acquire the cultivation and processing assets that were previously owned by Grassroots while complying with limits on license ownership in the state of Maryland. The cultivation and processing assets of Grassroots in Maryland were spun out prior to the acquisition of Grassroots by the Corporation but the Corporation intends to purchase those assets when allowed and approved by the Maryland regulators. The Corporation continues to receive indications of interest for the HMS Assets with the intent of divesting these assets and acquiring the Maryland business formerly held by Grassroots. As a result, the Corporation classified these assets as held for sale.

        In addition to the HMS Assets, the Corporation intends to divest Curaleaf Maryland, Inc., its licensed processing business in Maryland, to ensure compliance with Maryland regulations. The Corporation has signed definitive documents to sell 100% of Curaleaf Maryland, Inc. and is awaiting regulatory approval from the state of Maryland to complete the transaction. As a result, the Corporation classified these assets as held for sale.

Massachusetts Operations

        Massachusetts' medical cannabis program was established by "An Act for the Humanitarian Medical Use of Marijuana" in November 2012 when voters passed Ballot Question 3 "Massachusetts Medical Marijuana Initiative" with 63% of the vote. The first dispensary opened in June 2015.

        In November 2016, Massachusetts voters legalized adult-use cannabis by passing ballot Question 4—Legalize Marijuana with 54% of the vote. In March 2018, the Cannabis Control Commission (the "CCC"), the regulatory body, was set up to regulate the adult-use market and approve the rules that will govern the industry. In July 2018, Governor Baker signed legislation that laid the groundwork for the adult-use market. While the CCC originally aimed to officially launch adult-use sales on July 1, 2018, issues such as a lack of licensed testing labs and disagreements with city and town officials over agreements with cannabis businesses slowed the rollout, and the first adult-use sale did not take place until November 2018.

        The Department of Health originally oversaw the medical cannabis program but, in December 2018, transferred oversight to the CCC, a change which was mandated by the aforementioned July 2018 legislation. Each medical licensee must be vertically-integrated and may have up to three medical dispensaries. Licensed medical dispensaries are given priority in adult-use licensing. As of June 30, 2020, there were 47 adult-use dispensaries permitted to open across the state; however, as a result of the COVID-19 pandemic, Governor Charlie Baker ordered the closure of all adult-use dispensaries, effective from March 24, 2020 through May 25, 2020. All adult-use sales were prohibited through the duration of the order, though medical dispensaries were permitted to remain open for medical sales. As at the date hereof, all adult-use dispensaries are permitted to resume adult-use sales.

        The CCC oversees the adult-use cannabis program. Adult-use cultivators are grouped into 11 tiers of production—ranging from up to 5,000 square feet to no larger than 100,000 square feet—and regulators will bump a licensee down to a lower tier if that licensee has not shown an ability to sell at least 70% of what it produces. Medical dispensaries that wish to add the ability to sell cannabis products to non-patients will be required to reserve 35% of their inventory or the six-month average of their medical cannabis sales for medical cannabis patients. In order to achieve an adult-use license, a prospective licensee must first sign a "Host Community Agreement" with the town in which it wishes to locate. Roughly two-thirds of municipalities in the state have a ban or a moratorium in place that prohibits cannabis businesses from operating within their jurisdiction.

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        In both the medical and adult-use markets, extracted oils, edibles, and flower products are permitted. Wholesaling is also permitted.

        The Corporation holds an integrated medical cannabis license and operates a 104,000 square foot indoor grow and three dispensaries, one licensed for medical and adult-use sales in Oxford, one licensed for medical sales in Hanover, one licensed for adult-use sales in Provincetown, and one licensed for adult-use sales in Ware. In February 2019, Curaleaf exercised an option to purchase an adjacent unit in its cultivation facility, thereby expanding its cultivation facility from 54,000 to 104,000 square feet.

        On August 9, 2019, the Corporation announced that it had been granted approval by the CCC for the Corporation's reverse takeover transaction, which the CCC deemed a change of ownership and control.

        The Corporation expects to acquire Alternative Therapies Group, another licensed medical cannabis operator in Massachusetts, which operates a 53,000 square foot cultivation facility and processing facility.

Michigan Operations

        Michigan's medical cannabis program was introduced in November 2008, when 63% of voters approved the "Michigan Compassionate Care Initiative." In November 2018, 56% of voters approved the "Michigan Regulation and Taxation of Marijuana Act," which legalized adult-use cannabis in the state. The first adult-use dispensaries opened in December 2019.

        The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

        In February 2020, the Corporation closed the acquisition of Cura Partners, owners of the Select brand. Select is a leading wholesale brand in Michigan, among other states.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator in Michigan, among other states. After the closing of Grassroots, the Corporation operates four dispensaries in Michigan, located in Kalamazoo, Ann Arbor, Bangor, and Battle Creek, and holds preliminary licensure for a 42,000 square foot cultivation and processing facility located in Lansing.

Missouri Operations

        Missouri's medical cannabis program was introduced in November 2018 when 66% of voters approved Amendment 2, the "Medical Marijuana and Veteran Healthcare Services Initiative," which legalized medical cannabis for patients with certain qualifying conditions. The first dispensary is expected to open by the end of 2020.

        The Missouri Department of Health and Senior Services ("MO DHSS") is the regulatory agency that oversees the program. The market is divided into three main classes of licenses: cultivation, processing, and dispensary. The MO DHSS has awarded 60 cultivation, 86 processing, and 192 dispensary licenses. As of June 30, 2020, there were no operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-State operator in Missouri, among other states, which holds the right to acquire awarded five medical cannabis dispensary licenses and one processing license in Missouri.

Nevada Operations

        Nevada's medical cannabis program was introduced in June 2013 when the legislature passed SB374, legalizing the medicinal use of cannabis for certified patients. The first dispensaries opened to patients in August 2015.

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        In November 2016, Nevada voters approved Question 2 with 55% of the vote, legalizing adult-use cannabis in the state. Adult-use sales launched under an "early-start" program on July 1, 2018. This market is divided into five classes of licenses: dispensaries, cultivators, distribution, product manufacturing, and testing. Licenses are tied to the locality in which they were awarded. In December 2018, the Nevada Department of Taxation, the agency which oversees the cannabis program, issued 61 new dispensary licenses. As of June 30, 2020, there were approximately 68 operational dispensaries, 134 operational cultivators, and 96 operational processors. Effective March 20, 2020, Governor Steve Sisolak ordered the closure of all dispensary storefronts, meaning that, through the duration of the order, all cannabis sales in Nevada were made via delivery. On May 1, 2020, Governor Sisolak permitted cannabis dispensaries to offer curbside pickup, in addition to delivery. On May 9, 2020, Governor Sisolak permitted the resumption of in-store sales, with certain health and safety limits, as part of the governor's plan to reopen the state.

        Extracted oils, edibles, and flower products are permitted. Wholesaling is permitted.

        In 2018, the Corporation agreed to acquire a 10,000 square foot licensed indoor cannabis cultivation and a licensed dispensary, operating in Las Vegas, Nevada. Both businesses are licensed for both medical and adult-use sales. Each of these transactions is subject to regulatory approval. In March 2019, the Corporation agreed to acquire Acres, a company with a 269,000 square foot operating cultivation facility and further expansion as needed on 37 acres of land in Amargosa Valley, Nevada, a large dispensary located in Las Vegas, Nevada, and a dispensary license for a site in Ely, Nevada. The transaction consisted of two stages, with the Corporation closing the acquisition of the cultivation and processing assets of Acres in October 2019. The Acres businesses financial results were consolidated as of November 2019 in conjunction with completion of the cultivation and processing component of the transaction. The acquisition of the Acres dispensaries and processing facility closed in January 2020.

        In February 2020, the Corporation closed the acquisition of Cura Partners, a leading wholesale brand in Nevada, among other states.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator in Nevada, among other states. The closing of the Grassroots Transaction provides the Corporation with rights to seven additional cannabis dispensary licenses in Nevada.

New Jersey Operations

        New Jersey's medical cannabis program was introduced in January 2010 when then Governor Corzine signed the New Jersey Compassionate Use Medical Marijuana Act ("NJCUMMA") into law. The NJCUMMA legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

        In March 2018, under the direction of Governor Murphy, who campaigned on a platform that included cannabis legalization, the New Jersey Department of Health ("NJDOH") issued the Executive Order 6 Report, which immediately expanded the medical cannabis program in numerous ways, including adding chronic pain and anxiety as qualifying conditions, doubling the monthly product limit, and permitting current licensees to open satellite dispensaries. In August 2018, the NJDOH began accepting applications for the licensing of six additional ATCs. These licenses were awarded in December 2018, and as of June 30, 2020, there were nine operational ATCs dispensing medical cannabis to patients from a total of 11 dispensaries. In December 2019, the New Jersey state legislature passed a bill to add an initiative to the November 2020 ballot that will allow voters to decide whether to legalize the sale of adult-use cannabis in the state.

        A single ATC license allows for the cultivation, processing, and dispensing of medical cannabis products. Originally, each ATC was permitted to open one dispensary, located within the same facility in which the ATC cultivated and processed. With the Executive Order 6 Report, each ATC can now open two additional satellite dispensaries within their NJDOH-designated region for a total of three

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dispensaries each, as well as satellite production facilities. Wholesaling is permitted with approval from the NJDOH.

        Extracted oils and flower products are permitted. The Executive Order 6 Report recommended adding edibles as a permitted product, with rulemaking for edibles the responsibility of the state legislature. As at the date hereof, the legislature has yet to develop rules for edibles, and a timeline for edibles rulemaking is yet to be determined.

        Originally, ATCs were required to be non-profit entities. However, pursuant to the Jake Honig Act, signed into law on July 2, 2019, ATCs are permitted to sell or transfer their license to a for-profit entity, pending NJDOH approval.

        In July 2020, pursuant to the CLNJ APA, the Corporation announced the completion of the acquisition of the assets of Curaleaf NJ, a vertically integrated medical cannabis non-profit corporation that holds one of the original six medical licenses in New Jersey. The Corporation now owns 100% of the Curaleaf NJ ATC operations, assets and licenses in New Jersey, for which it previously provided management services. Curaleaf NJ owns a property that includes 46,890 square feet of cultivation space. Curaleaf NJ also owns an adjacent 12,000 square foot facility, of which 4,000 square feet is utilized for dispensary operations, with the remainder used for ancillary operations such as packaging and storage. Since the start of sales in October 2015, Curaleaf NJ has established itself as a market leader, dispensing 36% of all product sold in the state in 2018. In accordance with the recently adopted regulations described above, Curaleaf NJ plans to open two more dispensary locations in the state, as well as an additional cultivation facility, for which the Corporation has secured a 111,000 square foot facility in the township of Winslow, NJ.

New York Operations

        New York's medical cannabis program was introduced in July 2014 when Governor Cuomo signed the Compassionate Care Act, which legalized cannabis oils for patients with certain qualifying conditions. Under this program, five organizations, called Registered Organizations (each, a "RO"), were licensed to dispense cannabis oil to patients, with the first sale to a patient completed in January 2016.

        In December 2016, the New York State Department of Health ("NYSDOH") added chronic pain as a qualifying condition. In the month-and-a-half following the addition of chronic pain, the number of registered patients increased by 18%. In August 2018, the NYSDOH granted licenses to five additional ROs. A single RO license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four dispensaries in NYSDOH-designated regions throughout the state. Each RO is permitted to open one cultivation/processing facility. Each RO is required to cultivate and process all medical cannabis products they dispense; however, wholesale transactions are permitted with approval from the state.

        In November 2018, Governor Cuomo signed a bill to add post-traumatic stress disorder as a qualifying condition. In July 2018, the NYSDOH added opioid replacement as a qualifying condition, meaning any condition for which an opioid could be prescribed is now a qualifying condition for medical cannabis. In August 2018, Governor Cuomo, prompted by a NYSDOH study which concluded the "positive effects" of cannabis legalization "outweigh the potential negative impacts," appointed a group to draft a bill for regulating legal adult-use cannabis sales in New York. During the 2019 state legislative session, Governor Cuomo proposed adult-use legalization in his budget proposal, though the legislature failed to include legalization in the final budget, and also failed to pass a legalization bill during the session. In January 2020, Governor Cuomo again included cannabis legalization in his budget proposal, a proposal which, as at the date hereof, is still being considered by the legislature.

        Permitted products include oil-based formulations (vaporizer cartridges, tinctures, capsules), and ground-flower sold in tamper-proof vessels. Home delivery is also permitted.

        The Corporation was awarded a vertically-integrated license in May 2018 with the right to open four dispensaries. The Corporation is only one of ten license holders in the state. The Corporation currently operates four dispensaries located in Newburgh, Plattsburgh, Queens, and Nassau County, as well as a 72,000 square foot cultivation and manufacturing facility in Ravena, New York.

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North Dakota Operations

        North Dakota's medical cannabis program was introduced in November 2016 when 64% of voters approved Measure 5, "Medical Marijuana," which legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in March 2019.

        The North Dakota Department of Health ("ND DOH") is the regulatory agency that oversees the program. The market is divided into two main classes of licenses: cultivation/processing and dispensary. The ND DOH has awarded two cultivation/processing licenses and 8 dispensary licenses. As of June 30, 2020, all 8 dispensaries were operational. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-State operator in North Dakota, among other states, with four dispensary licenses and one cultivation and processing facility in North Dakota. The four dispensaries are operational and located in Minot, Devil's Lake, Jamestown and Dickinson. The cultivation and processing facility, located in Fargo, is 33,000 square feet and is also operational.

Ohio Operations

        Ohio's medical cannabis program was introduced in June 2016 when House Bill 523 was signed into law. In November 2018, the state issued 12 'Level I' cultivation licenses, which permit up to 25,000 square feet of canopy, and 12 'Level II' cultivation licenses, which permit up to 3,000 square feet of canopy. In June 2018, the state issued 56 dispensary licenses. In August 2018, the state issued seven processing licenses, and over the next few months issued seven additional processing licenses. In January 2019, the state issued an additional 26 processing licenses for a total of 40 across the state. Due to controversies around the scoring of cultivation applications and ensuing appeals, there are currently 57 dispensary licenses, 19 'Level I' cultivation licenses, 13 'Level II' cultivation licenses, and 43 processing licenses in the state. The first dispensaries opened in January 2019.

        The Ohio Department of Commerce is responsible for regulating cultivators and processors. The Ohio State Board of Pharmacy is responsible for regulating dispensaries and the patient and caregiver registry. The Ohio State Medical Board is responsible for certifying physicians and reviewing petitions to add qualifying medical conditions.

        Extracted oils, edibles, and non-combustible flower products are permitted.

        The Corporation was awarded a preliminary processing license in Amelia, Ohio in early 2019. The Corporation has relinquished this license due to the dissolution of the Village of Amelia and the absorption of the licensed processor site into a town that does not permit cannabis activities. In May 2019, the Corporation entered into an agreement granting it an option to acquire the licenses and operations of OGT, a holder of one of the 19 Level 1 cultivation licenses and a processing license. OGT completed construction of a 32,000 square foot production facility in Johnstown, Ohio, and received its final licenses on July 1, 2020. The transfer of the OGT licenses and operations to the Corporation is pending receipt of regulatory approval.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator in Ohio, among other states, with rights to acquire one cultivation and processing facility and two dispensaries in Ohio. The Corporation will own and operate the dispensaries upon receipt of regulatory approval. Due to license ownership limitations in Ohio, the Corporation is planning to dispose of its rights in the cultivation and processing facility.

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Oklahoma Operations

        Oklahoma's medical cannabis program was introduced in June 2018, when 57% of voters approved Oklahoma State Question 788, the "Medical Marijuana Legalization Initiative." The first medical dispensaries opened in October 2018.

        The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

        In May 2020, the Corporation announced the expansion of the Select brand to the Oklahoma medical cannabis market.

        On July 23, 2020 the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator in Oklahoma, among other states. Grassroots, through its subsidiaries and subject to final regulatory approval and licensing, at one point held seven medical cannabis dispensary licenses and operated three medical cannabis dispensaries in the state. However, due to saturation of the Oklahoma medical cannabis dispensary market, where over 2,000 dispensary licenses have been awarded, as at the date hereof, the Corporation only operates one Oklahoma dispensary, located in Broken Arrow, and does not plan to develop the remaining Grassroots medical cannabis dispensary licenses in Oklahoma.

Oregon Operations

        Oregon's medical cannabis program was introduced in November 1998 when voters approved Measure 67, the Oregon Medical Marijuana Act.

        In November 2014, voters approved Measure 91, the 'Oregon Legalized Marijuana Initiative', which legalized adult-use cannabis in the state. In October 2015, the first adult-use dispensaries opened.

        The market is divided into six classes of licenses: dispensaries, cultivators, wholesalers, processors, laboratories and research. To date, the market has had a more relaxed licensing structure which has led to an oversupply of product. In 2018, Oregon cultivators grew three times the amount of cannabis that could legally be consumed in the market. In response to a report highlighting the issues in Oregon, the U.S. Attorney for Oregon, Billy Williams, said, "The recent HIDTA Insight Report on marijuana production, distribution, and consumption in Oregon confirms what we already know—it is out of control."

        In June 2018, the Oregon Liquor Control Commission, which regulates the adult-use program, announced they would not process any new adult-use license applications in order to work through the backlog that has developed as the result of 3,432 applications being submitted as of May 2018. In July 2018, the Oregon Health Authority, which regulates the medical program, conceded in a report that it has not provided effective oversight of growers and others in the industry.

        Extracted oils, edibles, and flower products are permitted.

        The Corporation holds a producer license and a processing license for adult-use and operates a 20,000 square foot outdoor cultivation center and an adjacent 17,000 square foot indoor facility for indoor growing and large-scale CO2 extraction and manufacturing. In July 2018, the Corporation acquired a dispensary, which launched operations in Portland, Oregon at the end of 2018.

        In February 2020, the Corporation closed the acquisition of Cura Partners, owners of the leading Select wholesale brand in Oregon, among other states, with processing facilities in Portland, Oregon.

Pennsylvania Operations

        Pennsylvania's medical cannabis program was introduced in April 2016 when Governor Wolf signed into law SB 3 "Medical Marijuana Act", which legalized medical cannabis oils for patients with certain qualifying conditions. The law also called for a class of licenses, called "clinical registrant" licenses,

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whereby accredited medical institutions in the state can partner with medical cannabis companies to conduct research. There are two primary classes of licenses: licenses to grow/process cannabis products, and licenses to dispense cannabis products to patients. Grower/processors wholesale products to dispensaries. In June 2018, the Pennsylvania Department of Health ("PADOH") awarded licenses to 12 grower/processors as well as 27 dispensary licensees. Each dispensary license permits the licensee to open up to three dispensaries in the region in which the license was awarded. In February 2018, the first dispensaries opened to patients.

        In May 2018, a Commonwealth Court judge halted the PADOH's planned "clinical registrant" program whereby up to eight Pennsylvania medical schools would partner with licensed medical cannabis organizations to conduct research. In June 2018, Governor Wolf signed a bill to re-implement the clinical registrant program. In June 2018, the PADOH awarded licenses to an additional 13 grower/processors. In December 2018, the PADOH awarded an additional 23 dispensary licenses. In June 2019, the PADOH awarded three clinical registrant licenses. In February 2020, the PADOH awarded four additional clinical registrant licenses. In August 2020, the PADOH awarded the eighth and final clinical registrant license.

        Originally, only oil-based formulations were permitted. In April 2018, the PADOH approved flower as a permitted medical cannabis product offering, and dispensaries began to offer flower to patients in August 2018.

        The Corporation has partnered with an accredited medical school to obtain a "Clinical Registrant" license in Pennsylvania. In February 2020, the Corporation's Pennsylvania subsidiary was approved as a Clinical Registrant in Pennsylvania by the Commonwealth's Department of Health, Office of Medical Marijuana. Under this designation, the Pennsylvania subsidiary is entitled to open a cultivation and processing facility and up to six dispensaries, under the Commonwealth's medical marijuana research program. Pennsylvania's medical cannabis program has created this class of license to promote cooperation between industry and academia in the research of medical benefits of cannabis. To support its presence in Pennsylvania, the Pennsylvania subsidiary has leased a 49,200 square foot production facility in King of Prussia, Pennsylvania.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, a cannabis multi-state operator in Pennsylvania, among other states. Grassroots subsidiaries hold cultivation, processing and three dispensary licenses, and also the rights to acquire a fourth dispensary license. Each dispensary license entitles the license holder to operate up to three dispensaries. As the date hereof, the Pennsylvania subsidiaries operate a cultivation and processing facility and nine dispensaries in Pennsylvania.

Utah Operations

        Utah's medical cannabis program was introduced in November 2018, when 53% of voters approved "Proposition 2, Medical Marijuana Initiative". In December 2018, the state legislature passed a bill that legalized medical cannabis, but implemented several changes to the Proposition 2 ballot erasure, including removing home cultivation rights for patients and adding a requirement that dispensaries employ pharmacists.

        The market is divided into three main classes of licenses: cultivation, processing, and retail. In July 2019, the UDAF awarded eight cultivation licenses. In January 2020, the Utah Department of Health awarded 14 retail licenses. The UDAF has been issuing processing licenses on a rolling basis throughout early 2020. All medical cannabis form factors are permitted, as is wholesaling. The market is expected to begin sales in 2020.

        In January 2020, the Corporation was awarded a medical cannabis retail license from the Utah Department of Health. Also, in January 2020, the Corporation announced that it received preliminary

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approval for a processing license by the UDAF. The notice grants Curaleaf permission to begin the build out of its processing facility, which is scheduled to open in mid-September, in North Salt Lake City. The Corporation also opened its first retail location in the Utah market with a new pharmacy in Lehi on August 31, 2020.

Vermont Operations

        Vermont's medical cannabis program was introduced in May 2004 when Senate Bill 76 was approved by the Vermont House and Senate and became law without the governor's signature. This legislation permitted state-qualified patients to grow and possess marijuana for medicinal purposes. This legislation was expanded in June 2007 when Senate Bill 7 was approved by the Vermont House and Senate and again became law without the governor's signature. Senate Bill 7 expanded the list of qualifying conditions and increased the number of plants that patients may legally cultivate, among other things. In June 2011, the Vermont legislate passed Senate Bill 17, the "Vermont Marijuana for Symptom Relief Act," which, among other things, authorized a state-regulated system for medical cannabis sales through licensed dispensaries.

        The first sales were made to patients in 2012. In January 2018, Vermont became the first state to legalize cannabis via the legislature when Governor Scott signed H. 511, which legalized possession of up to one ounce of cannabis, among other things, though did not create a state-regulated system for adult-use sales. As of June 30, 2020, there is still no system for commercial adult-use sales in Vermont.

        The Vermont Department of Public Safety ("VT DPS") is the regulatory agency that oversees the medical program. The market consists of five vertically integrated licenses. Each license permits the owner to operate a grow/processing facility and up to two dispensaries. As of June 30, 2020, there were 7 operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

        On July 23, 2020, the Corporation closed the acquisition of Grassroots, which operates two dispensaries and one cultivation and processing facility in Vermont.


CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

        The applicable Prospectus Supplement may describe certain Canadian federal income tax considerations generally applicable to investors described therein of purchasing, holding and disposing of the applicable Securities, including, in the case of an investor who is not a resident of Canada, Canadian non-resident withholding tax considerations.


RISK FACTORS

        Before making an investment decision, prospective purchasers of Securities should carefully consider the information and risk factors described in this Prospectus and the documents incorporated by reference herein (including subsequently filed documents incorporated by reference herein), including the applicable Prospectus Supplement. Additional risk factors relating to a specific offering of Securities may be described in the applicable Prospectus Supplement. Some of the risk factors described herein and in the documents incorporated by reference herein (including subsequently filed documents incorporated by reference herein), including the applicable Prospectus Supplement are interrelated and, consequently, investors should treat such risk factors as a whole. If any event arising from these risks occurs, the Corporation's business, prospects, financial condition, results of operations and cash flows, and an investment in the Securities, could be materially adversely affected. Additional risks and uncertainties of which the Corporation is currently unaware or that are unknown or that the Corporation currently deems to be immaterial could have a material adverse effect on the Corporation's business, prospects, financial condition, results of operations and cash flows. The Corporation cannot provide any assurances that it will successfully address any or all of these risks.

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Risks Related to the Securities of the Corporation

Voting Control

        As a result of the Multiple Voting Shares, as of August 31, 2020, Gociter Holdings Ltd., a corporation of which Mr. Boris Jordan, the Executive Chairman of the Corporation, is the beneficial owner, exercise approximately 74.3% of the voting power in respect of the Corporation's outstanding shares. The Subordinate Voting Shares are entitled to one vote per share and the Multiple Voting Shares are entitled to 15 votes per share. As a result, Mr. Jordan has the ability to control the outcome of matters submitted to the Corporation's shareholders for approval, including the election and removal of directors and any arrangement, sale of all or substantially all of the assets, fundamental change or change of business of the Corporation. If Mr. Jordan's employment with the Corporation is terminated or they resign from their positions with the Corporation, they will continue to have the ability to exercise the same significant voting power. Additionally, each Multiple Voting Share, while transferable, they may be so transferred to the holder's immediate family members or any person controlled, directly or indirectly, by the holder or the holder's immediate family members, failing which the Multiple Voting Shares will be automatically converted into Subordinate Voting Shares.

        In the event of a take-over bid, the holders of Subordinate Voting Shares are entitled to participate on an equal footing with holders of Multiple Voting Shares. Mr. Boris Jordan, as the direct or indirect owner of all the outstanding Multiple Voting Shares, has entered into the Coattail Agreement which contains provisions customary for dual class listed corporations designed to prevent transactions that otherwise would deprive the holders of Subordinate Voting Shares of rights under applicable provincial take-over bid legislation to which they would have been entitled if the Multiple Voting Shares had been Subordinate Voting Shares.

        The concentrated control through the Multiple Voting Shares could delay, defer, or prevent a change of control of the Corporation, arrangement involving the Corporation, sale of all or substantially all of the assets of the Corporation, a fundamental change of the Corporation or a change of business of the Corporation that its other shareholders support. Conversely, this concentrated control could allow Mr. Jordan's to consummate such a transaction that the Corporation's other shareholders do not support. In addition, Mr. Jordan may make long-term strategic investment decisions and take risks that may not be successful and may seriously harm the Corporation's business.

        As directors of the Corporation, Mr. Jordan owes a fiduciary duty to the Corporation and are obligated to act honestly and in good faith with a view to the best interests of the Corporation. As shareholders, even controlling shareholders, the Mr. Jordan will be entitled to vote their shares, and shares over which they have voting control, in their own interests, which may not always be in the interests of the Corporation or the other shareholders of the Corporation.

Unpredictability Caused by the Capital Structure and Voting Control

        Although other Canadian-based companies have dual class or multiple voting share structures, given the concentration of voting control that is held by Mr. Jordan and given the other unique features of the capital structure of the Corporation, the Corporation is not able to predict whether this structure and control will result in a lower trading price for or greater fluctuations in the trading price of the Subordinate Voting Shares or will result in adverse publicity to the Corporation or other adverse consequences.

Possible Difficulty of Reselling the Subordinate Voting Shares over the CSE

        The Corporation understands that almost all major securities clearing firms in the U.S. refuse to facilitate transactions related to securities of Canadian public companies involved in the marijuana industry. This appears to be due to the fact that marijuana continues to be listed as a controlled substance under U.S. federal law, with the result that marijuana-related practices or activities, including the cultivation, possession or distribution of marijuana, are illegal under U.S. federal law. Accordingly,

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U.S. residents who acquire Subordinate Voting Shares as "restricted securities" may find it difficult—if not impossible—to resell such shares over the facilities of any Canadian stock exchange on which the Subordinate Voting Shares may then be listed including the CSE. It remains unclear what impact, if any, this and any future actions among market participants in the U.S. will have on the ability of U.S. residents to resell any Subordinate Voting Shares that they may acquire in open market transactions.

No Dividend Record

        The Corporation has no dividend record, and the ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. Dividends paid by the Corporation would be subject to tax and, potentially, withholdings. The Corporation does not anticipate paying any dividends on the Subordinate Voting Shares in the foreseeable future.

Additional Issuance of Subordinate Voting Shares May Result in Dilution

        The Corporation may issue additional securities in the future, which may dilute a shareholder's holdings in the Corporation. The Corporation's articles permit the issuance of an unlimited number of Subordinate Voting Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The Board has discretion to determine the price and the terms of further issuances. The Corporation may issue additional Subordinate Voting Shares in subsequent offerings (including through the sale of securities convertible into or exchangeable or exercisable for Subordinate Voting Shares). Moreover, additional Subordinate Voting Shares will be issued by the Corporation on the exercise, conversion or redemption of certain outstanding securities of the Corporation in accordance with their terms. The Corporation may also issue Subordinate Voting Shares to finance future acquisitions. The Corporation cannot predict the size of future issuances of Subordinate Voting Shares or the effect that future issuances and sales of Subordinate Voting Shares will have on the market price of the Subordinate Voting Shares. Issuances of a substantial number of additional Subordinate Voting Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices for the Subordinate Voting Shares. With any additional issuance of Subordinate Voting Shares, investors will suffer dilution to their voting power and the Corporation may experience dilution in its revenue per share.

Volatile Market Price of the Subordinate Voting Shares

        The market price of the Subordinate Voting Shares cannot be predicted and has been and may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Corporation's control, including the COVID-19 pandemic. This volatility may affect the ability of holders of Subordinate Voting Shares to sell their securities at an advantageous price. Market price fluctuations in the Subordinate Voting Shares may be due to the Corporation's operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts' estimates, adverse changes in general market conditions or competitive, regulatory or economic trends, adverse changes in the economic performance or market valuations of companies in the industry in which the Corporation operates, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments or other material public announcements by the Corporation or its competitors or government and regulatory authorities, operating and share price performance of the companies that investors deem comparable to the Corporation, addition or departure of the Corporation's executive officers and other key personnel, changes in global financial markets and global economies and general market conditions, such as interest rates and including those caused by COVID-19, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Subordinate Voting Shares.

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        Financial markets have at times historically experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Subordinate Voting Shares may decline even if the Corporation's operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue or arise, the Corporation's operations may be adversely impacted and the trading price of the Subordinate Voting Shares may be materially adversely affected.

No Market for Certain Securities

        There is currently no market through which the Securities, other than the Subordinate Voting Shares, may be sold and, unless otherwise specified in the applicable Prospectus Supplement, the Debt Securities, Subscription Receipts, Warrants or Units will not be listed on any securities or stock exchange or any automated dealer quotation system. As a consequence, purchasers may not be able to resell such Debt Securities, Subscription Receipts, Warrants or Units purchased under this Prospectus. This may affect the pricing of the Securities, other than the Subordinate Voting Shares, in the secondary market, the transparency and availability of trading prices, the liquidity of these securities and the extent of issuer regulation. There can be no assurance that an active trading market for the Securities, other than the Subordinate Voting Shares, will develop or, if developed, that any such market, including for the Subordinate Voting Shares, will be sustained.

Risks Related to the COVID-19 Pandemic

        The novel coronavirus commonly referred to as "COVID-19" was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

        The rapid development of the COVID-19 pandemic and the measures being taken by governments and private parties to respond to it are extremely fluid. While the Corporation has continuously sought to assess the potential impact of the pandemic on its financial and operating results, any assessment is subject to extreme uncertainty as to probability, severity and duration. The Corporation has attempted to assess the impact of the pandemic by identifying risks in the following principle areas.

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        The Corporation is actively addressing the risk to business continuity represented by each of the above factors through the implementation of a broad range of measures throughout its structure and is re-assessing its response to the COVID-19 pandemic on an ongoing basis. The above risks individually or collectively may have a material impact on the Corporation's ability to generate revenue. Implementing measures to remediate the risks identified above may materially increase our costs of doing business, reduce our margins and potentially result in losses. While the Corporation is not currently in financial distress, if the Corporation's financial situation materially deteriorates as a result of the impact of the pandemic, the Corporation could eventually be unable to meet its obligations to third parties, including observing financial covenants under the Term Loan Facility, which in turn could lead to insolvency and bankruptcy of the Corporation.

Risks Related to the Business Structure of the Corporation

Holding Company Structure

        Curaleaf Holdings, Inc. is a holding company as all of its assets are the capital stock of its subsidiaries in each of the markets the Corporation operates in and/or holds licenses in the adult-use and/or medicinal cannabis marketplace in Arizona, Arkansas, California, Colorado, Connecticut, Florida, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Utah and Vermont; and has no material assets other than: (a) cash on hand; and (b) ownership of its subsidiaries, stakes in joint ventures and minority interests in certain operating companies. As a result, investors in the Corporation are subject to the risks attributable to its subsidiaries. As a holding company, the Corporation conducts substantially all of its business through its subsidiaries, which generate substantially all of its revenues. Consequently, the Corporation's cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings to the Corporation. To the extent that the Corporation requires funds, and its subsidiaries and such other entities are restricted from making such distributions by applicable law, regulation or contract, or are otherwise unable to provide such funds, it could materially adversely affect the Corporation's liquidity and financial condition, as well as its ability to make distributions to its shareholders. In the event of a bankruptcy, liquidation or reorganization of any of the Corporation's material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before the Corporation.

Failure to Complete Acquisitions

        The Corporation currently expects to complete certain transactions in the future. These acquisitions are subject to a number of customary closing conditions including in certain instances, regulatory approval and may not close for a variety of reasons including if the closing conditions are not satisfied or waived, some of which may not be within the control of the Corporation. In addition, even if these transactions were to be completed, they may not close on terms or within the timing currently expected. If one or more of these transactions do not close or are completed pursuant to terms or timelines different than expected, it could have an adverse effect on the Corporation's future capital plans and require the Corporation to reallocate funds.

Future Acquisitions or Dispositions

        Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Corporation's ongoing business; (ii) distraction of management; (iii) the Corporation may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; and (v) loss or reduction of control over certain of the Corporation's assets. Additionally, the

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Corporation may issue additional Subordinate Voting Shares in material amounts which would dilute the current Shareholders' holdings in the Corporation or indirect holdings in the Corporation.

        The presence of one or more material liabilities of an acquired company that are unknown to the Corporation at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Corporation. A strategic transaction may result in a significant change in the nature of the Corporation's business, operations and strategy. In addition, the Corporation may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Corporation's operations.

Acquisition Integration and Management of Growth

        The Corporation may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Corporation to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the Corporation to deal with this growth may have a material adverse effect on the Corporation's business, financial condition, results of operations or prospects.

        Achievement of the benefits of acquisitions depends in part on successfully consolidating functions, integrating and leveraging operations, procedures and personnel in a timely and efficient manner, as well as the Corporation's ability to share knowledge and realize revenues, synergies and other growth opportunities from combining acquired businesses and operations with those of the Corporation. Failure by the Corporation to effectively integrate acquisitions could lead to a failure to realize anticipated benefits of one or more acquisitions. The integration of any acquired business into the Corporation includes the combination of systems and personnel. The successful integration of an acquired business is subject to the risk that personnel and professionals from the acquired business and the Corporation may not be able to work together successfully, which could affect the Corporation's operations. In particular, the Corporation may seek to require as a condition of its acquisitions that key personnel and professionals enter into employment agreements for specified post-acquisition periods and/or non-competition undertakings, however there are risks that such commitments will not be fulfilled or that the personnel and professionals subject to same or other personnel and professionals will not be successfully integrated as productive contributors to the Corporation's business. Integration requires the dedication of substantial management effort, time and resources, which may divert Management's focus and resources from other strategic opportunities and from operational matters during the process. The acquisition integration process may also result in the disruption of ongoing business, customer, employee and other relationships that may adversely affect the Corporation's ability to achieve the anticipated benefits of a given acquisition, including the ability to realize the anticipated synergies from combining the acquired business into the Corporation. In particular, major clients of the acquired businesses may not be retained following the acquisition of such businesses There is no assurance that the Corporation will be able to successfully integrate past acquisitions. Each year, the Corporation incurs acquisition-related integration costs which may be material. In addition, the overall integration may result in unanticipated operational problems, including the Corporation's own operational, financial and management systems which may be incompatible with or inadequate to effectively integrate and manage the acquired businesses.

        Management believes that growth through acquisitions can provide certain benefits to the Corporation. A variety of factors may also adversely affect the anticipated benefits of an acquisition or prevent these from materializing or occurring within the time periods anticipated by the Corporation. In connection with acquisitions made by the Corporation, there may also be liabilities and contingencies that the Corporation failed to discover or was unable to quantify in the due diligence conducted prior to closing of an acquisition and which could have a material adverse effect on the Corporation's business, financial condition or future prospects.

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Unproven Business Strategy

        While the Corporation has existing operations and is generating revenues, it plans to significantly expand its operations and staff to meet the requirements of its business initiatives. The commercial response to the product offerings is still uncertain, and although the Corporation believes that its strategy incorporates advantages compared to other medical cannabis business models, if patients or consumers do not respond favorably to the Corporation's products or if they take longer to develop its products or establish its customer base or it proves to be more costly than currently anticipated to develop its businesses, revenues may be adversely affected.

Service Providers

        As a result of any adverse change to the approach in enforcement of U.S. cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse change in public perception in respect of the consumption of marijuana or otherwise, third party service providers to the Corporation could suspend or withdraw their services, which may have a material adverse effect on the Corporation's business, revenues, operating results, financial condition or prospects.

Enforceability of Contracts

        It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal at a federal level, judges may refuse to enforce contracts in connection with activities that violate federal law, even if there is no violation of State law. There remains doubt and uncertainty that the Corporation will be able to legally enforce contracts it enters into if necessary. The Corporation cannot be assured that it will have a remedy for breach of contract, the lack of which may have a material adverse effect on the Corporation's business, revenues, operating results, financial condition or prospects.

Reliance on Management

        The success of the Corporation is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Corporation's business, operating results, financial condition or prospects.

Competition

        The cannabis industry remains quite nascent, and so what the landscape will be in the future remains largely unknown, which in itself is a risk. Potential competitors, which in the future may include pharmaceutical companies, are also larger and better capitalized than the Corporation, may have longer operating histories and have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources. The market for the products that the Corporation offers or intends to offer is competitive. The competition will most likely increase as more U.S. States permit the use of medicinal cannabis and new industry participants emerge. Increased competition may hinder the Corporation's ability to successfully market its products and services. The Corporation may not have the resources, expertise or other competitive requirements to compete successfully in the future.

Risks Inherent in an Agricultural Business

        The Corporation's business involves the cultivation of the cannabis plant. The cultivation of this plant is subject to agricultural risks related to insects, plant diseases, unstable growing conditions, water

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and electricity availability and cost, and force majeure events. Although the Corporation cultivates its cannabis plants in indoor, climate-controlled rooms staffed by trained personnel and in the future plans to cultivate cannabis plants in greenhouses, there can be no assurance that agricultural risks will not have a material adverse effect on the cultivation of its cannabis. The Corporation may in the future cultivate cannabis plants outdoors, which would also subject it to related agricultural risks.

Unfavorable Publicity or Consumer Perception

        The Corporation believes the adult-use and medical marijuana industries are highly dependent upon consumer perception regarding the safety, efficacy and quality of the marijuana produced. In particular, the Corporation's financial performance in each State will depend on whether patients and physicians view its products as effective and safe for use. Under the laws of the States in which the Corporation and its affiliates operate, the participation of physicians and health care providers in the certification process is voluntary and therefore depends on a number of variables, including: medical professionals' views as to the use of medical cannabis to treat qualifying conditions; the risks and benefits to individual patients or patient groups; the policies of particular medical practices; and patient demand. If physicians and other medical professionals do not certify patients where certification is required under State law, the Corporation's business, financial position and results of operations may be negatively affected.

        Public perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of marijuana products. There can be no assurance that future scientific research or findings, regulatory investigations, litigation, media attention or other publicity will be favorable to the marijuana market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory investigations, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or other publicity could have a material adverse effect on the demand for adult-use or medical marijuana and on the business, results of operations, financial condition, cash flows or prospects of the Corporation.

        Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect. There is no assurance that such adverse publicity reports or other media attention will not arise. A negative shift in the public's perception of cannabis, including vaping or other forms of cannabis administration in the U.S. or any other applicable jurisdiction could cause State jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new State jurisdictions into which the Corporation could expand. Any inability to fully implement the Corporation's expansion strategy and may have a material adverse effect on the Corporation's business, results of operations or prospects.

Product Liability

        As a manufacturer and distributor of products designed to be ingested by humans, the Corporation faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of marijuana involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of marijuana alone or in combination with other medications or substances could occur. As a manufacturer, distributor and retailer of adult-use and medical marijuana, or in its role as an investor in or service provider to an entity that is a manufacturer, distributor and/or retailer of adult-use or medical marijuana, the Corporation may be subject to various product liability claims, including, among

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others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

        A product liability claim or regulatory action against the Corporation could result in increased costs, could adversely affect the Corporation's reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations, financial condition or prospects of the Corporation. There can be no assurances that the Corporation will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Corporation's potential products or otherwise have a material adverse effect on the business, results of operations, financial condition or prospects of the Corporation.

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 labeling disclosure. Such recalls cause unexpected expenses of the recall and any legal proceedings that might arise in connection with the recall. This can cause loss of a significant amount of sales. In addition, a product recall may require significant management attention. Although the Corporation has detailed procedures in place for testing its products, 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 one of the Corporation's products were subject to recall, the image of that product and the Corporation could be harmed. Additionally, product recalls can lead to increased scrutiny of operations by applicable regulatory agencies, requiring further management attention and potential legal fees and other expenses.

Results of Future Clinical Research

        Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC) and future research and clinical trials may discredit the medical benefits, viability, safety, efficacy, and social acceptance of cannabis or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of the Corporation's securities should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this Prospectus or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for the Corporation's products with the potential to lead to a material adverse effect on the Corporation's business, financial condition, results of operations or prospects.

Difficulty Attracting and Retaining Personnel

        The Corporation's success depends to a significant degree upon its ability to attract, retain and motivate highly skilled and qualified personnel. Failure to attract and retain necessary technical personnel, sales and marketing personnel and skilled management could adversely affect the Corporation's business. If the Corporation fails to attract, train and retain sufficient numbers of these highly qualified people, its prospects, business, financial condition and results of operations will be materially and adversely affected.

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Dependence on Suppliers

        The ability of the Corporation to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to equipment, parts and components. No assurances can be given that the Corporation will be successful in maintaining its required supply of equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Corporation's capital expenditure plans may be significantly greater than anticipated by the Corporation's management, and may be greater than funds available to the Corporation, in which circumstance the Corporation may curtail, or extend the timeframes for completing, its capital expenditure plans. This could have an adverse effect on the business, financial condition, results of operations or prospects of the Corporation.

        We are monitoring the outbreak of the COVID-19 coronavirus. Should the outbreak become more widespread, it could disrupt the businesses of our industry partners and third party suppliers, which, in turn, could impact our ability to procure equipment and raw materials from them and thereby negatively impact the business, financial condition, results of operations or prospects of Curaleaf.

Reliance on Inputs

        The marijuana business is dependent on a number of key inputs and their related costs including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the Corporation. In addition, any restrictions on the ability to secure required supplies or utility services or to do so on commercially acceptable terms could have a materially adverse impact on the business, financial condition and operating results. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Corporation might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Corporation in the future. Any inability to secure required supplies and services or to do so on appropriate terms and/or agreeable terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the Corporation.

Limited Market Data and Difficulty to Forecast

        As a result of recent and ongoing regulatory and policy changes in the medical and adult-use marijuana industry, the market data available is limited and unreliable. Federal and State laws prevent widespread participation and hinder market research. Therefore, the Corporation must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the industry. Market research and projections by the Corporation of estimated total retail sales, demographics, demand, and similar consumer research are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of the Corporation's management team as at the date they are made. A failure in the demand for its products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations, financial condition or prospects of the Corporation.

Intellectual Property Risks

        The Corporation's ability to compete in the future partly depends on the superiority, uniqueness and value of its intellectual property and technology, including both internally developed technology and technology licensed from third parties. To the extent the Corporation is able to do so, in order to protect its proprietary rights, the Corporation will rely on a combination of trademark, copyright and

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trade secret laws, confidentiality agreements with its employees and third parties, and protective contractual provisions which may prove insufficient to protect the Corporation's proprietary rights.

        Third parties may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to the Corporation's proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on the Corporation's business, results of operations or prospects.

        As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the CSA, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to the Corporation. As a result, the Corporation's intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third-parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, the Corporation can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal, State or local level. While many States do offer the ability to protect trademarks independent of the federal government, patent protection is wholly unavailable on a State level, and State-registered trademarks provide a lower degree of protection than would federally-registered marks.

Constraints on Marketing Products

        The development of the Corporation's business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the U.S. limits companies' abilities to compete for market share in a manner similar to other industries. If the Corporation is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Corporation's sales and results of operations could be adversely affected.

Fraudulent or Illegal Activity by Employees, Contractors and Consultants

        The Corporation is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Corporation that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for the Corporation to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Corporation to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Corporation from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Corporation, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Corporation's business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Corporation's operations, any of which could have a material adverse effect on the Corporation's business, financial condition, results of operations or prospects.

Information Technology Systems and Cyber-Attacks

        The Corporation's operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology systems and software against damage from a number of threats,

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including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Corporation's operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, information technology systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses.

        In addition, the Corporation collects and stores personal information about its patients and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the Corporation's business, financial condition and results of operations.

        The Corporation has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Corporation will not incur such losses in the future. The Corporation's risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Corporation may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

Security Breaches

        Given the nature of the Corporation's products and its lack of legal availability outside of channels approved by the government of the U.S., as well as the concentration of inventory in its facilities, there remains a risk of shrinkage as well as theft. If there was a breach in security systems and the Corporation becomes victim to a robbery or theft, the loss of cannabis plants, cannabis oils, cannabis flowers and cultivation and processing equipment or if there was a failure of information systems or a component of information systems, it could, depending on the nature of any such breach or failure, adversely impact the Corporation's reputation, business continuity and results of operations. A security breach at one of the Corporation's facilities could expose the Corporation to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Corporation's products.

Reliance on Management Services Agreements with Subsidiaries and Affiliates

        The Corporation's subsidiaries and other affiliates engage in the medicinal cannabis business through management services agreements entered into with State-licensed entities. Under such agreements, its subsidiaries and affiliates perform a number of services, including cultivation, growing and handling of marijuana plants, trimming, curing and packaging of dry flower, patient advisory, lab and scientific research services, consultation on regulatory issues and a variety of management functions. In exchange for providing these services, the Corporation's subsidiaries and affiliates receive management fees which are a key source of revenue. Payment of such fees is dependent on the continuing validity and enforceability of the relevant management services agreements. If such agreements are found to be invalid or unenforceable, or are terminated by the counter-party, this could have a material adverse effect on the business, prospects, financial condition, and operating results.

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Website Accessibility

        Internet websites are visible by people everywhere, not just in jurisdictions where the activities described therein are considered legal. As a result, to the extent the Corporation sells services or products via web-based links targeting only jurisdictions in which such sales or services are compliant with State law, the Corporation may face legal action in other jurisdictions which are not the intended object of any of the Corporation's marketing efforts for engaging in any web-based activity that results in sales into such jurisdictions deemed illegal under applicable laws.

High Bonding and Insurance Coverage

        There is a risk that a greater number of State regulatory agencies will begin requiring entities engaged in certain aspects of the business or industry of legal marijuana to post a bond or significant fees when applying, for example, for a dispensary license or renewal as a guarantee of payment of sales and franchise tax. The Corporation is not able to quantify at this time the potential scope for such bonds or fees in the States in which it currently or may in the future operate. Any bonds or fees of material amounts could have a negative impact on the ultimate success of the Corporation's business.

        The Corporation's business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labor disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability.

        Although the Corporation maintains insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance does not cover all the potential risks associated with its operations. The Corporation may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards encountered in the operations of the Corporation is not generally available on acceptable terms. The Corporation might also become subject to liability for pollution or other hazards which may not be insured against or which the Corporation may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Corporation to incur significant costs that could have a material adverse effect upon its business, results of operations, financial condition or prospects.

Past Performance Not Indicative of Future Results

        The prior investment and operational performance of the Corporation is not indicative of the future operating results of the Corporation. There can be no assurance that the historical operating results achieved by the Corporation or its affiliates will be achieved by the Corporation, and the Corporation's performance may be materially different.

Financial Projections May Prove Materially Inaccurate or Incorrect

        The Corporation's financial estimates, projections and other forward-looking information or statements included in this Prospectus are based on assumptions of future events that may or may not occur, which assumptions may not be disclosed in this Prospectus. Shareholders should inquire of the Corporation and become familiar with the assumptions underlying any estimates, projections or other forward-looking information or statements. Projections are inherently subject to varying degrees of uncertainty and their achievability depends on the timing and probability of a complex series of future events. There is no assurance that the assumptions upon which these projections are based will be realized. Actual results may differ materially from projected results for a number of reasons including increases in operation expenses, changes or shifts in regulatory rules, undiscovered and unanticipated adverse industry and economic conditions, and unanticipated competition. Accordingly, the

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Shareholders should not rely on any projections to indicate the actual results the Corporation might achieve.

Business Interruption Risks

        The Corporation may be impacted by business interruptions resulting from pandemics and public health emergencies, including those related to COVID-19. An outbreak of infectious disease, a pandemic or a similar public health threat, such as the recent outbreak of the novel coronavirus known as COVID-19, or a fear of any of the foregoing, could adversely impact the Corporation by causing operating, manufacturing supply chain, and project development delays and disruptions, labour shortages, travel and shipping disruption and shutdowns (including as a result of government regulation and prevention measures). It is unknown whether and how the Corporation may be affected if such an epidemic persists for an extended period of time. The Corporation may incur expenses or delays relating to such events outside of its control, which could have a material adverse impact on its business, operating results and financial condition.

Unionization of Employees at the Corporation's Facilities

        Employees in our New York facilities are unionized. If additional employees at our dispensaries or processing or cultivation facilities were to unionize, our relationship with our employees could be adversely affected. We would also face an increased risk of work stoppages and higher labor costs wherever labor is organized. Accordingly, unionization of our employees could have a material adverse impact on our operating costs and financial condition and could force us to raise prices on our products or curtail operations.

Natural Disasters and Terrorism Risk

        The occurrence of one or more natural disasters, such as hurricanes and earthquakes, unusually adverse weather, pandemic outbreaks, including the COVID-19 pandemic, boycotts and geo-political events, such as civil unrest, riots, war and acts of terrorism, or similar disruptions could materially adversely affect the Corporation's business, results of operations or financial condition. These events could result in physical damage to one or more of the Corporation's properties, increases in energy prices, temporary or permanent closure of one or more of the Corporation's facilities, labour shortages, temporary or long-term disruption in the supply of raw materials and other inputs, disruption in the Corporation's distribution network or disruption to the Corporation's information systems, any of which could have a material adverse effect on the Corporation's business, operating results and financial condition.

Financing Risks

Additional Financing

        The continued development of the Corporation will require additional financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There is no guarantee that the Corporation will be able to achieve its business objectives. The Corporation intends to fund its business objectives by way of additional offerings of equity and/or debt financing. The failure to raise or procure such additional funds could result in the delay or indefinite postponement of current business objectives. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to the Corporation. If additional funds are raised by offering equity securities or convertible debt, existing shareholders could suffer significant dilution. Any debt financing secured in the future could involve the granting of security against assets of the Corporation and also contain restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Corporation to obtain additional capital and to pursue

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business opportunities, including potential acquisitions. The Corporation inability to raise financing through traditional banking to fund on-going operations, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon the Corporation's business, results of operations, financial condition or prospects.

        If additional funds are raised through further issuances of equity or convertible debt securities, existing Shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to existing holders of Subordinate Voting Shares.

Restricted Access to Banking

        In February 2014, the FinCEN bureau of the U.S. Treasury Department issued guidance (which is not law) with respect to financial institutions providing banking services to cannabis businesses, including burdensome due diligence expectations and reporting requirements. The FinCEN Guidance remains effective to this day, in spite of the fact that the 2014 Cole Memorandum was rescinded and replaced by the Sessions Memorandum. The FinCEN Guidance does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the DOJ, FinCEN or other federal regulators, though. Thus, most banks and other financial institutions in the U.S. do not appear to be comfortable providing banking services to cannabis-related businesses, or relying on this guidance, which can be amended or revoked at any time by the Trump administration. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Corporation may have limited or no access to banking or other financial services in the U.S. The inability or limitation in the Corporation's ability to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Corporation to operate and conduct its business as planned or to operate efficiently.

        On September 26, 2019, the U.S. House of Representatives passed the SAFE Banking Act, which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass the SAFE Banking Act, the Corporation's inability, or limitations on the Corporation's ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Corporation to operate and conduct its business as planned or to operate efficiently.

Risks Related to the Term Loan Facility

        The Term Loan Facility requires the Corporation to satisfy certain negative covenants, including restrictions on its ability to pay dividends, to conduct transactions with affiliates, to modify any organizational documents, to invest in non-wholly owned entities and to incur subordinated and non-subordinated debt and certain covenant tests. Further, the Term Loan Facility imposes certain financial covenants, including minimum annual cash earnings and maintenance of unrestricted cash and cash equivalents. In addition, the Term Loan Facility is subject to potential mandatory quarterly amortization, the amount of which, if any, is determined by a quarterly leverage ratio test. The Term Loan Facility is non-callable in the first two years and from year 2 to 3 is payable at par +1/2 coupon, from year 3 to 31/2 at par +1/4 coupon and at par from year 31/2 to maturity. The covenants and restrictions under the Term Loan Facility may prevent the Corporation from taking actions that it believes would be in the best interest of its business and may make it difficult for it to execute its business strategy successfully or effectively compete with businesses that are not subject to the same restrictions. The Corporation's ability to comply with these covenants may be affected by economic, financial and industry conditions beyond its control, including credit or capital market disruptions. The

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breach of any of the covenants contained in the Term Loan Facility could result in a default that would permit the lenders under the Term Loan Facility to declare all amounts outstanding to be due and payable, together with accrued and unpaid interest. There is no assurance that the Corporation will be able to secure additional financing to repay the Term Loan Facility should cash flows from operations be insufficient to repay the indebtedness, whether it is in default or not. If the Corporation is unable to repay the indebtedness, the lenders could proceed against the collateral securing the indebtedness. This could have serious consequences to the Corporation's financial position and results of operations and could cause it to become bankrupt or insolvent. See "Recent Developments—Senior Secured Financing" for more information on the Term Loan Facility.

Risks of Leverage

        Although the Corporation will seek to use leverage in connection with its investments in a manner it believes is prudent, such leverage will increase the exposure of an investment to adverse economic factors such as downturns in the economy or deterioration in the condition of the investment. If the Corporation defaults on unsecured indebtedness, the terms of the loan may require the Corporation to repay the principal amount of the loan and any interest accrued thereon in addition to heavy penalties that may be imposed. Because the Corporation may engage in financings where several investments are cross-collateralized, multiple investments may be subject to the risk of loss. As a result, the Corporation could lose its interest in performing investments in the event such investments are cross-collateralized with poorly performing or nonperforming investments.

        In addition to leveraging the Corporation investments, the Corporation may borrow funds in its own name for various purposes, and may withhold or apply from distributions amounts necessary to repay such borrowings. The interest expense and such other costs incurred in connection with such borrowings may not be recovered by income from investments purchased by the Corporation. If investments fail to cover the cost of such borrowings, the value of the investments held by the Corporation would decrease faster than if there had been no such borrowings. Additionally, if the investments fail to perform to expectation, the interests of investors in the Corporation could be subordinated to such leverage, which will compound any such adverse consequences.

Risks Related to the Cannabis Business

Cannabis Continues to be a Controlled Substance under the United States Federal Controlled Substances Act

        The Corporation is engaged directly and indirectly in the medical and adult-use cannabis industry in the U.S. where only state law permits such activities. Investors are cautioned that in the U.S., cannabis is largely regulated at the State level. To the Corporation's knowledge, cannabis has been legalized in some form in 37 States and Washington, D.C., Puerto Rico and Guam as at the date hereof. Additional States have pending legislation regarding the same. Notwithstanding the permissive regulatory environment of cannabis at the State level, cannabis continues to be categorized as a controlled substance under the CSA and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the U.S. Unless and until Congress amends the CSA with respect to cannabis (and the President approves such amendment), there is a risk that federal authorities may enforce current federal law.

        The DOJ, under the current administration, could allege that the Corporation has "aided and abetted" in violations of federal law by providing financing and services to its portfolio cannabis companies. Under these circumstances, the federal prosecutor could seek to seize the assets of the Corporation, and to recover the "illicit profits" previously distributed to shareholders resulting from any of the foregoing financing or services. In these circumstances, the Corporation's operations would cease, shareholders may lose their entire investment and directors, officers and/or shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, be sent to federal prison.

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        Notwithstanding the foregoing, as part of the Congressional omnibus-spending bill, Congress renewed, through September 30, 2020, the Rohrabacher-Farr Amendment, which prohibits the DOJ from expending any funds for the prosecution of medical cannabis businesses operating in compliance with State and local laws. At such time, it may or may not be included in the omnibus appropriations package or a continuing budget resolution once the current continuing resolution expires. Should the Rohrabacher-Farr Amendment not be renewed upon expiration in subsequent spending bills, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law. Such potential proceedings could involve significant restrictions being imposed upon the Corporation or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Corporation's business, revenues, operating results and financial condition as well as the Corporation's reputation, even if such proceedings were concluded successfully in favor of the Corporation.

        Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Corporation, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical and adult-use cannabis licenses in the U.S., the listing of its securities on the CSE, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Corporation to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

        See "United States Regulatory Environment—Federal Regulatory Environment".

Change in Enforcement of Cannabis Laws

        As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the U.S. are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the Cole Memorandum acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the U.S., several states have enacted laws relating to cannabis for medical purposes.

        The Cole Memorandum outlined certain enforcement priorities for the DOJ 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 DOJ did not provide specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard.

        In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis. states where cannabis had been legalized were not characterized as a high priority. In March 2017, then newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit. However, he disagreed that it had been implemented effectively and, on January 4, 2018, Mr. Sessions issued the Sessions Memorandum that rescinded and superseded the Cole Memorandum effective as at such date. The Sessions Memorandum stated, in part, that current law reflects "Congress' determination that cannabis is a dangerous drug and cannabis activity is a serious crime", and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by U.S. Congress and to follow well-established principles when pursuing prosecutions related to cannabis

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activities. U.S. Attorney General Jeff Sessions resigned on November 7, 2018. As of his resignation, Matthew Whitaker was the acting

        U.S. Attorney General until William Barr was appointed as the U.S. Attorney General on February 14, 2019. In an April 10, 2019 Senate Appropriations Subcommittee meeting to discuss the Justice Department's budget 2020, in response to a question about his position on the proposed Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, Attorney General Barr stated: "Personally, I would still favor one uniform federal rule against marijuana," "But if there is not sufficient consensus to obtain that then I think the way to go is to permit a more federal approach so states can, you know, make their own decisions within the framework of the federal law. So we're not just ignoring the enforcement of federal law." The STATES Act, if it were to pass, would allow states to determine their own approaches to marijuana. Attorney General Barr said the legislation is still being reviewed by his office but that he would "much rather... the approach taken by the STATES Act than where we currently are." It is unclear what impact this development will have on federal government enforcement policy. The inconsistency between federal and state laws and regulations is a major risk factor.

        As a result of the Sessions Memorandum, federal prosecutors may use their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws permitting such activity. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memorandum did not discuss the treatment of medical cannabis by federal prosecutors. Under the Rohrabacher-Farr Amendment, federal prosecutors are prohibited from expending federal funds against medical cannabis activities that are in compliance with state law. Dozens of U.S. Attorneys across the country have affirmed that their view of federal enforcement priorities has not changed. In Washington, Annette Hayes, U.S. Attorney for the Western District of Washington, released a statement affirming that her office will continue to investigate and prosecute "cases involving organized crime, violent and gun threats, and financial crimes related to marijuana" and that "enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve." However, in California, at least one U.S. Attorney has made comments indicating a desire to enforce the Controlled Substances Act: Adam Braverman, Interim U.S. Attorney for the Southern District of California, has been viewed as a potential "enforcement hawk" after stating that the rescission of the 2013 Cole Memorandum "returns trust and local control to federal prosecutors" to enforce the Controlled Substances Act. Additionally, Greg Scott, the Interim U.S. Attorney for the Eastern District of California, has a history of prosecuting medical cannabis activity: his office published a statement that cannabis remains illegal under federal law, and that his office would "evaluate violations of those laws in accordance with our district's federal law enforcement priorities and resources". 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.

        Such potential proceedings could involve significant restrictions being imposed upon the Corporation or third parties, while diverting the attention of key executives. Such proceedings could have an adverse effect on the Corporation's business, revenues, operating results and financial condition as well as the Corporation's reputation and prospects, even if such proceedings were concluded successfully in favor of the Corporation. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Corporation or the seizure of its corporate assets.

        See "United States Regulatory Environment—Federal Regulatory Environment".

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Renewal of Rohrabacher-Farr Amendment

        The Rohrabacher-Farr Amendment, as discussed above, prohibits the DOJ from spending funds appropriated by Congress to enforce the tenets of the CSA against the medical cannabis industry in states which have legalized such activity. This amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. The Rohrabacher-Farr Amendment will remain in effect until September 30, 2020. At such time, it may or may not be included in the omnibus appropriations package or a continuing budget resolution, and its inclusion or non-inclusion, as applicable, is subject to political changes.

Civil Asset Forfeiture

        Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry, such as the Corporation, which is either used in the course of conducting such business, or is the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.

Laws and Regulations Affecting the Cannabis Industry are Constantly Changing

        The constant evolution of laws and regulations affecting the cannabis industry could detrimentally affect the Corporation. The current and proposed operations of the Subsidiaries are subject to a variety of local, state and federal medical cannabis laws and regulations relating to the manufacture, management, transportation, storage and disposal of cannabis, as well as laws and regulations relating to consumable products health and safety, the conduct of operations and the protection of the environment. These laws and regulations are broad in scope and subject to evolving interpretations, which could require the Corporation to incur substantial costs associated with compliance or alter certain aspects of their business plans. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the business plans of the Corporation and result in a material adverse effect on certain aspects of their planned operations. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Corporation's profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the FDA, SEC, the DOJ, the Financial Industry Regulatory Advisory or other federal or applicable state or nongovernmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or adult use purposes in the United States. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the industry may adversely affect the business and operations of the Corporation, including without limitation, the costs to remain compliant with applicable laws and the impairment of its business or the ability to raise additional capital. In addition, the Corporation will not be able to predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to its business.

Market for Cannabis Could Decline due to Regulatory Changes

        There can be no assurance that the number of States that allow the use or medicinal cannabis will increase. Furthermore, there can be no assurance that the existing States, districts and territories that permit the use of medicinal cannabis will not reverse their position. If either of these things happens at any future time, then growth of the Corporation's business may be materially impacted. The Corporation may not be able to achieve targeted revenue levels and may experience declining revenue as the potential market for its products and services diminishes.

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General Regulatory and Legal Risks

Litigation

        The Corporation may become threatened by a party, or otherwise become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Corporation becomes involved be determined against the Corporation, such a decision could adversely affect the Corporation 's ability to continue operating and the market price for the Subordinate Voting Shares. Even if the Corporation is involved in litigation and is successful, such litigation could redirect significant company resources.

Anti-Money Laundering Laws and Regulations

        The Corporation is subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Sections 1956 and 1957 of U.S.C. Title 18 (the Money Laundering Control Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada. Further, under U.S. federal law, banks and 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, aiding and abetting, or conspiracy.

        In the event that any of the Corporation's operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the U.S. were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Corporation to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while there are no current intentions to declare or pay dividends on the Subordinate Voting Shares in the foreseeable future, in the event that a determination was made that the Corporation's proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Corporation may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

Lack of Access to U.S. Bankruptcy Protections

        Because the use of cannabis is illegal under federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Corporation were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to the Corporation's U.S. operations, which would have a material adverse effect on the Corporation, its lenders and other stakeholders.

Heightened Scrutiny by Regulatory Authorities

        For the reasons set forth above, the Corporation's existing operations in the U.S., and any future operations or investments of the Corporation, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Corporation may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Corporation's ability to operate or invest in any other jurisdictions, in addition to those described herein.

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        Further to the indication by CDS Clearing and Depository Services Inc. ("CDS"), Canada's central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets that it would refuse to settle trades for cannabis issuers that have investments in the U.S., the TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S., despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.

        On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding ("MOU") with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The MOU outlines the parties' understanding of Canada's regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the U.S. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented at a time when the Subordinate Voting Shares are listed on a stock exchange, it would have a material adverse effect on the ability of holders of Subordinate Voting Shares to make and settle trades. In particular, the Subordinate Voting Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of securities through the facilities of the applicable stock exchange. Curaleaf has obtained eligibility with DTC for its Subordinate Voting Shares quotation on the OTCQX and such eligibility provides another possible avenue to clear the Subordinate Voting Shares in the event of a CDS ban. Revocation of DTC eligibility or implementation by DTC of a ban on the clearing of securities of issuers with cannabis-related activities in the United States would similarly have a material adverse effect on the ability of holders of the Subordinate Voting Shares to make and settle trades.

Risk of Legal, Regulatory or Political Change

        The success of the business strategy of the Corporation depends on the legality of the marijuana industry. The political environment surrounding the marijuana industry in general can be volatile and the regulatory framework remains in flux. To the Corporation's knowledge, some form of cannabis has been legalized in 37 States and Washington, D.C., Puerto Rico and Guam as of March 2020; however, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting the Corporation's business, results of operations, financial condition or prospects.

        Delays in enactment of new State or federal regulations could restrict the ability of the Corporation to reach strategic growth targets. The growth strategy of the Corporation is contingent upon certain federal and State regulations being enacted to facilitate the legalization of medical and adult-use marijuana. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, the growth targets of the Corporation, and thus, the effect on the return of investor capital, could be detrimental. The Corporation is unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.

        Further, there is no guarantee that State laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of State laws within their respective jurisdictions. If the federal government begins to enforce federal laws relating to cannabis in States where the sale and use of cannabis is currently legal, or if existing applicable State laws are repealed or curtailed, the Corporation's business, results of

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operations, financial condition and prospects would be materially adversely affected. t is also important to note that local and city ordinances may strictly limit and/or restrict disbursement of marijuana in a manner that will make it extremely difficult or impossible to transact business in that jurisdiction, which may adversely affect the Corporation's continued operations. Federal actions against individuals or entities engaged in the marijuana industry or a repeal of applicable marijuana legislation could adversely affect the Corporation and its business, results of operations, financial condition and prospects.

        The Corporation is also aware that multiple States are considering special taxes or fees on businesses in the marijuana industry. It is a potential yet unknown risk at this time that other States are in the process of reviewing such additional fees and taxation. Should such special taxes or fees be adopted, this could have a material adverse effect upon the Corporation's business, results of operations, financial condition or prospects.

        The commercial medical and adult-use marijuana industry is in its infancy and the Corporation anticipates that such regulations will be subject to change as the jurisdictions in which the Corporation does business matures. The Corporation has in place a detailed compliance program headed by its VP of Compliance who oversees, maintains, and implements the compliance program and personnel. Compliance officers in each operating subsidiary are charged with knowing the local regulatory process and monitoring developments with their governing bodies. Each compliance officer regularly reports regulatory developments to the VP of Compliance or enforcement by regulators in certain States against such services arrangements through written and oral communications and is charged with the creation and implementation of plans regarding any regulatory developments. In addition to the Corporation's robust legal and compliance departments, the Corporation also has local legal/regulatory counsel engaged in every jurisdiction in which it operates. Corporation's compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Additionally, the Corporation has created comprehensive standard operating procedures that include detailed descriptions and instructions for monitoring inventory at all stages of development and distribution. The Corporation will continue to monitor compliance on an ongoing basis in accordance with its compliance program, standard operating procedures, and any changes to regulation in the marijuana industry.

        Overall, the medical and adult-use marijuana industry is subject to significant regulatory change at both the State and federal level. The inability of the Corporation to respond to the changing regulatory landscape may cause it to not be successful in capturing significant market share and could otherwise harm its business, results of operations, financial condition or prospects.

General Regulatory and Licensing Risks

        The Corporation's business is subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of marijuana, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the Corporation's business objectives are contingent, in part, upon compliance with applicable regulatory requirements and obtaining all requisite regulatory approvals. Changes to such laws, regulations and guidelines due to matters beyond the control of the Corporation may result in a material adverse effect on the Corporation's business, financial condition, results of operations or prospects.

        The Corporation is required to obtain or renew further government permits and licenses for its current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time-consuming process potentially involving numerous regulatory agencies, involving public hearings and costly undertakings on the Corporation's part. The duration and success of the Corporation's efforts to obtain, amend and renew permits and licenses are contingent

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upon many variables not within its control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority. The Corporation may not be able to obtain, amend or renew permits or licenses that are necessary to its operations or to achieve the growth of its business. Any unexpected delays or costs associated with the permitting and licensing process could impede the ongoing or proposed operations of the Corporation. To the extent necessary permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Corporation may be curtailed or prohibited from proceeding with its ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on the Corporation's business, financial condition, results of operations or prospects.

        Several of the Corporation's licenses are subject to renewal on an annual or periodic basis; however, they are generally renewed, as a matter of course, if the license holder continues to operate in compliance with applicable legislation and regulations and without any material change to its operations.

        While the Corporation's compliance controls have been developed to mitigate the risk of any material violations of any license it holds arising, there is no assurance that the Corporation's licenses will be renewed by each applicable regulatory authority in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process for any of the licenses held by the Corporation could impede the ongoing or planned operations of the Corporation and have a material adverse effect on the Corporation's business, financial condition, results of operations or prospects.

        The Corporation may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Corporation's reputation, require the Corporation to take, or refrain from taking, actions that could harm its operations or require Corporation to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management's attention and resources or have a material adverse impact on the Corporation's business, financial condition, results of operations or prospects.

Limitations on Ownership of Licenses

        In certain States, the cannabis laws and regulations limit, not only the number of cannabis licenses issued, but also the number of cannabis licenses that one person may own. For example, in Massachusetts, no person may have an ownership interest, or control over, more than three license holders in any category—cultivation, processing, adult use dispensing or medical dispensing. In Maryland, the Department of Health has taken the position that the law prevents having a material ownership interest in more than four license holders in any one of these three categories. In New Jersey, there are restrictions on overlapping ownership of license holders. In Florida, there are also limitations on owning more than one of the vertically integrated medical cannabis licenses offered in that state. The Corporation believes that, where such restrictions apply, it may still capture significant share of revenue in the market through wholesale sales, exclusive marketing relations, provision of management or support services, franchising and similar arrangement with other operators in compliance with state law. Nevertheless, such limitations on the acquisition of ownership of additional licenses within certain States or enforcement by regulators in certain States against such services arrangements may limit the Corporation's ability to grow organically or to increase its market share in such States.

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Regulatory Action and Approvals from the Food and Drug Administration

        The Corporation's cannabis-based products are supplied to patients diagnosed with certain medical conditions. However, the Corporation's cannabis-based products are not approved by the FDA as "drugs" or for the diagnosis, cure, mitigation, treatment, or prevention of any disease. Accordingly, the FDA may regard any promotion of the cannabis-based products as the promotion of an unapproved drug in violation of the Food, Drug and Cosmetic Act ("FDCA"). Cannabidiol, a compound referred to as CBD is one of the non-psychotropic cannabinoids in industrial hemp from the plant species Cannabis sativa L. There has been growing interest in CBD in recent years. CBD is increasingly used as an ingredient in food and beverages, as an ingredient in dietary supplements and as an ingredient in cosmetics, thereby generating new investments and creating employment in the cultivation and processing of hemp and hemp-derived products. Pharmaceutical products with CBD as an active ingredient have also been developed, including one product approved by the FDA (Epidiolex®). Foods and beverages, dietary supplements, pharmaceuticals, and cosmetics containing CBD are all subject to regulation under the FDCA. The FDA has asserted that CBD is not a lawful ingredient in foods and beverages, supplements and pharmaceuticals (unless FDA-approved), although the FDA has generally refrained from taking enforcement action against those products. CBD-containing products may also be subject to the jurisdiction of the state and local health authorities.

        In recent years, the FDA has issued letters to a number of companies selling products that contain CBD oil derived from hemp warning them that the marketing of their products violates the FDCA. FDA enforcement action against the Corporation could result in a number of negative consequences, including fines, disgorgement of profits, recalls or seizures of products, or a partial or total suspension of the Corporation's production or distribution of its products. Any such event could have a material adverse effect on the Corporation's business, prospects, financial condition, and operating results.

        On December 20, 2018, the Agricultural Improvement Act, H.R. 25, which included the language of the Hemp Farming Act of 2018, removed industrial hemp and hemp-derived products with a THC concentration of not more than 0.3 percent (dry weight basis) from Schedule I of the Controlled Substances Act. This has the effect of legalizing the cultivation of industrial hemp for commercial purposes, including the production of CBD and other cannabinoids, except for THC, subject to regulations to be developed by the U.S. Department of Agriculture.

        The Corporation sells and distributes certain products containing CBD. There is a risk that the FDA or state or local Departments of Health will seek to stop the Corporation from selling its CBD products or seek to have the claims made for those products revised.

Constraints on Marketing Products

        The development of the Corporation's business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the U.S. limits companies' abilities to compete for market share in a manner similar to other industries. If the Corporation is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Corporation's sales and results of operations could be adversely affected.

European Anti-Money Laundering Laws and Regulation

        European laws, regulations and their enforcement, particularly those pertaining to anti-money laundering, relating to making and/or holding investments in cannabis-related practices or activities are in flux and vary dramatically from jurisdiction to jurisdiction across Europe (including without limitation, the United Kingdom). The enforcement of these laws and regulations and their effect on shareholders are uncertain and involve considerable risk. In the event that any of the Corporation's

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operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations are found to be in violation of such laws or regulation, such transactions (including holding of shares in the Corporation) could expose any shareholder(s) in that jurisdiction to potential prosecution and/or criminal and civil sanction.

Loss of Foreign Private Issuer Status

        The Corporation is a Foreign Private Issuer as defined in Rule 405 under the United States Securities Act of 1933, as amended (the "U.S. Securities Act") and Rule 3b-4 under the U.S. Exchange Act. If, as of the last business day of the Corporation's second fiscal quarter for any year, more than 50% of the Corporation's outstanding voting securities (as determined under Rule 405 of the U.S. Securities Act) are directly or indirectly held of record by residents of the United States, the Corporation will no longer meet the definition of a Foreign Private Issuer, which may have adverse consequences on the Corporation's ability to raise capital in private placements or Canadian prospectus offerings. In addition, the loss of the Corporation's Foreign Private Issuer status may likely result in increased reporting requirements and increased audit, legal and administration costs. These increased costs may significantly affect the Corporation's business, financial condition and results of operations.

        The term "Foreign Private Issuer" is defined as any non-U.S. corporation, other than a foreign government, except any issuer meeting the following conditions:

    (a)
    more than 50 percent of the outstanding voting securities of such issuer are, directly or indirectly, held of record by residents of the United States; and

    (b)
    any one of the following:

    (i)
    the majority of the executive officers or directors are United States citizens or residents, or

    (ii)
    more than 50 percent of the assets of the issuer are located in the United States, or

    (iii)
    the business of the issuer is administered principally in the United States.

        A "holder of record" is defined by Rule 12g5-1 under the U.S. Exchange Act. Generally speaking, the holder identified on the record of security holders is considered as the record holder. In December 2016, the SEC issued a Compliance and Disclosure Interpretation to clarify that issuers with multiple classes of voting stock carrying different voting rights may, for the purposes of calculating compliance with this threshold, examine either (i) the combined voting power of its share classes, or (ii) the number of voting securities, in each case held of record by U.S. residents. Based on this interpretation, each issued and outstanding Multiple Voting Share is counted as one voting security and each issued and outstanding Subordinate Voting Shares is counted as one voting security for the purposes of determining the 50 percent U.S. resident threshold and the Corporation is a "Foreign Private Issuer". Should the SEC's guidance and interpretation change, it is likely the Corporation will lose its Foreign Private Issuer status.

The Corporation's Status as an "Emerging Growth Company" under United States securities laws

        The Corporation is an "emerging growth company" as defined in section 3(a) of the U.S. Exchange Act (as amended by the JOBS Act, enacted on April 5, 2012), and the Corporation will continue to qualify as an emerging growth company until the earliest to occur of: (a) the last day of the fiscal year during which the Corporation has total annual gross revenues of $1.07 billion (as such amount is indexed for inflation every five years by the SEC) or more; (b) the last day of the fiscal year of the Corporation following the fifth anniversary of the date of the first sale of common equity securities of the Corporation pursuant to an effective registration statement under the U.S. Securities Act; (c) the date on which the Corporation has, during the previous three year period, issued more

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than $1 billion in non-convertible debt; and (d) the date on which the Corporation is deemed to be a "large accelerated filer", as defined in Rule 12b-2 under the U.S. Exchange Act. The Corporation will qualify as a large accelerated filer (and would cease to be an emerging growth company) at such time when on the last business day of its second fiscal quarter of such year the aggregate worldwide market value of its common equity held by non-affiliates will be $700 million or more.

        For so long as the Corporation remains an emerging growth company, it is permitted to and intends to rely upon exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the JOBS Act. The Corporation takes advantage of some, but not all, of the available exemptions available to emerging growth companies. The Corporation cannot predict whether investors will find the Subordinate Voting Shares less attractive because the Corporation relies upon certain of these exemptions. If some investors find the Subordinate Voting Shares less attractive as a result, there may be a less active trading market for the Subordinate Voting Shares and the price per Subordinate Voting Share may be more volatile. On the other hand, if the Corporation no longer qualifies as an emerging growth company, the Corporation would be required to divert additional management time and attention from the Corporation's development and other business activities and incur increased legal and financial costs to comply with the additional associated reporting requirements, which could negatively impact the Corporation's business, financial condition and results of operations.

Limited Trademark Protection

        The Subsidiaries will not be able to register any U.S. federal trademarks for their cannabis products. Because producing, manufacturing, processing, possessing, distributing, selling, and using cannabis is illegal under the CSA, the United States Patent and Trademark Office will not permit the registration of any trademark that identifies cannabis products. As a result, the Subsidiaries likely will be unable to protect their cannabis product trademarks beyond the geographic areas in which they conduct business. The use of its trademarks outside the states in which they operate by one or more other persons could have a material adverse effect on the value of such trademarks.

Environmental Risks

Environmental Regulation

        The Corporation's operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Corporation's operations.

        Government approvals and permits are currently, and may in the future, be required in connection with the Corporation's operations. To the extent such approvals are required and not obtained, the Corporation may be curtailed or prohibited from its proposed production of medical marijuana or from proceeding with the development of its operations as currently proposed.

        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. The Corporation may be required to

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compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

        Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the Corporation and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

Unknown Environmental Risks

        There can be no assurance that the Corporation will not encounter hazardous conditions at the facilities where it operates its businesses, including, without limitation, its medical cannabis cultivation and dispensary facilities, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Corporation may be suspended. The presence of other hazardous conditions may require significant expenditure of the Corporation's resources to correct the condition. Such conditions could have a material impact on the investment returns of the Corporation.

Tax Risks

        Section 280E of the Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the CSA). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable State laws. 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 and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses. Further, there are several pieces of legislation being considered by the U.S. Congress that could change the interpretation of Section 280E by removing its applicability to the legalized cannabis industry. Given these facts, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the Corporation.

        Under Section 382 of the Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. The Corporation has not completed a study to assess whether an "ownership change" has occurred or whether there have been multiple ownership changes since the Corporation became a "loss corporation" as defined in Section 382. Future changes in the Corporation's stock ownership, which may be outside of the Corporation's control, may trigger an "ownership change." In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an "ownership change." If an "ownership change" has occurred or does occur in the future, utilization of the net operating loss carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to the Corporation.


PROMOTER

        No person or company has been, within the two years immediately preceding the date of this Prospectus, a promoter of the Corporation.

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MATERIAL CONTRACTS

        Except for certain contracts entered into in the ordinary course business of the Corporation, the following contracts are the only contracts entered into by the Corporation on or after January 1, 2019 (or prior to January 1, 2019 if still in effect) that is material to the Corporation:

    •
    the Cura Merger Agreement (described above under Recent Developments—Recent Acquisitions—Cura Partners, Inc.);

    •
    the Grassroots Merger Agreement (described above under Recent Developments—Recent Acquisitions—Grassroots); and

    •
    the Financing Agreement, as amended pursuant to the Financing Agreement Amendment (described above under Recent Developments—Senior Secured Financing").

        Copies of the above material contracts are available on the Corporation's SEDAR profile at www.sedar.com.


LEGAL MATTERS

        Unless otherwise specified in the Prospectus Supplement relating to an offering of Securities, certain legal matters relating to the offering of Securities will be passed upon on behalf of the Corporation by Stikeman Elliott LLP with respect to matters of Canadian law. As at the date hereof, Stikeman Elliott LLP, and its partners and associates, beneficially own, directly or indirectly, as a group, less than 1% of any class of outstanding securities of the Corporation. In addition, certain legal matters in connection with any offering of Securities will be passed upon for any underwriters, dealers or agents by counsel to be designated at the time of the offering by such underwriters, dealers or agents, as the case may be.


AUDITORS, TRANSFER AGENT AND REGISTRAR

        Antares Professional Corporation, Chartered Professional Accountants ("PKF Antares") is the auditor of the Corporation and has confirmed that they are independent within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations. PKF Antares have performed the audit in respect of certain financial statements incorporated by reference herein. As at the date hereof, PKF Antares and its partners and associates, beneficially own, directly or indirectly, less than 1% of any class of outstanding securities of the Corporation. The transfer agent and registrar for the Subordinate Voting Shares is Odyssey Trust Company at its principal offices in Calgary, Alberta.


EXEMPTIONS

        Pursuant to a decision of the Autorité des marchés financiers dated August 28, 2020, the Corporation was granted a permanent exemption from the requirement to translate into French this Prospectus as well as the documents incorporated by reference therein and any Prospectus Supplement to be filed in relation to an "at-the-market distribution". This exemption is granted on the condition that this Prospectus and any Prospectus Supplement (other than in relation to an "at-the-market distribution") be translated into French if the Corporation offers Securities to Québec purchasers in connection with an offering other than in relation to an "at-the-market distribution".

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PART II

INFORMATION NOT REQUIRED TO BE DELIVERED TO
OFFEREES OR PURCHASERS

Indemnification of Directors and Officers.

        Under the Business Corporations Act (British Columbia) (the "BCBCA") the Registrant may indemnify a director or officer, a former director or officer, or an individual who acts or acted as a director or officer of an affiliate of the Registrant, or at the Registrant's request as a director or officer (or in a similar capacity) of another corporation or other legal entity, against all judgments, penalties or fines awarded or imposed in, or amounts paid in settlement of, any legal proceeding or investigative action, whether current, threatened, pending or completed, in which such individual or any of his or her heirs and personal or other legal representatives is or may be joined as a party, or is or may liable for in respect of a judgment, penalty or fine in, or expenses related to such legal proceeding or investigative action because of serving in such capacity, on condition that (i) the individual acted honestly and in good faith with a view to the best interests of the Registrant or such other corporation or legal entity, and (ii) in the case of such a proceeding or investigative action other than a civil proceeding, the individual had reasonable grounds for believing that his or her conduct was lawful. The Registrant may also indemnify a person described above in respect of all costs, charges and expenses, including legal and other fees, actually and reasonably incurred by such person in respect of such a legal proceeding or investigative action, providing such person complies with (i) and (ii) above. The Registrant may provide indemnification in respect of such costs, charges and expenses after the final disposition of such legal proceeding or investigative action, and may pay such costs, charges and expenses as they are incurred in advance of such final disposition, provided it obtains a written undertaking that such person will repay the amounts advanced if it is ultimately determined that the individual did not comply with (i) and (ii) above. Under the BCBCA, an individual described above is entitled to indemnification from the Registrant in respect of such costs, charges and expenses after the final disposition of such legal proceeding or investigative action as a matter of right if the individual has not been reimbursed for such costs, charges and expenses and is wholly successful in the outcome of such legal proceeding or investigative action, or is substantially successful on the merits thereof, providing such individual complies with (i) and (ii) above. On application of the Registrant or an individual described above, the Supreme Court of British Columbia may order the Registrant to indemnify a person described above in respect of any liability incurred by such person in respect of such a legal proceeding or investigative action, and to pay some or all of the expenses incurred by such individual in respect of such legal proceeding or investigative action.

        In accordance with the BCBCA, the Articles of the Registrant provide that the Registrant must indemnify a person named above, and such person's heirs and legal personal representatives, as set out in the BCBCA, against all judgments, penalties or fines awarded or imposed in, or amounts paid in settlement of, any legal proceeding or investigative action, whether current, threatened or completed, in which such individual or any of his or her heirs and legal personal representatives is or may be joined as a party, or is or may be liable for or in respect of a judgment, penalty or fine in such legal proceeding or investigative action, by reason of that person having been a director or officer of the Registrant.. The Articles of the Registrant provide that the Registrant must, after the final disposition of such legal proceeding or investigative action, pay the costs, charges and expenses, including legal and other fees, actually and reasonably incurred by such person in respect of that proceeding.

        The Articles of the Registrant also provide that the Registrant must pay, as they are incurred in advance of the final disposition of a legal proceeding or investigative action, the costs, charges and expenses, including legal and other fees relating to such legal proceeding or investigative action, actually and reasonably incurred by such person in respect of a proceeding, but the Registrant must first receive from such person a written undertaking that, if it is ultimately determined that the payment of expenses is prohibited by the BCBCA, such person will repay the amounts advanced.

        A policy of directors' and officers' liability insurance is maintained by the Registrant which insures directors and officers for losses as a result of claims against the directors and officers of the Registrant

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in their capacity as directors and officers and also reimburses the Registrant for payments made pursuant to the indemnity provisions under the Articles of the Registrant and the BCBCA.

        Insofar as indemnification for liabilities arising under the U.S. Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the U.S. Securities Act and is therefore unenforceable.

Exhibit
  Description
  4.1   The annual information form of the Registrant dated September 25, 2020

 
4.2
 
The audited consolidated financial statements of the Registrant as at and for the years ended December 31, 2019 and 2018 together with the notes attached thereto and the independent auditor's report attached thereto

 
4.3
 
The management's discussion and analysis of the Registrant for the years ended December 31, 2019 and 2018

 
4.4
 
The unaudited condensed interim consolidated financial statements of the Registrant as at and for the six months ended June 30, 2020 and 2019, together with the notes attached thereto

 
4.5
 
The management's discussion and analysis of the Registrant for the three months ended June 30, 2020

 
4.6
 
The management information circular of the Registrant dated October 10, 2019 prepared in connection with the annual general meeting of the shareholders of the Registrant, held on November 21, 2019

 
4.7
 
The material change report relating to the execution of an amended and restated agreement for the acquisition of GR Companies, Inc., dated July 7, 2020

 
4.8
 
The material change report relating to the announcement of a private placement of 4,383,698 Subordinate Voting Shares for aggregate gross proceeds of approximately $34,056,007, dated July 7, 2020

 
4.9
 
The material change report relating to the closing of the private placement of 4,383,698 Subordinate Voting Shares for aggregate gross proceeds of approximately $34,056,007 and the acquisition of GR Companies, Inc., dated July 31, 2020

 
4.10
 
The business acquisition report relating to the completion of the acquisition of Cura Partners, Inc., dated May 29, 2020

 
5.1
 
Consent of Antares Professional Corporation

 
6.1
 
Powers of Attorney (contained in the signature page hereto)

 
7.1
 
Form of Indenture

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PART III

UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

Item 1.    Undertaking.

        The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to the securities registered pursuant to this Form F-10 or to transactions in said securities.

Item 2.    Consent to Service of Process.

    (a)
    Concurrently with the filing of this Registration Statement, the Registrant is filing with the Commission a written irrevocable consent and power of attorney on Form F-X.

    (b)
    Any change to the name or address of the Registrant's agent for service shall be communicated promptly to the Commission by amendment to Form F-X referencing the file number of this Registration Statement.

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SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-10 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, on September 25, 2020.

  CURALEAF HOLDINGS, INC.

 

By:

 

/s/ JOSEPH LUSARDI

      Name:   Joseph Lusardi

      Title:   Chief Executive Officer


POWERS OF ATTORNEY

        Each person whose signature appears below constitutes and appoints Joseph Lusardi and Michael Carlotti and each of them, either of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement and registration statements filed pursuant to Rule 429 under the Securities Act, and to file the same, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Signature
 
Title
 
Date

 
 
 
 
 
/s/ JOSEPH LUSARDI
Joseph Lusardi 		  Director and Chief Executive Officer   September 25, 2020

/s/ MICHAEL CARLOTTI
Michael Carlotti
 
Chief Financial Officer
 
September 25, 2020

/s/ BORIS JORDAN
Boris Jordan
 
Executive Chairman of the Board
 
September 25, 2020

/s/ KARL JOHANSSON
Karl Johansson
 
Director
 
September 25, 2020

/s/ PETER DERBY
Peter Derby
 
Director
 
September 25, 2020

/s/ JASWINDER GROVER
Jaswinder Grover, MD
 
Director
 
September 25, 2020

/s/ MITCHELL KAHN
Mitchell Kahn
 
Director
 
September 25, 2020

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AUTHORIZED REPRESENTATIVE

        Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the Authorized Representative has duly caused this Registration Statement to be signed on its behalf by the undersigned, solely in its capacity as the duly authorized representative of the Registrant in the United States, on September 25, 2020.

  CURALEAF, INC.

 

By:

 

/s/ JOSEPH LUSARDI

      Name:   Joseph Lusardi

      Title:   President



Exhibit 4.1

 

 

CURALEAF HOLDINGS, INC.

 

ANNUAL INFORMATION FORM

 

Fiscal year ended December 31, 2019

 

September 25, 2020

 

 

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EXPLANATORY NOTES

2

 

 

CORPORATE STRUCTURE

4

 

 

GENERAL DEVELOPMENT OF THE BUSINESS

5

 

 

BUSINESS OF THE COMPANY

16

 

 

UNITED STATES REGULATORY OVERVIEW

24

 

 

RISK FACTORS

45

 

 

DIVIDENDS

69

 

 

DESCRIPTION OF THE CAPITAL STRUCTURE

69

 

 

MARKET FOR SECURITIES AND TRADING PRICE AND VOLUME

71

 

 

ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

72

 

 

DIRECTORS AND OFFICERS OF THE COMPANY

73

 

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

79

 

 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

80

 

 

INDEPENDENT AUDITOR, TRANSFER AGENT AND REGISTRAR

81

 

 

PROMOTER

81

 

 

MATERIAL CONTRACTS

81

 

 

INTEREST OF EXPERTS

81

 

 

AUDIT COMMITTEE

82

 

 

ADDITIONAL INFORMATION

83

 

 

GLOSSARY OF TERMS

84

 

 

APPENDIX A MANDATE OF THE AUDIT COMMITTEE OF CURALEAF HOLDINGS, INC.

A-1

 

 

EXPLANATORY NOTES

 

Introductory Information

 

Unless otherwise noted or the context otherwise requires, all information provided in this Annual Information Form (the “Annual Information Form”) is given as at December 31, 2019 and references to the “Company”, “Curaleaf”, “we”, “us” or “our” refer to Curaleaf Holdings, Inc., its direct and indirect subsidiaries and any other entities controlled by them.

 

Certain capitalized terms and phrases used in this Annual Information Form are defined in the “Glossary of Terms” beginning on page 84.

 

Forward-Looking Statements

 

This Annual Information Form contains “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States (U.S.) securities laws (“forward-looking statements”). Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on management’s current beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions of the Company. In addition, the Company may make or approve certain statements in future filings with Canadian securities regulatory authorities, in press releases, or in oral or written presentations by representatives of the Company that are not statements of historical fact and may also constitute forward-looking statements. All statements, other than statements of historical fact, made by the Company that address activities, events or developments that the Company expects or anticipates will or may occur in the future are forward-looking statements, including, but not limited to, statements preceded by, followed by or that include words such as “may”, “will”, “would”, “could”, “should”, “believes”, “estimates”, “projects”, “potential”, “expects”, “plans”, “intends”, “anticipates”, “targeted”, “continues”, “forecasts”, “designed”, “goal”, or the negative of those words or other similar or comparable words and includes, among others, information regarding: expectations for the effects of any transactions; expectations for the effects and potential benefits of any transactions; expectations for the effects of COVID-19 on the business’ operations and financial condition; statements relating to the business and future activities of, and developments related to, the Company after the date of this Annual Information Form, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Company’s business, operations and plans; expectations that planned acquisitions will be completed; expectations that licenses applied for will be obtained; potential future legalization of adult-use and/or medical cannabis under U.S. federal law; expectations of market size and growth in the U.S. and the states in which the Company operates; expectations for other economic, business, regulatory and/or competitive factors related to the Company or the cannabis industry generally; the ability for U.S. holders of securities of the Company to sell them on the CSE; and other events or conditions that may occur in the future. Forward-looking statements may relate to future financial conditions, results of operations, plans, objectives, performance or business developments. These statements speak only as at the date they are made and are based on information currently available and on the then current expectations. Holders of securities of the Company are cautioned that forward-looking statements are not based on historical facts but instead are based on reasonable assumptions and estimates of management of the Company at the time they were provided or made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, including, but not limited to, risks and uncertainties related to: business structure risks; legal and regulatory risks inherent in the cannabis industry; financing risks related to additional financing and restricted access to banking; general regulatory and legal risks including risk of civil asset forfeiture, anti-money laundering laws and regulations, lack of access to U.S. bankruptcy protections, heightened scrutiny by regulatory authorities, risk of legal, regulatory or political change, general regulatory and licensing risks, limitations on ownership of licenses, regulatory action and approvals from the FDA and risks of litigation; environmental risks including environmental regulation and unknown environmental risks; general business risks including risks related to COVID-19 pandemic, failure to

 

2

 

complete acquisitions, risks related to the senior secured debt facility, unproven business strategy, service providers, enforceability of contracts, resale of the Subordinate Voting Shares on the CSE, reliance on management, competition, risks inherent in an agricultural business, unfavorable publicity or consumer perception, product liability, product recalls, results of future clinical research, difficulty attracting and retaining personnel, dependence on suppliers, reliance on inputs, limited market data and difficulty to forecast, intellectual property risks, constraints on marketing products, fraudulent or illegal activity by employees, contractors and consultants, information technology systems and cyber-attacks, security breaches, business disruptions and dislocations due to natural disasters, civil unrest, riots, acts of terrorism or otherwise, unionization of employees at our facilities, reliance on management services agreements with subsidiaries and affiliates, website accessibility, high bonding and insurance coverage, risks of leverage, future acquisitions or dispositions, management of growth, performance not indicative of future results and financial projections may prove materially inaccurate or incorrect, conflict of interest; tax risks as well as those risk factors discussed under “Risk Factors” herein and as described from time to time in documents filed by the Company with Canadian securities regulatory authorities. The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. In particular, but without limiting the foregoing, disclosure in this Annual Information Form as well as statements regarding the Company’s objectives, plans and goals, including future operating results and economic performance may make reference to or involve forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Certain of the forward-looking statements and other information contained herein concerning the cannabis industry, its medical, adult-use and hemp-based CBD markets, and the general expectations of the Company concerning the industry and the Company’s business and operations are based on estimates prepared by the Company using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which the Company believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Company is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry involves risks and uncertainties that are subject to change based on various factors.

 

A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. You should not place undue reliance on forward-looking statements contained in this Annual Information Form. Such forward-looking statements are made as of the date of this Annual Information Form. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

 

All of the forward-looking information contained in this Annual Information Form is expressly qualified by the foregoing cautionary statements.

 

Presentation of Financial Information

 

The Company’s financial statements, copies of which are available on the Company’s SEDAR profile at www.sedar.com, are prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee. The financial year end of all entities within Curaleaf's corporate structure is December 31. Financial information presented in this Annual Information Form is presented in U.S. dollars (“$” or “US$”), unless otherwise indicated.

 

3

 

Market and Industry Data

 

The Company has obtained the market and industry data presented in this Annual Information Form from a combination of internal surveys, third party information and the estimates of the Company’s management. There are limited sources that report on the Company’s markets and industries. As such, much of the market and industry data presented in this Annual Information Form is based on internally-generated management estimates, including estimates based on extrapolations from third party surveys of the industries in which the Company competes. While the Company believes internal surveys, third party information and estimates of the Company’s management are reliable, the Company has not verified them, nor have they been verified by any independent sources and the Company has no assurance that the information contained in third party websites is current and up-to-date. While the Company is not aware of any misstatements regarding the market and industry data presented in this Annual Information Form, such data involves risks and uncertainties and are subject to change based on various factors, including those factors discussed under “Forward-Looking Statements” and “Risk Factors”.

 

CORPORATE STRUCTURE

 

Incorporation and Office

 

The Company, formerly known as Lead Ventures Inc. (“LVI”), was incorporated under the laws of the Province of British Columbia, pursuant to the BCBCA, on November 13, 2014 and is a vertically integrated multi-State cannabis operator in the U.S. Prior to the completion of the Business Combination (as defined below), the Company was a junior mineral exploration company engaged in the business of acquiring, exploring and evaluating natural resource properties.

 

On October 25, 2018, the Company and Curaleaf, Inc. (formerly PalliaTech, Inc.) completed the combination of their respective businesses (the “Business Combination”) that resulted in the reverse take-over of the Company by the securityholders of Curaleaf, Inc. The Business Combination was structured as a series of transactions, including a Canadian three-cornered amalgamation transaction and a series of U.S. merger and reorganization steps (further described below). At the Company’s annual general and special meeting of shareholders held on October 12, 2018, the shareholders of the Company approved all of the resolutions in connection with the Business Combination. As part of the Business Combination, the Company changed its name from “Lead Ventures Inc.” to “Curaleaf Holdings, Inc.”, and restructured its existing share capital to, among other things, reclassify its existing common shares as subordinate voting shares (the “Subordinate Voting Shares”), create a class of multiple voting shares (the “Multiple Voting

 

4

 

Shares”), eliminate the class of preferred shares and add certain provisions, including a redemption right in favour of the Company to ensure that the Company complies with applicable licensing regulations.

 

Immediately prior to the Business Combination, 1177687 B.C. Ltd. (“Curaleaf FinCo”), a special purpose corporation, completed a brokered and a non-brokered subscription receipt financing at a price of C$11.45 per subscription receipt for aggregate gross proceeds of approximately C$520 million (the “Private Placement”).

 

As part of the Business Combination, the Company, Curaleaf FinCo and 1177679 B.C. Ltd., a wholly-owned subsidiary of the Company, were parties to a three-cornered amalgamation (the “Amalgamation”) pursuant to which the shareholders of Curaleaf FinCo (being the investors in the Private Placement after automatic conversion of their subscription receipts into common shares of Curaleaf FinCo (the “Curaleaf FinCo Shares”)) received Subordinate Voting Shares in exchange for their Curaleaf FinCo Shares. Concurrently with the Amalgamation, Curaleaf MergerCo Inc., a wholly-owned subsidiary of the Company, merged with and into Curaleaf, Inc., with Curaleaf, Inc. continuing as the surviving corporation and becoming a wholly-owned subsidiary of the Company.

 

In connection with the Business Combination, Gociter Holdings Ltd., a corporation of which Mr. Boris Jordan, the Executive Chairman of the Company, is the beneficial owner, made a contribution of 3,734,965 shares of common stock of Curaleaf, Inc. and cash to the Company in exchange for 122,170,705 Multiple Voting Shares, representing 100% of the issued and outstanding Multiple Voting Shares as of closing of the Business Combination.

 

The Company’s head office address is 301 Edgewater Place Suite 405 Wakefield, Massachussets, United States of America, 01880. The Company’s registered and records office address is 666 Burrard Street, Suite 1700 Vancouver, British Columbia, Canada, V6C 2X8.

 

The Company’s Subordinate Voting Shares are listed on the CSE under the symbol “CURA” and on the OTCQX under the symbol “CURLF”.

 

Intercorporate Relationships

 

The table below lists the principal subsidiaries of the Company as at the date hereof, the percentage of votes attaching to all voting securities of each subsidiary beneficially owned, or controlled or directed, directly or indirectly, by the Company, and the jurisdiction of organization of each such subsidiary. The Company has other subsidiaries, but the assets and revenues of such subsidiaries individually did not exceed 10%, and in the aggregate did not exceed 20%, of the Company's assets or consolidated revenues.

 


Subsidiaries

 

Percentage of Voting
Securities Owned

 

Jurisdiction Where
Organized

 

Curaleaf, Inc.

 

100

%

Delaware

 

CLF AZ Management, LLC

 

100

%

Arizona

 

Curaleaf Florida, LLC

 

100

%

Florida

 

Curaleaf Massachusetts, Inc.

 

100

%

Massachusetts

 

Curaleaf NJ II, Inc.

 

100

%

Delaware

 

Cura Partners, Inc.

 

100

%

Oregon

 

Cura CA, LLC

 

100

%

California

 

GR Companies, Inc.

 

100

%

Delaware

 

 

GENERAL DEVELOPMENT OF THE BUSINESS

 

Curaleaf is a leading vertically integrated medical and wellness cannabis operator in the U.S. The Company operates in 23 States, and, as at the date hereof, operates 92 dispensaries, 22 cultivation sites and 30 processing sites with a focus on highly populated, limited license states, including New York, New Jersey, Florida, Illinois, Pennsylvania and Massachusetts. The Company leverages its extensive research and development capabilities to distribute cannabis products with the highest standard for safety, effectiveness, consistent quality and customer care. The Company is committed to leading the industry in education and advancement through research and advocacy. The Company markets to medical and adult-use customers through brand strategies intended to build trust and loyalty. After 2016, Curaleaf, Inc. significantly accelerated its capital-raising and acquisition pipeline, as more fully described in the “Recent Developments” section below.

 

Currently, the Company is a diversified holding company dedicated to delivering market-leading products and services while building trusted national brands within the legal cannabis industry. Through its team of physicians, pharmacists, medical experts and industry innovators, the Company has developed a portfolio of branded cannabis-based therapeutic offerings in multiple formats and a strategic network of branded retail dispensaries. Exemplifying its commitment to quality, Curaleaf’s Florida operations were the

 

5

 

first in the cannabis industry to receive the Safe Quality Food certification under the Global Food Safety Initiative, setting a new standard of excellence.

 

Recent Developments

 

COVID-19 Pandemic

 

The novel coronavirus commonly referred to as “COVID-19” was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

 

The Company has taken responsible measures with respect to the COVID-19 pandemic to maximize the safety of staff working at its facilities. This includes reorganizing physical layouts, adjusting schedules to improve social distancing, implementing health screening measures for employees and applying rigorous standards for personal protective equipment. Certain markets, such as Massachusetts and Nevada experienced a greater impact on sales due to prolonged business closures and reduced foot traffic in certain locations. Other markets, such as Florida and New York have not been significantly impacted by COVID-19 and in some cases, stores in those markets have generated increased sales. The Company’s facilities continue to be operational and the Company is working closely with the authorities to ensure it is following or exceeding the stated guidelines related to COVID-19. For instance, the Company has modified store operations in certain locations, with an increased focus on direct-to-consumer delivery and enabling a curbside pickup option for its customers. See “Risk Factors — General Business Risks — COVID-19 Pandemic” for more information.

 

Acres Cultivation, LLC and Acres Medical, LLC, each a Nevada limited liability company (collectively, "Acres")

 

On January 3, 2020, the Company announced the closing of the acquisition of Acres for a total consideration of $47.6 million, of which $15 million was paid in cash upon signing, $9.5 million was paid upon receiving regulatory approval of the license transfer for the dispensary in January 2020, as well as a $500,000 holdback. Total consideration also included $12.86 million which was settled through the issuance of 3,108,183 Subordinate Voting Shares, $8.57 million which was settled through the issuance of 2,039,062 Subordinate Voting Shares upon receiving regulatory approval of the license transfer for the dispensary in January 2020, and $1.17 million of contingent consideration which is payable if certain financial targets are met. Acres has a 269,000 square-foot operating cultivation facility (with further expansion as needed) on its 37 acres of land in Amargosa Valley, Nevada, and a large dispensary located in Las Vegas, Nevada, adjacent to the Strip, and a second dispensary located in Ely, Nevada. 

 

Curaleaf Utah, LLC

 

On January 6, 2020, the Company announced it received a Notice of Intent to Award a medical cannabis retail license from the Utah Department of Health, one of 14 licenses to open a medical cannabis dispensary in Utah from more than 130 applications and 60 different companies. The Company’s license is for Region 3, which includes Utah, Wasatch, Daggett, Duchesne, Uintah, Carbon, Emery, Grand and San Juan Counties.

 

Following this announcement, on January 14, 2020, the Company announced that it received preliminary approval for a processing license by the Utah Department of Agriculture and Food. The notice grants Curaleaf permission to begin the build out of its processing facility, which is scheduled to open in mid-September 2020, in North Salt Lake City. The Company also opened its first retail location in the Utah market with a new pharmacy in Lehi on August 31, 2020.

 

6

 

Cura Partners, Inc., an Oregon corporation (“Cura Partners” or “Select”)

 

On February 1, 2020, the Company announced the closing of the acquisition of Cura Partners (the “Cura Transaction”), owners of the Select brand. At Closing, pursuant to the terms of an Amended and Restated Agreement and Plan of Merger dated October 30, 2019 (the “Cura Merger Agreement”), Curaleaf issued 55,000,000 Subordinate Voting Shares to the benefit of the former Select equity holders. 40,555,556 Subordinate Voting Shares will be payable to the former Select equity holders contingent upon Curaleaf achieving certain calendar year 2020 revenue targets based on Select branded retail extract sales beginning at a target of $130 million with maximum achievement at $250 million. In addition, the former Select equity holders are also eligible to receive an earn out of up to $200 million from the issuance of additional Subordinate Voting Shares, contingent upon Curaleaf exceeding $300 million in calendar year 2020 revenue for Select branded retail extract sales.

 

Further information about the Cura Transaction can be found in the Company’s material change reports dated May 10, 2019 and November 8, 2019, as well as the Company’s business acquisition report dated May 29, 2020, copies of which are available on SEDAR (www.sedar.com) under the Company’s profile. A copy of the Cura Merger Agreement is also available on SEDAR under the Company’s issuer profile at www.sedar.com.

 

Expansion of Executive Team

 

On February 3, 2020, the Company announced an expansion of its executive team. Cameron Forni assumed the role of President of Select. Renowned brand marketer Jason White joined the Company in the newly created role of Chief Marketing Officer. The Company’s Chief Financial Officer Neil Davidson was elevated to Chief Operating Officer. Former Chief Operating Officer Stuart Wilcox transitioned to a new role, leading business expansion efforts in emerging markets. In addition, Michael Carlotti joined the Company as Chief Financial Officer, succeeding Mr. Davidson, and Mark Russ was appointed Senior Vice President of Sales. Finally, Jaswinder Grover, MD, an orthopedic and spine surgeon with 25 years of experience, joined the Board of Directors, replacing Dr. Steven Patierno, PhD. Dr. Patierno will remain in his role as the Chairman of the Company’s Medical Advisory Board.

 

This news followed the December 9, 2019 announcement of Joe Bayern becoming President of the Company. Mr. Bayern brings over 20 years of executive leadership experience in consumer packaged goods at a critically important moment in Curaleaf’s growth trajectory.

 

Remedy Compassion Center, Inc., a Maine corporation (“Remedy”)

 

In February 2020, Remedy, which operated until then as a Maine non-profit corporation, converted to a for-profit corporation as approved by their independent Board of Directors when changes in Maine regulations allowed for such change. In connection with the conversion, the management services agreement entered among the Company and Remedy in October 2016 was terminated and the Company entered into a Registered Dispensary Management Agreement (the “Remedy Operating Agreement”).  Current Maine regulations require that licensed medical marijuana dispensaries be owned by residents of Maine.  However, under the Remedy Operation Agreement, the Company has acquired operational control and substantially all of the economic benefit of its business, which allows the Company to control Remedy in accordance with IFRS 10 definitions. The Company retains a right to acquire Remedy for nominal value at such time as the residency requirement for ownership is lifted. The total consideration paid included the forgiveness of approximately $2.34 million of debt. See "United States Regulatory Overview – Regulation of Cannabis in the United States Federally – Maine Operations" section.

 

Curaleaf PA, LLC

 

On February 21, 2020, the Company announced it had been approved as a Clinical Registrant in Pennsylvania by the Commonwealth’s Department of Health, Office of Medical Marijuana. Under this designation, the Company will be permitted to open a cultivation and processing facility and up to six dispensaries, under the Commonwealth’s medical marijuana research program. As a Clinical Registrant, Curaleaf will support research initiatives into the potential medical benefits of cannabis by providing medical cannabis expertise and distribution to patients participating in studies.

 

Arrow Alternative Care, Inc., Arrow Alternative Care #2, Inc., Arrow Alternative Care #3, Inc., each a Delaware corporation (collectively, the “Arrow Companies”)

 

7

 

On April 6, 2020, the Company announced the closing of the acquisition of the Arrow Companies, which operated licensed medical cannabis dispensaries in Stamford, Hartford, and Milford, in the state of Connecticut. The Arrow dispensary licenses in Stamford and Hartford transferred on April 6, 2020 and the transfer of the Arrow dispensary license in Milford occurred on August 3, 2020, although the Company assumed management and economic control of the Milford dispensary along with the other dispensaries as at April 6, 2020. The fair value of the aggregate consideration paid was $38 million, including 3,194,149 Subordinate Voting Shares having a fair value of approximately $21.38 million. Certain “top up” shares are now due as additional consideration in connection with the Hartford dispensary.

 

Primary Organic Therapy, Inc. (d/b/a Mainte Organic Therapy), a Maine corporation (“MEOT”)

 

MEOT owns and operates a duly licensed registered medical marijuana and cultivation facility in the state of Maine. In January 2017, the Company entered into a Management Services Agreement with MEOT (“MEOT MSA”) under which the Company provided services in the areas of financial services, compliance consulting, and human resources management. Under the MEOT MSA, MEOT maintained exclusive control and possession, and was solely responsible for final decision-making regarding all aspects of the business and the Company acted solely in an advisory capacity. The Company recognized management fee income for services rendered under the MEOT MSA.

 

The MEOT MSA was terminated in July 2020 and MEOT entered into a new MSA agreement (“Verdure MSA”) with Verdure, Inc. (“Verdure”), an entity in which the Company’s CEO, Joseph Lusardi had a 50% ownership interest. The Company acquired Verdure in July 2020 for $8 million in cash and a cash earn-out of $2 million based on MEOT’s achievement of certain earnings targets. Current Maine regulations require that licensed medical marijuana dispensaries be owned by residents of Maine. However, under the Verdure MSA, the Company has acquired operational control and substantially all of the economic benefit of MEOT’s business.  The acquisition of Verdure resulted in the Company controlling MEOT in accordance with IFRS 10.  The Company retains a right to acquire MEOT for nominal value at such time as the residency requirement for ownership is lifted. See “United States Regulatory Overview – Regulation of Cannabis in the United States Federally – Maine Operations” section.

 

Curaleaf NJ, Inc., a New Jersey corporation (“Curaleaf NJ”)

 

In February 2011, the Company entered into a Management Services Agreement (the “NJ MSA”) with Curaleaf NJ (formerly Compassionate Sciences ATC Inc.) As required under state law, Curaleaf NJ was formed as a New Jersey nonprofit corporation without shareholders acting through its governing body, the Board of Trustees (“NJ Board”). Curaleaf NJ operated medical dispensary, processing, and cultivation facilities as permitted by the state of New Jersey. Under the NJ MSA, the Company acted as an independent contractor providing services in the areas of cultivation, extraction, and other consulting services. The Company recognized management fee income for services rendered under the NJ MSA. In addition to the NJ MSA, the Company entered into a Conditionally Convertible Promissory Note (“NJ Note”). The NJ Note allowed the Company to acquire Curaleaf NJ when the regulations in New Jersey changed to allow the conversion of non-profit corporations to for-profit corporations.

 

In July 2019, New Jersey Governor Murphy signed an amendment to the New Jersey Compassionate Use Medical Marijuana Act, known as the Jake Honig Compassionate Use Medical Cannabis Act (the “Jake Honig Act”). The Jake Honig Act authorized the New Jersey nonprofit corporations that hold Alternative Treatment Center Permits (“ATC Permits”) to sell or transfer their permits and other assets to for-profit entities Due to changes in New Jersey regulations, Curaleaf NJ received approval from the state of New Jersey for the transfer of the ATC Permit to a Curaleaf NJ II, Inc, a wholly owned subsidiary of the Company. In conjunction with the transfer of the ATC Permit, the Company entered into an Asset Purchase Agreement (“CLNJ APA”). As part of the CLNJ APA, Curaleaf NJ agreed to sell and transfer the ATC Permit and substantially all of its other assets to Curaleaf NJ II. This transaction closed in July 2020.  As a result of the close of the sale and transfer of the assets, the $82.23 million balance of the NJ Note was applied to the purchase price under the CLNJ APA with the remainder written off.

 

Virginia’s Kitchen, LLC, a Colorado company d/b/a Blue Kudu (“Blue Kudu”)

 

In February 2020, the Company signed a definitive agreement to acquire 100% of Blue Kudu, a Colorado-licensed processor and producer of cannabis edibles, operating an 8,400 square foot facility in Denver, Colorado. The consideration consisted of 322,580 Subordinate Voting Shares, $1.38 million payable in cash at closing of the transaction and a 5% note of up to $500,000 due ten and a half months from closing. The transaction closed in July 2020.

 

GR Companies, Inc., a Delaware corporation (“Grassroots”)

 

In July 2019, Curaleaf announced that it had signed a definitive agreement to acquire Grassroots (the “Grassroots Transaction”). On June 22, 2020, Curaleaf entered into an Amended and Restated Agreement and Plan of Merger (the “Grassroots Merger Agreement”) which amended and restated the original definitive agreement and amended certain terms of the Grassroots Transaction. Closing of the Grassroots Transaction occurred on July 23, 2020.

 

At closing, the Company issued (i) 103,455,816 Subordinate Voting Shares to the benefit of the former holders of common stock of Grassroots, and (ii) 12,851,005 Subordinate Voting Shares to be held in escrow in accordance with the terms of the Grassroots Merger Agreement. The total consideration paid in connection with the Grassroots Transaction does not include a cash component. In addition, the parties have resolved that certain Grassroots assets in Illinois, Ohio and Maryland are designated for sale to comply with local limitations on license ownership. Curaleaf also agreed to issue 2,119,864 Subordinate Voting Shares to partially offset the dilution to the holders of common stock of Grassroots caused by the conversion of certain debentures of Grassroots into equity of Grassots immediately prior to the closing of the Grassroots Transaction. The transaction price remains subject to usual working capital and other adjustments.

 

Upon closing of the Grassroot Transaction, Curaleaf has appointed Mitchell Kahn, co-founder and CEO of Grassroots, to its Board of Directors, effective immediately. The appointment of Mr. Kahn expands the Board of Directors from five to six members.

 

Further information about the Grassroots Transaction can be found in the Company’s material change reports dated July 31, 2020, July 7, 2020 and July 17, 2019, copies of which are available on

 

8

 

SEDAR under the Company’s issuer profile at www.sedar.com. A copy of the Grassroots Merger Agreement is also available on SEDAR under the Company’s issuer profile at www.sedar.com.

 

Private Placement of Subordinate Voting Shares

 

On July 20, 2020, Curaleaf completed the private placement offering previously announced on July 2, 2020 (the “Offering”). Under the initial tranche, subscribers purchased an aggregate of 3,541,429 Subordinate Voting Shares for aggregate gross proceeds of approximately CAD $27.27 million. Subsequent to setting the initial tranche, the Company secured a second tranche investment, which was part of the Offering which closed on July 20, 2020. Under the second tranche, a subscriber purchased 842,269 Subordinate Voting Shares for gross proceeds of approximately CAD $6.79 million. In aggregate, the Offering generated approximately CAD $34.06 million in gross proceeds for the Company in exchange for 4,383,698 Subordinate Voting Shares. The Offering was conducted in connection with the closing of the Grassroots Transaction. Net proceeds of the Offering will be used to fund Grassroots’s high-return expansion projects, replenish its working capital as well as for general corporate purposes.

 

Further information about the Offering can be found in the Company’s material change reports dated July 31, 2020 and July 7, 2020, copies of which are available on SEDAR under the Company’s profile at www.sedar.com.

 

Sale and Leaseback Transaction

 

In August 2020, the Company closed on a sale and leaseback transaction at its Mount Dora, Florida cultivation facility. In the transaction, the Company sold leasehold improvements with a gross value of $44.94 million for $41 million and entered into a new 15 year lease on the entire property with the new owner. Net of transaction costs and security deposits, the Company received $39.07 million at closing.

 

PalliaTech Florida

 

On August 17, 2020, the Company acquired the remaining 11.4% equity interest in PalliaTech Florida from certain of the Remaining Florida Minority Holders (as defined herein) for consideration of 2,375,000 Subordinate Voting Shares. In connection with the foregoing, the Company also agreed to the repayment of certain secured promissory notes in the amount of $1.75 million. Another 11.4% equity interest in PalliaTech Florida was acquired by the Company on January 10, 2020 from certain other Remaining Florida Minority Holders for consideration of $2.5 million in cash and 1,772,062 Subordinate Voting Shares. Upon completion, PalliaTech Florida became an indirect wholly-owned subsidiary of Curaleaf. See “Legal Proceedings and Regulatory Actions — Florida”.

 

Three Year History

 

2019

 

HMS Health LLC, a Maryland limited liability company (“HMS”)

 

In January 2019, the Company completed the acquisition of HMS which was structured as a $30 million convertible financing with the owners of HMS Health, LLC, HMS Processing, LLC, HMS Sales, LLC and MI Health LLC (the “HMS/MI Businesses”).

 

The HMS/MI Businesses consist of a 21,000 square-foot cultivation facility and 1,000 square-foot processing facility in Frederick, Maryland, and two separate 1,000 square-foot dispensaries, each in Gaithersburg, Maryland. As part of the agreement, the HMS/MI Businesses rebranded and now operate under the Curaleaf name, and receive products, services, and other support from the Company. Prior to funding, HMS spun off its cannabis processing license and cannabis dispensing license into separate entities.

 

9

 

The $30 million in loans from the Company, together with accrued interest, are convertible into equity of each of the HMS/MI Businesses upon receipt of all required State and local regulatory approvals. The owners of HMS will receive $2 million in Subordinate Voting Shares at the then-current market price upon conversion of the loans.

 

Due to current restrictions under Maryland State law that prevent change of control over cannabis licenses within the first three years of operations, the loans to HMS/MI are convertible in parts between August 2020 (for HMS Health, LLC, a cannabis cultivation facility), March 2021 (for HMS Sales LLC, a cannabis dispensary facility), June 2021 (for MI Health LLC, a cannabis dispensary facility) and October 2021 (for HMS Processing, LLC, a cannabis processing facility), based on the operation start dates of each of the businesses. Furthermore, Curaleaf may only own equity in one cannabis processing business under Maryland law as applied by the Maryland Medical Cannabis Commission. Therefore, the conversion of the loan instruments into equity of each of the HMS/MI Businesses will only occur upon regulatory approval if the conversion will not violate any restriction in force at the time.

 

Town Center Wellness, LLC

 

Also in January 2019, the Company completed an agreement with the owners of Town Center Wellness, LLC (operating as Elevate Takoma) that secures the option to purchase 100 percent of the equity of the company’s dispensary for a total cash consideration of $2 million. The Company also paid the option exercise price of $100,000. Elevate Takoma is a 1,500 square-foot dispensary located in Takoma, Maryland, along the Washington, D.C. border.

 

In Maryland, Curaleaf already owns and operates one dispensary in Reisterstown and a processing facility in Allegany County.

 

Eureka Investment Partners, LLC, a Nevada limited liability company (“Eureka”)

 

In February 2019, the Company entered into an agreement to purchase Eureka for $25.5 million (the “Base Price”) and to provide Eureka with $5 million to repay all existing debt and to replenish working capital. The Base Price was paid $5 million in cash and $20.5 million in Subordinate Voting Shares. The acquisition of Eureka closed in April 2019, at which time, a total of 2,351,860 Subordinate Voting Shares were issued by the Company to the sellers, of which 688,349 Subordinate Voting Shares were delivered in escrow contingent upon the satisfaction of post-closing conditions relating to the transfer of controlling stakes in three retail cannabis dispensaries in Long Beach, Salinas and Monterrey County, California. These escrowed Subordinate Voting Shares were returned to the Company's treasury and cancelled in August 2020 as the post-closing conditions were not fully met. No contingent earn-out has been or is expected to be paid to the sellers in connection with this transaction.

 

The addition of Eureka’s cultivation platform provided the Company access to California’s wholesale market through an existing 110,000 square-foot greenhouse facility in Salinas, California.

 

In October 2018, Curaleaf, Inc. received a conditional use permit and business license from the City of Davis, California for cannabis manufacturing and State-wide distribution. A conditional use permit and business license for mobile delivery was issued by the City of Davis in November 2018. As of January 1, 2019, the Company’s operations were licensed by the State of California and the City of Davis, and as of April 2019, the Company commenced its cannabis manufacturing operations.

 

The acquisition of Eureka’s facilities in Salinas allows for seamless backward integration with the Company’s manufacturing facility in Davis and the Company’s subsequent acquisition of Cura Partners, enabling the Company to manage its supply chain efficiently through vertically integrated cultivation, production, distribution and dispensing in California. The Company’s Davis facility and the Cura Partners facilities located in California position Eureka to maximize the value of its harvest, reducing waste and converting trim into oil and other consumables that can be utilized for distribution across the retail footprint.

 

PalliaTech Ohio, LLC

 

In February 2019, PalliaTech Ohio, LLC, an Ohio affiliate of the Company, received a provisional medical cannabis processor license from the Ohio Department of Commerce for a location in Amelia

 

10

 

Village, Ohio. The Company is currently evaluating strategic opportunities for the Amelia processing license.

 

Ohio Grown Therapies, LLC, an Ohio limited liability company (“OGT”)

 

In May 2019, the Company entered into an agreement granting it an option to acquire OGT for $20 million. The Company paid $5 million in cash in May 2019 and $7.5 million in July 2020. The remaining consideration will be paid upon completion of milestones, culminating with regulatory approval of the transfer of the final licenses and OGT facility to Curaleaf.  The closing of this transaction is currently pending receipt of regulatory approval.

 

Absolute Healthcare, Inc. dba Emerald Dispensary, an Arizona non-profit corporation (“Emerald”)

 

In May 2019, the Company announced it acquired exclusive rights to operate the Emerald dispensary in Gilbert, AZ, whose license is held by Absolute Healthcare, Inc. Total consideration for the transaction was $18 million in cash. The acquisition closed in May 2019.

 

GX3 LLC, an Arizona limited liability company (“GX3”), GGM LLC, an Arizona limited liability company (together with GX3, “Glendale Greenhouse”) and Phytotherapeutics Management Services, LLC (“Phytotherapeutics”)

 

In June 2019, the Company announced that it had made two separate acquisitions in Arizona for combined consideration of $25.5 million, of which $3.5 million was payable in Subordinate Voting Shares and $22 million in cash.

 

The Company entered into an agreement to acquire Glendale Greenhouse, a vertically integrated cannabis business operating a cultivation and processing facility, as well as a retail location, with plans to rebrand as Curaleaf after the transaction closes.

 

The Glendale Greenhouse production facility is a 20,000 square-foot, multi-level cultivation center which is capable of producing 3,600 pounds of flower annually. Its 1,500 square-foot dispensary, located directly off the Agua Fria Freeway with 90,000 cars passing daily, can be expanded to nearly 5,000 square-feet. Glendale Greenhouse holds the master lease on the 15,000 square-foot multi-tenant building where the dispensary is located. The facility also operates a CO2 extraction lab and a kitchen, which is already producing various edible lines such as mints, gummies, brownies and ice cream. This acquisition closed in August 2019.

 

Additionally, Curaleaf agreed to acquire Phytotherapeutics Management Services, LLC, which operates under the license of Phytotherapeutics of Tucson, LLC. This acquisition closed in July 2019. Upon close of the transaction, the license associated with the dispensary was applied to a newly developed, flagship dispensary located at 2175 N 83rd Avenue, which is part of an exciting Phoenix metro submarket with close access to the I-10 Freeway. The dispensary is in the immediate vicinity of the nationally recognized Ak-Chin Pavilion, a popular outdoor amphitheater and concert stadium hosting nearly forty events a year. This new location on 83rd Avenue has brought Curaleaf’s store count in Arizona to eight, all in Maricopa county.

 

11

 

Approval for Change of Ownership and Control in Massachusetts

 

On August 9, 2019, the Company announced that it had been granted approval for its change of ownership and control by the Cannabis Control Commission (“CCC”). Please refer to “Legal Proceedings and Regulatory Actions — Massachusetts Cannabis Control Commission” for additional details.

 

Subsequently, on September 13, 2019, the Company announced that it had been granted approval for three final adult-use licenses by the CCC. One license was a retail license co-located with the current medical retail location in Oxford, with adult-use sales launching in Oxford in November 2019. The other two licenses were for cultivation and manufacturing co-located with the current medical cultivation and manufacturing facility in Webster. On December 19, 2019, the Company announced it had been granted final approval for an adult-use retail license in Provincetown, the State’s first adult-use location on Cape Cod, with the Provincetown dispensary opening in January 2020. On February 6, 2020, the Company announced it had been granted final approval for an adult-use retail license in Ware, with the Ware dispensary opening in  March 2020. In addition to the adult-use licenses mentioned above, Curaleaf currently has medical retail locations in Hanover and Oxford.

 

Sale-Leaseback Transaction

 

On August 27, 2019, the Company announced it had signed a sale-leaseback agreement with Freehold Properties valued at approximately $28.3 million for six of its properties in Florida, Massachusetts and New Jersey. As a result of the transaction, Curaleaf sold a portion of its real estate assets while retaining use of the properties for cultivation, processing and retail, respectively. The sale price of $28.3 million for the six properties covers initial investment plus all tenant improvements made to date and the proceeds were used for capital expenditures and acquisition purposes.

 

DTC Eligibility

 

On August 21, 2019, the Company announced it had obtained eligibility with The Depository Trust Company (“DTC”) for its shares listed on the OTCQX. DTC is a subsidiary of the Depository Trust & Clearing Corporation, a U.S. company that manages the electronic clearing and settlement of publicly traded companies. DTC eligibility provides cost benefits for investors and brokers trading in our securities in the United States.

 

Senior Secured Term Loan Facility

 

On December 20, 2019, the Company announced that it had received commitments from a syndicate of lenders for a $275 million senior secured term loan facility (the “Term Loan Facility”), bearing interest at a rate of 13.0% per annum, payable quarterly in arrears, pursuant to a financing agreement by and between Curaleaf, Inc., as borrower, the Company, as parent, certain subsidiaries of Curaleaf Inc., as guarantors, the Lenders (as defined therein) and Glass Trust Company, LLC, as agent (the “Financing Agreement”). On January 15, 2020, the Company amended the Financing Agreement, pursuant to an amendment no. 1 to the Financing Agreement (the “Financing Agreement Amendment”), to among other things, increase the Term Loan Facility with additional commitments of $25 million, for a total commitment of $300 million. The Term Loan Facility, as amended, closed on January 15, 2020 and is due in January of 2024. This debt financing constituted a broadly syndicated institutional deal led by sophisticated and long-term investors.

 

The Term Loan Facility is secured by a guarantee of all the wholly-owned direct and indirect subsidiaries of the Company, as well as a pledge on the assets of the Company and each such guarantor. While the Term Loan Facility is outstanding, the Company is subject to certain negative covenants, including restrictions on its ability to pay dividends, to conduct transactions with affiliates, to modify any organizational documents, to invest in non-wholly owned entities and to incur subordinated and non-subordinated debt and certain covenant tests. Further, the Term Loan Facility imposes certain financial covenants, including minimum annual cash earnings and maintenance of unrestricted cash and cash equivalents. The Term Loan Facility is non-callable in the first two years and from year 2 to 3 is payable at par + ½ coupon, from year 3 to 3 ½ at par + ¼ coupon and at par from year 3 ½ to maturity. The proceeds were used to refinance the existing Cetus Senior Debt (as defined below), satisfy transaction fees and expenses from previously announced acquisitions, fund capital expenditures and for general corporate purposes. See “Risk Factors”.

 

Further information about the Term Loan Facility can be found in the Company’s material change report dated December 31, 2019, a copy of which is available on SEDAR under the Company’s issuer profile at www.sedar.com. Copies of the Financing Agreement and the Financing Agreement Amendment, have been filed on SEDAR on December 31, 2019 and January 17, 2020, respectively, and are available thereto under the heading “Other material contracts”, under the Company’s issuer profile at www.sedar.com.

 

2018

 

In January 2018, Curaleaf, Inc. completed a non-brokered private placement of 1,150,747 shares of common stock at a price of $26.07 per share for aggregate cash proceeds of $30 million. The proceeds were used for the acquisition of Swell Management, LLC (“Swell”), the expansion of existing operations and to fund operations.

 

12

 

In March 2018, the Company acquired a 50% stake, plus one share, in Curaleaf MA, for a consideration of $36,000 in cash and $3.51 million of debt settlement, in accordance with a plan of conversion of Curaleaf MA’s predecessor, Mass Organic Therapy, Inc., to a for-profit entity. PT Mass Holdings, LLC, of which Joseph F. Lusardi, Curaleaf, Inc.’s President and Chief Executive Officer, is a member, acquired the remaining shares of Curaleaf MA at the time of conversion for a consideration of $35,500. In August 2018, the Company agreed to acquired PT Mass Holdings, LLC’s stake in Curaleaf MA for $46.2 million, of which $28.2 million was satisfied by the issuance of 3,212,337 Subordinate Voting Shares and $18 million in cash.This transaction was completed immediately following completion of the Business Combination.

 

In April 2018, Curaleaf, Inc.’s subsidiary CLF AZ acquired 100% of the interests in Swell from JK Swell, LLC. Through its subsidiaries, Swell operates four medical cannabis dispensaries in and around Phoenix and a cultivation facility in Holbrook, Arizona under management services agreements with four not-for-profit companies which hold licenses to process, cultivate and dispense medical cannabis in Arizona. Swell also holds non-economic voting interests over these four not-for-profit license holders, which entitle it to appoint the directors of these entities. The total consideration for the acquisition of $26.9 million was comprised of $19.3 million in cash and a promissory note in an aggregate amount of $7.6 million (the “Arizona Convertible Note”). Curaleaf, Inc. further settled Swell’s debt of $3.7 million to third parties. The repayment of debt was additional consideration as part of the acquisition. The Arizona Convertible Note was converted into 3,715,038 Subordinate Voting Shares.

 

From May 2018 until completion of the Business Combination, Curaleaf, Inc. completed a number of unsecured private placement bridge financings with an affiliate of Mr. Boris Jordan, a principal shareholder and the Executive Chairman of the Company, for aggregate proceeds of $14.3 million, in each case, with a maturity date of November 4, 2018 at an interest rate of 11% per annum. The proceeds from the financings were used for working capital and capital expenditures, and were repaid in full as of December 31, 2018.

 

On June 7, 2018, Curaleaf, Inc. completed an unsecured private placement bridge financing of $6 million with Cetus Investments Limited (“Cetus”) with a maturity date of December 7, 2018, at a rate of 11% per annum. The proceeds from the financing were used for working capital and capital expenditures. The total amount of the financing was repaid in full as of December 31, 2018.

 

In August 2018, Curaleaf, Inc. issued an aggregate amount of $85 million of 15% senior secured debt due August 23, 2021 (the “Cetus Senior Debt”) to Cetus. The Cetus Senior Debt was repaid in full as of December 20, 2019.

 

In January 2017, the Company’s subsidiary, PalliaTech Florida, acquired 49% voting and 70% economic interest in Modern Health Concepts (“MHC”) for consideration of $28 million paid in cash, and following approval of the Florida Department of Health, PalliaTech Florida’s interest in MHC converted into 70% voting and economic interest in MHC. PalliaTech Florida is owned 75% by the Company and 25% by third parties (the “Remaining Florida Minority Holders”). In accordance with its operating agreement, PalliaTech Florida was formed to invest up to $50 million in MHC, including the initial consideration paid by PalliaTech Florida to acquire 70% of its membership interests. The operating agreement further provides that PalliaTech Florida is to be financed entirely by loans from its members bearing interest at 14% per annum. The Remaining Florida Minority Holders are required to contribute 5% of this debt financing. The members of PalliaTech Florida have contributed the full investment amount of $50 million provided for in the operating agreement. In September 2018, the Company entered into an agreement with the former minority owner of Curaleaf Florida to acquire such minority owner’s remaining interest (equal to 30% of the membership interests), for total consideration of $55 million, $25 million of which was payable in cash and $30 million of which was payable through the issuance of 3,417,379 Subordinate Voting Shares. The transaction closed immediately following completion of the Business Combination.

 

13

 

In August 2018, the Company entered into an agreement to acquire all of the membership interests of Alternative Therapies Group, Inc, a Massachusetts corporation (“ATG”), a registered marijuana dispensary licensed by the Massachusetts Department of Health, operating a 53,600 square foot cultivation and processing facility in Amesbury, Massachusetts and intends to enter into supply agreements with ATG’s three dispensaries in Massachusetts (the “ATG Acquisition”). The consideration payable by the Company for the ATG Acquisition is $50 million in cash, $42.5 million of which was prepaid in cash in December 2018 in order to solidify the Company’s intent to complete the purchase of ATG. The remaining $7.5 million is due at closing. The closing of the transaction is subject to receipt of regulatory approval.

 

In November 2018, the Company acquired Thunderbird III Partners, LLC, a cannabis dispensary operating pursuant to a management services agreement with Catalina Hills Botanica Center, LLC, d/b/a Midtown Roots (“MTR”), a non-profit entity holding a vertical medical marijuana license issued by the Arizona Department of Health Services (“MTR Acquisition”). Total consideration consisted of $7 million in cash and $1.9 million which was settled through the issuance 341,737 Subordinate Voting Shares.

 

Also in October 2018, the Business Combination, as further described under “Corporate Structure — Incorporation and Office”, was completed.

 

In December 2018, the Company commenced a normal course issuer bid (“NCIB”) to expend up to an aggregate of $50 million on the purchase of Subordinate Voting Shares. The actual number of Subordinate Voting Shares that was available to be purchased under the NCIB and the exact timing of any such purchases was subject to determination by the Company. Pursuant to the NCIB, the Company was allowed to purchase Subordinate Voting Shares through the facilities of the CSE and/or alternative trading systems, from time to time over the 12-month period ending December 12, 2019, which purchases did not exceeded 5% of the issued and outstanding Subordinate Voting Shares in the aggregate. The Company appointed GMP Securities L.P. to coordinate and facilitate its NCIB purchases. All Subordinate Voting Shares purchased by the Company under the NCIB were cancelled.

 

2017

 

In March 2017, the Company entered into an agreement to acquire, through a series of transactions, 51% of all outstanding membership units in DRH, a Delaware limited liability that owns Curaleaf, LLC, a Connecticut-based medical cannabis facility that is one of the four licensed cultivators in Connecticut, for a consideration of $14 million, payable in cash, of which $10.8 million was allocated towards the membership units and the balance was allocated towards working capital of the business. In October 2018, Curaleaf, Inc. agreed to acquire from the minority members of DRH (the “DRH Minority Members”) their 49% membership interests in DRH (the “DRH Minority Membership Units”) for $40.14 million in cash and 4,755,548 Subordinate Voting Shares. This acquisition was completed immediately after closing of the Business Combination.

 

In August 2017, the New York State Department of Health authorized the Company as a registered organization (RO) to manufacture and dispense medical marijuana in New York State. Such authorization granted the Company pre-approval for a vertically-integrated medical cannabis license permitting one cultivation/processing facility and up to four dispensaries. The authorization was the result of a competitive application process.

 

In August 2017, Curaleaf, Inc. entered into an agreement to acquire 57% of the membership interests in Las Vegas Natural Care Givers, LLC, doing business as House of Herbs, a company that cultivates high-quality cannabis for Las Vegas area dispensaries. The consideration paid by Curaleaf,

 

14

 

Inc. for the acquisition consisted of 129,574 shares of common stock of Curaleaf, Inc., which is the equivalent to 4,238,365 Subordinate Voting Shares, valued for purposes of the transaction at $3.1 million as of the date of the announcement. Pursuant to such agreement, the Company has acquired operational control and substantially all of the economic benefit of House of Herbs’ business.

 

In October 2017, Curaleaf, Inc.'s subsidiary, PT Nevada, Inc., entered into an agreement to acquire 51.2% of Blackjack by purchasing a 64% interest in VSLV Management, a related party, which in turn owns 80% of Blackjack, a cannabis dispensary located in Las Vegas, Nevada. The consideration paid by Curaleaf, Inc. for the acquisiton consisted of 125,527 shares of common stock of Curaleaf, Inc., which is the equivalent to 4,105,988 Subordinated Voting Shares, valued for purposes of the transaction at $3 million as of the date of the announcement. In January 2019, the Company entered into an agreement to acquire an additional 18% of Blackjack from minority owners for a cash consideration of $1.3 million. Pursuant to such agreements, the Company has acquired operational control and substantially all of the economic benefit of Blackjack’s business. The transaction is awaiting receipt of regulatory approval.

 

In November 2017, Curaleaf, Inc. completed a non-brokered private placement of 836,506 shares of common stock at a price of $23.91 per share for cash proceeds of $20 million. The proceeds were used for acquisitions, expansion of existing operations and to fund operations.

 

In June 2017, the Company acquired 85% of the outstanding capital stock in PharmaCulture Corp., a Maryland-based processor of medical cannabis, for consideration of $2 million and a net settlement of a promissory note of $0.8 million. PharmaCulture Corp. was renamed Curaleaf Maryland, Inc. in 2018.

 

BUSINESS OF THE COMPANY

 

About Curaleaf

 

Curaleaf is a leading vertically integrated medical and wellness cannabis operator in the U.S. Headquartered in Wakefield, Massachusetts, the Company operates in 23 States, and, as at the date hereof, operates 92 dispensaries, 22 cultivation sites and 30 processing sites with a focus on highly populated, limited license states, including New York, New Jersey, Florida, Illinois, Pennsylvania and Massachusetts. The Company leverages its extensive research and development capabilities to distribute cannabis products with the highest standard for safety, effectiveness, consistent quality and customer care. The Company is committed to leading the industry in education and advancement through research and advocacy. The Company markets to medical and adult-use customers through brand strategies intended to build trust and loyalty.

 

Curaleaf, Inc. was one of the first professionally managed companies to enter the U.S. legal cannabis industry, which is one of the fastest growing industries in the U.S.1 and still in its early stages of maturity. Formed in 2010, Curaleaf, Inc. started in the state of New Jersey and was the first to develop and patent a medical cannabis vaporizing unit capable of delivering single metered doses of cannabis medicine to patients. The device adhered to exacting Food and Drug Administration (“FDA”) standards and was the first known means of administering medical cannabis in a clinical setting.

 

Currently, the Company is a diversified holding company dedicated to delivering market-leading products and services while building trusted national brands within the legal cannabis industry. Through its team of physicians, pharmacists, medical experts and industry innovators, the Company has developed a portfolio of branded cannabis-based therapeutic offerings in multiple formats and a strategic network of branded retail dispensaries. Exemplifying its commitment to quality, Curaleaf’s Florida operations were the first in the cannabis industry to receive the Safe Quality Food certification under the Global Food Safety Initiative, setting a new standard of excellence.

 

The Company’s Subordinate Voting Shares are listed on the CSE under the symbol “CURA” and on the OTCQX under the symbol “CURLF”.

 

1  The State of Legal Marijuana Markets. 5th ed., ArcView Market Research & BDS Analytics, 2017.

 

15

 

In order to achieve its strategy, the Company has completed several acquisitions since its formation. The Company expects to continue to actively pursue other acquisition, disposition and investment opportunities in the future.

 

Operating Segments

 

The Company currently operates in two segments:

 

·                  Cannabis Operations. The Company engages in the production and sale of cannabis via retail and wholesale channels. As at the date hereof, the Company operates 92 retail dispensaries in 18 states, as well as 22 cultivation sites in 17 states, and 30 processing sites in 22 states which sell cannabis through wholesale channels.

 

·                  Non-Cannabis Operations. The Company provides professional services including cultivation, processing and retail know-how and back office administration, intellectual property licensing, real estate leasing services and lending facilities to medical and adult-use cannabis licensees under management service agreements. The Company currently manages, under management service agreements, one integrated medical cannabis license in the State of Massachusetts, as well as certain Grassroots Illinois licenses pending state or local approval and licensing in connection with the Grassroots Transaction. The financial results of these entities are not included into the consolidated financial statements of the Company as the Company does not have control over these operations in accordance with IFRS 10. The Company recognizes management fee income for services rendered to this operation.

 

The Company currently operates in the United States as more specifically described in the below table. For further details on the Company's operations in the United States, see the "United States Regulatory Overview" section of this AIF.

 

 

 

 

 

Curaleaf Operations Overview(1)

 

 

 

 

 

 

 

Dispensaries

 

Production(2)

 

Cultivation

 

 

 

 

 

Licensed

 

Operating

 

Processing

 

Cultivation

 

Facility SF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Arizona

 

9

 

8

 

Y

 

Y

 

119 424

 

2

 

Arkansas

 

1

 

1

 

 

 

 

 

 

 

3

 

California

 

 

 

 

 

Y

 

Y

 

190 000

 

4

 

Colorado

 

 

 

 

 

Y

 

 

 

 

 

5

 

Connecticut

 

4

 

4

 

Y

 

Y

 

60 000

 

6

 

Florida(3)

 

40

 

31

 

Y

 

Y

 

352 200

 

7

 

Illinois(4)

 

10

 

7

 

Y

 

Y

 

70 000

 

8

 

Kentucky(5)

 

 

 

 

 

Y

 

 

 

 

 

9

 

Maine(6)

 

4

 

2

 

Y

 

Y

 

43 070

 

10

 

Maryland

 

4

 

4

 

Y

 

Y

 

22 000

 

11

 

Massachusetts(7)

 

4

 

4

 

Y

 

Y

 

157 000

 

12

 

Michigan

 

4

 

4

 

Y

 

Y

 

 

 

13

 

Missouri(8)

 

 

 

 

 

Y

 

 

 

 

 

14

 

Nevada(9)

 

3

 

3

 

Y

 

Y

 

278 800

 

15

 

New Jersey

 

3

 

1

 

Y

 

Y

 

153 150

 

16

 

New York

 

4

 

4

 

Y

 

Y

 

72 000

 

17

 

North Dakota

 

4

 

4

 

Y

 

Y

 

33 000

 

18

 

Ohio(10)

 

2

 

2

 

Y

 

Y

 

32 000

 

19

 

Oklahoma(11)

 

 

 

 

 

Y

 

 

 

 

 

20

 

Oregon

 

1

 

1

 

Y

 

Y

 

37 000

 

21

 

Pennsylvania(12)

 

18

 

9

 

Y

 

Y

 

75 000

 

22

 

Utah

 

1

 

1

 

Y

 

 

 

 

 

23

 

Vermont

 

4

 

2

 

Y

 

Y

 

13 000

 

 

 

Total

 

120

 

92

 

30

 

22

 

1 707 644

 

 

Notes:

(1) Licensed operations of the Company’s subsidiaries that are consolidated based on ownership, management agreement or similar contractual relationships.

(2) The Company has multiple production licenses and/or facilities in certain states.

(3) Caps on the number of dispensaries one company can open in Florida expired in April 2020. As such, the 40 Florida licensed dispensaries listed in this table only includes the number of locations Curaleaf has secured or is actively pursuing as of the date hereof.

(4) In Illinois, the Company is awaiting regulatory approval to acquire five dispensary licenses, which permit the holder to open up to ten total dispensaries, seven of which are currently operational. Ownership of the Illinois dispensaries is subject to receipt of regulatory approval.

(5) Kentucky has not legalized medical cannabis, but does permit hemp cultivation and processing. In Kentucky, the Company holds a hemp processor/handler license issued by the Kentucky Department of Agriculture and operates out of a 74,000 square foot facility.

(6) The Company's two adult-use dispensaries have received local approval for their locations and their state license application are pending regulatory approval.

(7) Of the four licensed dispensaries in Massachusetts, one is medical-cannabis-only.

(8) While the Company, its subsidiaries, or affiliates, may have rights to certain dispensary licenses in Missouri, these are not included above since the Company, its subsidiaries, or affiliates do not intend to operationalize these licenses.

(9) Nevada licensed dispensary count excludes rights held by a Grassroots subsidiary to acquire certain dispensary licenses in the state. These licenses are excluded since the Company has not realized these rights at this time.

(10) Acquisition of the Ohio dispensaries is subject to receipt of regulatory approval.

(11) Oklahoma operations exclude certain dispensary licenses held by an affiliate of Grassroots, one of which is currently operational as of the date hereof. These licenses are not included above since the Company intends to close the one operational location and does not intend to operationalize the remaining licenses.

(12) Pennsylvania licenses are held by affiliates of the Company and not directly by the Company.

 

Principal Products and Services

 

The Company, through its subsidiaries and affiliates, operates in highly regulated markets that require expertise in cultivation, manufacturing, retail operations and logistics. The Company leverages its extensive research and development capabilities to assist its state-licensed entities to manufacture cannabis products in multiple formats with the highest standards for safety, effectiveness, consistent quality and customer care. Currently, the Company’s subsidiary entities cultivate, process, market and/or dispense a wide-range of permitted cannabis products across its operating markets, including: flower, pre-rolls and flower pods, dry-herb vaporizer cartridges, concentrates for vaporizing such as pre-filled vaporizer cartridges and disposable vaporizer pens, concentrates for dabbing such as distillate droppers, mints, topical balms and lotions, tinctures, lozenges, capsules and edibles.

 

In most of the Company’s markets, its licensed entities are vertically integrated, meaning the entire supply chain is managed from seed to sale, cultivating cannabis flower, processing the flower into manufactured products, and selling the product to registered patients and/or legal adult-use consumers. In most states in which its licensed entities operate, products are sold under the Curaleaf and Select brands, and in Curaleaf dispensaries. The Company is committed to be the industry’s leading resource in education and advancement through research and advocacy, and is focused on developing a trusted, national brand.

 

The Company believes that it has developed the in-house resources to maintain best practices in cannabis cultivation, processing and dispensing and is dedicated to staying at the forefront of technology in the industry. The Company continues to invest strategically in infrastructure to ensure low overall production costs and to stay nimble in its ability to adapt its product mix to the rapidly developing cannabis market. The Company intends to use its footprint to share know-how and technology throughout its operations and spread out development costs.

 

·                  Cultivation: The Company has grown over 180 strains of cannabis, which it has extensively tested and characterized for yield, cannabinoid content and patient response. Additionally, Curaleaf cultivates cannabis using a variety of methods, including: greenhouse, outdoor, indoor, and two-tier indoor cultivation.

 

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·                  Extraction and Purification: The Company uses proprietary processes for cannabis and terpene purification, including “cold process” terpene purification. The Company believes it is an industry leader in achieving the desired composition of cannabinoids and terpenes in its finished products through processing and purification, enabling it to respond to trends in medical product formulation.

 

·                  Formulation and Quality Control: The Company’s processing facilities produce across the range of solid, liquid and inhaled products utilizing its vast in-house knowledge and experience. By combining expert cultivation, manufacturing and analytical laboratory operations, the Company believes that it has developed a complete in-house quality assurance and quality control program. In-house quality assurance enables rapid product development cycles and production of higher quality consumer products.

 

Research and Development

 

Curaleaf’s research and development activities primarily focus on optimizing cultivation and manufacturing techniques, and developing new manufactured products.

 

The Company collects data on the number of grams of cannabis flower produced per watt of light, per square foot, and per plant. This allows cultivators to gain insights on optimal cultivation methods by adjusting certain variables such as cannabis strain variety and plant spacing. The Company’s cultivators also institute pest management techniques in facilities and document successes and failures, sharing this knowledge across its cultivation operations.

 

The Company also researches new methods of cannabis extraction for the development of new manufactured products. The Company’s research and development activities operate on an on-going basis as the Company continually seeks to improve current methods for its licensed businesses.

 

Production and Sales

 

Curaleaf currently has 22 cultivation facilities totaling approximately 1.6 million square feet. Its current annual production capacity is estimated at over 150,000 pounds of dry flower.

 

As at the date hereof, Curaleaf has 30 processing facilities. Each new manufacturing suite is built to ISO 8 clean room specifications and employs advanced nutritional and pharmaceutical formulations technology for the most optimal delivery methods. These facilities adhere to FDA guidelines and current good manufacturing principles. Each Curaleaf production facility (cultivation and processing) primarily focuses on the commercialization of cannabis products, with a strict focus on quality control and patient care. Illustrating this commitment, Curaleaf’s Florida operations were the first in the cannabis industry to receive the Safe Quality Food certification under the Global Food Safety Initiative.

 

Curaleaf’s primary method of sales currently occur in its brick-and-mortar dispensaries across the U.S. However, the Company also offers home delivery services across the States of Arizona, Florida, Nevada and New York, in compliance with all State regulations. Also in Florida, the Company offers drive-thru service at two of its dispensaries. In multiple States, the Company offers customers the option to order online to pick-up in store. Curaleaf aims to expand its e-commerce operations and delivery operations, where permitted, to offer convenient access for its customers and meet the demands of an evolving retail landscape.

 

Intellectual Property

 

Curaleaf has developed multiple proprietary product formats, technologies and processes to ensure the high quality of its premium cannabis products. These proprietary technologies and processes include its cultivation and extraction techniques, product formulations and cannabis delivery and monitoring systems. While actively determining and pursuing the patentability of these processes and materials, Curaleaf ensures confidentiality through the use of non-disclosure and/confidentiality agreements.

 

17

 

Curaleaf has spent considerable time and resources to establish a premium and recognizable brand amongst consumers and retailers in the cannabis industry. As of December 31, 2019, Curaleaf has one federally registered patent with the United States Patent and Trademark Office (“USPTO”). Additionally, as of December 31, 2019, 21 trademarks were currently filed and pending approval with the USPTO, and Curaleaf is actively pursuing the filing of additional trademarks at both the federal and State levels. All patent and trademarks are further described below.

 

In addition to its patent and pending trademarks, Curaleaf owns 254 website domains, including www.curaleaf.com, as well as numerous social media accounts across all major platforms.

 

Curaleaf maintains an in-house legal team, as well as engages outside legal counsel, to actively monitor and identify potential infringements on its intellectual property.

 

Patents

 

As of December 31, 2019, Curaleaf has registered patent 8910630 published by the USPTO on December 6, 2012 for its medical inhalation system, which is categorized at the USPTO as a Cannabis Delivery and Monitoring System.

 

Trademarks

 

Additionally, as of December 31, 2019, Curaleaf had 21 pending trademarks with the USPTO, all pertaining to use of the Curaleaf brands and related goods associated with the Curaleaf brands and/or names.

 

 

 

Filing Date

 

Serial Number

 

Word Mark

 

Description

1.

 

6/21/2018

 

88008972

 

CURALEAF

 

Hemp oil for use as a dietary supplement containing only naturally occurring amounts of CBD; dietary; dietary and nutritional supplements containing CBD derived from industrial hemp

 

 

 

 

 

 

 

 

 

2.

 

6/25/2018

 

88013026

 

CURALEAF

 

Electronic vaporizer liquid containing only naturally occurring amounts of CBD derived from industrial hemp for use in electronic vaporizers, including e-cigarettes, e-cigars, and personal vaporizers

 

 

 

 

 

 

 

 

 

3.

 

8/7/2018

 

88068377

 

CURALEAF

 

Retail and online store services featuring smoker’s articles, namely, smoking pipes and oral smokeless vaporizers, tobacco storage boxes, tobacco grinders, none of the foregoing intended for use with cannabis

 

 

 

 

 

 

 

 

 

4.

 

8/27/2018

 

88093822

 

CURALEAF

 

Apparel, namely, t-shirts, sweatshirts, hats

 

 

 

 

 

 

 

 

 

5.

 

8/27/2018

 

88094444

 

CURALEAF

 

Nutritional supplements for medicinal purposes

 

 

 

 

 

 

 

 

 

6.

 

9/17/2018

 

88120354

 

CURALEAF

 

Reusable stainless steel, glass, and plastic water bottles sold empty

 

18

 

7.

 

9/18/2018

 

88121665

 

CURALEAF

 

smoker’s articles, namely, smoking pipes and oral smokeless vaporizers, tobacco storage boxes, tobacco grinders, none of the foregoing intended for use with cannabis

 

 

 

 

 

 

 

 

 

8.

 

10/9/2018

 

88148369

 

CURALEAF

 

Retail and online store services featuring smoker’s articles, namely, smoking pipes and oral smokeless vaporizers, tobacco storage boxes, tobacco grinders, none of the foregoing intended for use with cannabis

 

 

 

 

 

 

 

 

 

9.

 

10/9/2018

 

88148362

 

CURALEAF

 

smoker’s articles, namely, smoking pipes and oral smokeless vaporizers, tobacco storage boxes, tobacco grinders, none of the foregoing intended for use with cannabis

 

 

 

 

 

 

 

 

 

10.

 

10/9/2018

 

88148295

 

CURALEAF

 

Reusable stainless steel, glass, and plastic water bottles sold empty

 

 

 

 

 

 

 

 

 

11.

 

10/9/2018

 

88148305

 

CURALEAF

 

Apparel, namely, t-shirts, sweatshirts, hats

 

 

 

 

 

 

 

 

 

12.

 

10/9/2018

 

88148263

 

CURALEAF

 

Nutritional supplements for medicinal purposes

 

 

 

 

 

 

 

 

 

13.

 

10/9/2018

 

88148333

 

CURALEAF

 

Electronic vaporizer liquid containing only naturally occurring amounts of CBD derived from industrial hemp for use in electronic vaporizers, including e-cigarettes, e-cigars, and personal vaporizers

 

 

 

 

 

 

 

 

 

14.

 

10/9/2018

 

88148241

 

CURALEAF

 

Hemp oil for use as a dietary supplement containing only naturally occurring amounts of CBD; dietary; dietary and nutritional supplements containing CBD derived from industrial hemp

 

 

 

 

 

 

 

 

 

15.

 

11/28/2018

 

88208488

 

UKU

 

Nutritional supplements for medicinal purposes

 

 

 

 

 

 

 

 

 

16.

 

11/28/2018

 

88208490

 

UKU

 

Reusable water bottles sold empty

 

 

 

 

 

 

 

 

 

17.

 

11/28/2018

 

88208497

 

UKU

 

Apparel, namely, t-shirts, sweatshirts, hats

 

 

 

 

 

 

 

 

 

18.

 

11/28/2018

 

88208522

 

UKU

 

Retail and online store services featuring smoker’s articles, namely, smoking pipes and oral smokeless vaporizers, tobacco storage boxes, tobacco grinders, none of the foregoing intended for use with cannabis

 

 

 

 

 

 

 

 

 

19.

 

11/28/2018

 

88208515

 

UKU

 

Smoker’s articles, namely, smoking pipes and oral smokeless vaporizers, tobacco storage boxes, tobacco grinders, none of the foregoing intended for use with cannabis

 

 

 

 

 

 

 

 

 

20.

 

11/28/2018

 

88208506

 

UKU

 

Electronic vaporizer liquid containing only naturally occurring amounts of CBD derived from industrial hemp for use in electronic vaporizers, including e-cigarettes, e-cigars, and personal vaporizers

 

 

 

 

 

 

 

 

 

21.

 

11/28/2018

 

88208463

 

UKU

 

Hemp oil for use as a dietary supplement containing only naturally occurring amounts of CBD; dietary; dietary and nutritional supplements containing CBD derived from industrial hemp

 

19

 

Curaleaf also has a registered trademark in the State of Connecticut (Connecticut registration number 3946987 filed September 22, 2017) for retail use of the Curaleaf brand for marketing purposes and related goods and services.

 

All federal registered trademarks in the U.S. described above are subject to renewal ten (10) years from the date of registration and the Connecticut trademark described above is subject to renewal five (5) years from the date of registration.

 

Competitive Conditions

 

The cannabis industry is highly competitive. The Company compete on quality, price, brand recognition, and distribution strength. Our cannabis products compete with other products for consumer purchases, as well as shelf space in retail dispensaries and wholesaler attention. The Company compete with thousands of cannabis producing companies with various business models, from small family-owned operations to multi-billion dollar market capitalized multi-state operators. In certain markets, such as California, there are also a number of illegally operating dispensaries, which serve as competition as well.

 

The Company maintains an operational footprint of primarily limited-license States, with natural high barriers to entry and limited market participants. The majority of the markets in which the Company operates have formal regulations limiting the number of cannabis licenses that will be awarded, helping to ensure the Company’s market share is protected in these limited-market States under the current regulatory framework.

 

As cannabis remains federally illegal in the U.S., businesses seeking to enter the industry face additional challenges when accessing capital. Presently, there exists no reliable source of U.S. bank lending or equity capital available to fund operations in the U.S. cannabis sector. Nevertheless, the Company is well-capitalized, and management believes that the level of expertise and significant capital investment required to operate a large-scale, vertically-integrated cannabis operation make it difficult and inefficient for smaller cannabis operators to enter this sector of the market. Due to the rapid growth of the cannabis industry in the U.S., management acknowledges that the Company will face competition from other companies accessing equity capital markets in the sector.

 

Foreign Operations

 

The Company conducts business exclusively in the U.S. See “United States Regulatory Overview”.

 

Compliance and Monitoring

 

As at the date hereof, the Company believes that each of its licensed operating entities (a) holds all applicable licenses to cultivate, manufacture, process, and/or distribute cannabis in its respective State, and (b) is in good standing and in material compliance with its respective State’s cannabis regulatory program. The Company is in material compliance with its obligations under State law related to its cannabis cultivation, processing and dispensary licenses, other than minor violations that would not result in a material fine, suspension or revocation of any relevant license.

 

The Company uses reasonable commercial efforts to ensure that its business is in material compliance with laws and applicable licensing requirements and engages in the regulatory and legislative

 

20

 

process nationally and in every State it operates through the Company’s compliance department, government relations department, outside government relations consultants, cannabis industry groups and legal counsel.

 

The compliance department consists of Chief Compliance Officer Jim Shorris, Vice President Keisha Brice and local compliance officers in our subsidiaries. Compliance officers in each operating subsidiary are charged with knowing the local regulatory process and monitoring developments with their governing bodies. Each compliance officer regularly reports regulatory developments and ongoing developments to the Company’s VP of Compliance, through written and oral communications and are charged with the creation and implementation of plans regarding all regulatory developments. The Company’s Chief Compliance Officer and VP of Compliance work with external legal advisors in the states in which the Company operates to ensure that the Company is in on-going compliance with applicable state laws.

 

The government relations department, consisting of Senior Vice President, Ed Conklin, and Vice Presidents Matt Harrell and Don Williams, work closely with Curaleaf management to develop relationships with local and State regulators, industry groups, and elected officials in order to effectively monitor and engage in the regulatory and legislative processes. The Company’s Government Relations Department develops strategies, engages legislative consultant’s, directly lobbies and works with third party groups to protect the Company’s right to operate and to advocate for legislation, regulations and oversight under which it can be successful.

 

Although the Company believes that its business activities are materially compliant with applicable and state and local laws of the United States, strict compliance with State and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law nor provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may result in a material adverse effect on the Company. The Company derives 100% of its revenues from the cannabis industry in certain States, which industry is illegal under United States federal law. Even where the Company’s cannabis-related activities are compliant with applicable State and local law, such activities remain illegal under United States federal law. The enforcement of relevant federal laws is a significant risk.

 

United States Customs and Border Protection (“CBP”) enforces the laws of the United States. Crossing the border while in violation of the CSA and other related United States federal laws may result in denied admission, seizures, fines, and apprehension. CBP officers administer the United States Immigration and Nationality Act to determine the admissibility of travelers who are non-U.S. citizens into the United States. An investment in the Company, if it became known to CBP, could have an impact on a non-U.S. citizen’s admissibility into the United States and could lead to a lifetime ban on admission. Medical cannabis has been protected against enforcement by enacted legislation from the United States Congress in the form of the Rohrabacher-Farr Amendment (as defined herein), which prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to the United States Congress restoring such funding. This amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. Subsequent to the issuance of Sessions Memo (as defined herein), the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the fourth consecutive year contained the Rohrabacher-Farr Amendment (as defined herein) language and continued the protections for the medical cannabis marketplace and its lawful participants from interference by the Department of Justice (“DOJ”). The Rohrabacher-Farr Amendment again was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019 and was similarly renewed again on November 21, 2019.  The FY 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrbacher-Farr Amendment effective through September 30, 2020. Notably, such Amendments have always applied only to medical cannabis programs and have no effect on pursuit of recreational cannabis activities.

 

21

 

In addition to the above disclosure, please see “Risk Factors” for further risk factors associated with the operations of the Company and the Company.

 

Employees

 

As at December 31, 2019, the Company had 1,937 employees.

 

Specialized Skill and Knowledge

 

To remain a leader in its field, Curaleaf relies on a motivated and experienced team, focused on offering the highest-quality product, in accordance with the regulations in force. The Company employs a diverse group of people for their particular administrative, operational and financial expertise, as well as numerous industry professionals with in-depth knowledge of the cultivation and growing of wellness and medical marijuana.

 

UNITED STATES REGULATORY OVERVIEW

 

In accordance with the Canadian Securities Administrators Staff Notice 51-352 (Revised) dated February 8, 2018 — Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”), below is a discussion of the federal and State-level U.S. regulatory regimes in those jurisdictions where the Company is currently directly involved, through its subsidiaries, in the cannabis industry. Curaleaf is directly engaged in the manufacture, possession, sale or distribution of cannabis in the adult-use and/or medical industries in the states of Arizona, Arkansas, California, Colorado, Connecticut, Florida, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Utah and Vermont. In addition, the Company is indirectly involved through management services which include the use of the “Curaleaf” brand and retail and cultivation and production operations, human resources, finance and accounting, marketing, sales, legal and compliance support services, in both the adult-use and medical cannabis industry in the States of Maine and Massachusetts. 

 

In accordance with Staff Notice 51-352, the Company evaluates, monitors and reassesses this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on the Company’s license, business activities or operations will be promptly disclosed by the Company.

 

Regulation of Cannabis in the United States Federally

 

The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, in one of five different schedules. Cannabis is classified as a Schedule I drug. As a Schedule I drug, the federal Drug Enforcement Agency (“DEA”) considers marijuana to have a high potential for abuse; no currently accepted medical use in treatment in the United States; and a lack of accepted safety for use of the drug under medical supervision2. The classification of marijuana as a Schedule I drug is inconsistent with what the Company believes to be many valuable medical uses for marijuana accepted by physicians, researchers, patients, and others. As evidence of this, the FDA, on June 25, 2018, approved Epidiolex CBD oral solution with an active ingredient derived from the cannabis plant for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. This is the first FDA-approved drug that contains a purified drug substance derived from the cannabis plant. In this case, the substance is CBD, a chemical component of marijuana that does not contain the intoxication properties of THC, the primary psychoactive component of marijuana. The Company believes the CSA categorization as a Schedule I drug is not reflective of the medicinal properties of marijuana or the public

 

2  21 U.S.C. 812(b)(1).

 

22

 

perception thereof, and numerous studies show cannabis is not able to be abused in the same way as other Schedule I drugs, has medicinal properties, and can be safely administered3.

 

The federal position is also not necessarily consistent with democratic approval of marijuana at the State government level in the United States. Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of marijuana under the Cannabis Act (Canada), marijuana is largely regulated at the State level in the United States. State laws regulating cannabis conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use cannabis production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts. Although the Company’s activities are compliant with applicable State and local laws, strict compliance with State and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law nor provide a defense to federal criminal charges that may be brought against the Company. The Supremacy Clause of the United States Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and State law, federal law shall apply.

 

Nonetheless, 37 states and the District of Columbia in the United States have legalized some form cannabis for medical use, while 11 states and the District of Columbia have legalized the adult use of cannabis for recreational purposes. As more and more states legalized medical and/or adult-use marijuana, the federal government attempted to provide clarity on the incongruity between federal prohibition under the CSA and these State-legal regulatory frameworks. Notwithstanding the foregoing, marijuana remains illegal under U.S. federal law, with marijuana listed as a Schedule I drug under the CSA. Until 2018, the federal government provided guidance to federal law enforcement agencies and banking institutions through a series of United States DOJ memoranda. The most recent such memorandum was drafted by former Deputy Attorney General James Cole on August 29, 2013 (the “Cole Memorandum”)4.

 

The Cole Memorandum offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states, and instructed federal law enforcement agencies not to prosecute violations of federal drug laws related to cannabis where the activity is permitted and regulated under cannabis laws of the relevant state.

 

The Cole Memorandum put forth eight prosecution priorities:

 

1.              Preventing the distribution of marijuana to minors;

 

2.              Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

 

3.              Preventing the diversion of marijuana from states where it is legal under State law in some form to other states;

 

3  See Lachenmeier, DW & Rehm, J. (2015). Comparative risk assessment of alcohol, tobacco, cannabis and other illicit drugs using the margin of exposure approach. Scientific Reports, 5, 8126. doi: 10.1038/srep08126; Thomas, G & Davis, C. (2009). Cannabis, Tobacco and Alcohol Use in Canada: Comparing risks of harm and costs to society. Visions Journal, 5. Retrieved from http://www.heretohelp.bc.ca/sites/default/files/visions_cannabis.pdf; Jacobus et al. (2009). White matter integrity in adolescents with histories of marijuana use and binge drinking. Neurotoxicology and Teratology, 31, 349-355. https://doi.org/10.1016/j.ntt.2009.07.006; Could smoking pot cut risk of head, neck cancer? (2009 August 25). Retrieved from https://www.reuters.com/article/us-smoking-pot/could-smoking-pot-cut-risk-of-head-neck-cancer-idUSTRE57O5DC20090825; Watson, SJ, Benson JA Jr. & Joy, JE. (2000). Marijuana and medicine: assessing the science base: a summary of the 1999 Institute of Medicine report. Arch Gen Psychiatry Review, 57, 547-552. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/10839332; Hoaken, Peter N.S. & Stewart, Sherry H. (2003). Drugs of abuse and the elicitation of human aggressive behavior. Addictive Behaviours, 28, 1533-1554. Retrieved from http://www.ukcia.org/research/AgressiveBehavior.pdf; and Fals-Steward, W., Golden, J. & Schumacher, JA. (2003). Intimate partner violence and substance use: a longitudinal day-to-day examination. Addictive Behaviors, 28, 1555-1574. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/14656545.

4  See James M. Cole, Memorandum for All United States Attorneys (Aug. 29, 2013), available at https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf

 

23

 

4.              Preventing the State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

 

5.              Preventing the violence and the use of firearms in the cultivation and distribution of marijuana;

 

6.              Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

 

7.              Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

 

8.              Preventing marijuana possession or use on federal property.

 

The Cole Memorandum was seen by many State-legal marijuana companies as a safe harbor — albeit an imperfect one — for their licensed operations that were conducted in full compliance with all applicable State and local regulations.

 

On January 4, 2018, former United States Attorney General Jeff Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United States Attorneys (the “Sessions Memo”). Rather than establish national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana activity was legal under State law, the Sessions Memo instructs that “[i]n deciding

 

which marijuana activities to prosecute... with the [DOJ’s] finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions.” Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.

 

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

 

Former United States Attorney General Sessions resigned on November 7, 2018. He was replaced by William Barr on February 14, 2019. It is unclear what specific impact this development will have on U.S. federal government enforcement policy. However, in a written response to questions from U.S. Senator Cory Booker made as a nominee, Attorney General Barr stated “I do not intend to go after parties who have complied with State law in reliance on the Cole Memorandum.”5 Nonetheless, there is no guarantee that State laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of State laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law.

 

The Company believes it is too soon to determine if any prosecutorial effects will be undertaken by the rescission of the Cole Memorandum, or if Attorney General Barr will reinstitute the Cole Memorandum or a similar guidance document for United States attorneys. The sheer size of the cannabis industry, in addition to participation by State and local governments and investors, suggests that a largescale enforcement operation would possibly create unwanted political backlash for the DOJ and the Trump administration.

 

5  Questions for the Record William P. Barr Nominee to be United States Attorney General, available at https://www.judiciary.senate.gov/imo/media/doc/Barr%20Responses%20to%20Booker%20QFRs1.pdf.

 

24

 

As an industry best practice, despite the recent rescission of the Cole Memorandum, the Company abides by the following standard operating policies and procedures to ensure compliance with the guidance provided by the Cole Memorandum:

 

1.              ensure that its operations are compliant with all licensing requirements as established by the applicable State, county, municipality, town, township, borough, and other political/administrative divisions;

 

2.              ensure that its cannabis related activities adhere to the scope of the licensing obtained (for example: in the states where cannabis is permitted only for adult-use, the products are only sold to individuals who meet the requisite age requirements);

 

3.              implement policies and procedures to ensure that cannabis products are not distributed to minors;

 

4.              implement policies and procedures to ensure that funds are not distributed to criminal enterprises, gangs or cartels;

 

5.              implement an inventory tracking system and necessary procedures to ensure that such compliance system is effective in tracking inventory and preventing diversion of cannabis or cannabis products into those states where cannabis is not permitted by State law, or across any State lines in general;

 

6.              ensure that its State-authorized cannabis business activity is not used as a cover or pretense for trafficking of other illegal drugs, is engaged in any other illegal activity or any activities that are contrary to any applicable anti-money laundering statutes; and

 

7.              ensure that its products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving.

 

In addition, the Company conducts background checks to ensure that the principals and management of its operating subsidiaries are of good character, have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in cultivation, manufacturing or distribution of cannabis. The Company will also conduct ongoing reviews of the activities of its cannabis businesses, the premises on which they operate and the policies and procedures that are related to possession of cannabis or cannabis products outside of the licensed premises, including the cases where such possession is permitted by regulation. See “Risk Factors”.

 

Although the Cole Memorandum has been rescinded, one legislative safeguard for the medical marijuana industry remains in place: Congress has passed a so-called “rider” provision in the FY 2015, 2016, 2017, 2018, 2019 and 2020 Consolidated Appropriations Acts to prevent the federal government from using congressionally appropriated funds to enforce federal marijuana laws against regulated medical marijuana actors operating in compliance with State and local law. The rider is known as the “Rohrbacher- Farr” Amendment after its original lead sponsors (it is also sometimes referred to as the “Rohrbacher- Blumenauer” or “Joyce-Leahy” Amendment, but it is referred to in this Annual Information Form as “Rohrbacher-Farr”). Most recently, the Rohrbacher-Farr Amendment was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019. In signing the Act, President Trump issued a signing statement noting that the Act “provides that the DOJ may not use any funds to prevent implementation of medical marijuana laws by various States and territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” While the signing statement can fairly be read to mean that the executive branch intends to enforce the CSA and other federal laws prohibiting the sale and possession of medical marijuana, the president did issue a similar signing statement in 2017 and no major federal enforcement actions followed. On September 27, 2019 the Rohrbacher-Farr Amendment was temporarily

 

25

 

renewed through a stopgap spending bill and was similarly renewed again on November 21, 2019.  The FY 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrbacher-Farr Amendment effective through September 30, 2020.  In signing the spending bill, President Trump again released a statement similar to the ones he made May 2017 and February 2019 regarding the Rohrbacher-Farr Amendment.

 

There is a growing consensus among marijuana businesses and numerous congressmen and congresswomen that guidance is not law and temporary legislative riders, such as the Rohrbacher-Farr Amendment, are an inappropriate way to protect lawful medical marijuana businesses. Numerous bills have been introduced in Congress in recent years to decriminalize aspects of State-legal marijuana trades. For fiscal year 2019, the strategy amongst the bipartisan Congressional Marijuana Working Group in Congress, has been to introduce numerous marijuana-related appropriations amendments in the Appropriations Committee in both the House and Senate, similar to the strategy employed in Fiscal 2018. The amendments included protections for marijuana-related businesses in states with medical and adult-use marijuana laws, as well as protections for financial institutions that provide banking services to State-legal marijuana businesses. The Company also has observed that each year more congressmen and congresswomen sign on and co-sponsor marijuana legalization bills. These include the CARERS Act, REFER Act and others. While there are different perspectives on the most effective route to end federal marijuana prohibition, Congressman Blumenauer and Senator Wyden have introduced the three-bill package, Path to Marijuana Reform, which would fix the so-called Internal Revenue Service 280E provision that provides tax burdens for marijuana businesses, eliminate civil asset forfeiture and federal criminal penalties for marijuana businesses complying with State law, reduce barriers to banking, de-schedule marijuana from the federal list of controlled substances, and tax and regulate marijuana.6

 

Senator Booker has also introduced the Marijuana Justice Act, which would de-schedule marijuana, and in 2018 Congresswoman Barbara Lee introduced the House companion. Colorado Republican Senator Cory Gardner has reportedly secured a probable assurance from President Trump that he would sign a bill to allow states to legalize and regulate marijuana without federal intervention7.

 

In light of all of this, it was anticipated that the federal government will eventually repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit regulated cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco. Given current political trends, however, the Company considers these developments unlikely in the near-term. For the time being, marijuana remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor its rescission nor the continued passage of the Rohrbacher-Farr Amendment has altered that fact. The federal government of the United States has always reserved the right to enforce federal law regarding the sale and disbursement of medical or adult-use marijuana, even if State law sanctions such sale and disbursement. If the United States federal government begins to enforce United States federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable State laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects could be materially adversely affected.

 

Additionally, under United States federal law, it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of any Schedule I controlled substance. Due to the CSA categorization of marijuana as a Schedule I drug, federal law makes it illegal for financial institutions that depend on the Federal Reserve’s money transfer system to take any proceeds from marijuana sales as deposits. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses under the Bank Secrecy Act.

 

6  Wyden, Blumenauer. (2017 March 30). Wyden, Blumenauer announce bipartisan path to marijuana reform. Retrieved from https://blumenauer.house.gov/media-center/press-releases/wyden-blumenauer-announce-bipartisan-path-marijuana-reform

7  Mark. K. Matthews, Donald Trump would “probably” support legalizing Colorado’s marijuana industry — through bid by Cory Gardner and Elizabeth Warren, THE DENVER POST (June 8, 2018), available at https://www.denverpost.com/2018/06/08/coloradomarijuana- industry-sanctioning-donald-trump/

 

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Therefore, under the Bank Secrecy Act, 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 charged with money laundering or conspiracy.

 

On September 26, 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (commonly known as the “SAFE Banking Act”), which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

While there has been no change in U.S. federal banking laws to accommodate businesses in the large and increasing number of U.S. states that have legalized medical and/or adult-use marijuana, in 2014, the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) issued guidance to prosecutors of money laundering and other financial crimes (the “FinCEN Guidance”) and notified banks that it would not seek enforcement of money laundering laws against banks that service cannabis companies operating under state law, provided that strict due diligence and reporting standards are met. The FinCEN Guidance advised prosecutors not to focus their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses so long as that business is legal in their State and none of the federal enforcement priorities referenced in the Cole Memorandum are being violated (such as keeping marijuana away from children and out of the hands of organized crime). The FinCEN Guidance also clarifies how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, including thorough customer due diligence, but makes it clear that they are doing so at their own risk. The customer due diligence steps include:

 

1.              Verifying with the appropriate State authorities whether the business is duly licensed and registered;

 

2.              Reviewing the license application (and related documentation) submitted by the business for obtaining a State license to operate its marijuana-related business;

 

3.              Requesting from State licensing and enforcement authorities available information about the business and related parties;

 

4.              Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus adult use customers);

 

5.              Ongoing monitoring of publicly available sources for adverse information about the business and related parties;

 

6.              Ongoing monitoring for suspicious activity, including for any of the red flags described in this

 

guidance; and

 

7.              Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

 

With respect to information regarding State licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by State licensing authorities, where states make such information available.

 

Because most banks and other financial institutions are unwilling to provide any banking or financial services to marijuana businesses, these businesses can be forced into becoming “cash-only” businesses.

 

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While the FinCEN Guidance decreased some risk for banks and financial institutions considering serving the industry, in practice it has not increased banks’ willingness to provide services to marijuana businesses, and most banks continue to decline to operate under the strict requirements provided under the FinCEN Guidance. This is because, as described above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions to undertake time-consuming and costly due diligence on each marijuana business they accept as a customer.

 

The few State-chartered banks and/or credit unions that have agreed to work with marijuana businesses are limiting those accounts to small percentages of their total deposits to avoid creating a liquidity risk. Since, theoretically, the federal government could change the banking laws as it relates to marijuana businesses at any time and without notice, these credit unions must keep sufficient cash on hand to be able to return the full value of all deposits from marijuana businesses in a single day, while also keeping sufficient liquid capital on hand to serve their other customers. Those State-chartered banks and credit unions that do have customers in the marijuana industry charge marijuana businesses high fees to pass on the added cost of ensuring compliance with the FinCEN Guidance. Unlike the Cole Memorandum, however, the FinCEN Guidance from 2014 has not been rescinded.

 

The Secretary of the U.S. Department of the Treasury, Stephen Mnuchin, has publicly stated that the Department was not informed of any plans to rescind the Cole Memorandum. Secretary Mnuchin stated that he does not have a desire to rescind the FinCEN Guidance.8 As an industry best practice and consistent with its standard operating procedures, the Company adheres to all customer due diligence steps in the FinCEN Guidance.

 

In the United States, a bill has been tabled in Congress to grant banks and other financial institutions immunity from federal criminal prosecution for servicing marijuana-related businesses if the underlying marijuana business follows State law. This bill, the Secure and Fair Enforcement (SAFE) Banking Act, passed the U.S. House of Representatives in September 2019 and is currently awaiting consideration in the U.S. Senate. There can be no assurance with that the bill will be passed in its current form or at all. In both Canada and the United States, transactions involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Legislative changes could help to reduce or eliminate these challenges for companies in the cannabis space and would improve the efficiency of both significant and minor financial transactions.

 

An additional challenge to marijuana-related businesses is that the provisions of Internal Revenue Code Section 280E are being applied by the IRS to businesses operating in the medical and adult-use marijuana industry. Section 280E prohibits marijuana businesses from deducting 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 marijuana 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.

 

CBD is a product that often is derived from hemp, which contains only trace amounts of THC, the psychoactive substance found in marijuana. On December 20, 2018, President Trump signed the Agriculture Improvement Act of 2018 (popularly known as the “2018 Farm Bill”) into law.89 Until the 2018 Farm Bill became law, hemp and products derived from it, such as CBD, fell within the definition of “marijuana” under the CSA and the DEA classified hemp as a Schedule I controlled substance because hemp is part of the cannabis plant.10

 

8  Angell, Tom. (2018 February 6). Trump Treasury Secretary Wants Marijuana Money In Banks, available at https://www.forbes.com/sites/tomangell/2018/02/06/trump-treasury-secretary-wants-marijuana-money-in-banks/#2848046a3a53; see also Mnuchin: Treasury is reviewing cannabis policies. (2018 February 7), available at http://www.scotsmanguide.com/News/2018/02/Mnuchin—Treasury-is-reviewing-cannabis-policies/.

9  H.R.2 - 115th Congress (2017-2018): Agriculture Improvement Act of 2018, Congress.gov (2018), https://www.congress.gov/bill/115th-congress/house-bill/2/text.

10  See, e.g., 21 C.F.R. § 1308.35.

 

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The 2018 Farm Bill defines hemp as the plant Cannabis sativa L. and any part of the plant with a delta-9 THC concentration of not more than 0.3 percent by dry weight and removes hemp from the CSA. The 2018 Farm Bill also allows states to create regulatory programs allowing for the licensed cultivation of hemp and production of hemp-derived products. Hemp and products derived from it, such as CBD, may then be sold into commerce and transported across State lines provided that the hemp from which any product is derived was cultivated under a license issued by an authorized State program approved by the U.S. Department of Agriculture and otherwise meets the definition of hemp removed from the CSA. The introduction of hemp and products derived from it, such as CBD, in foods, beverages, and dietary supplements has not — been approved by the FDA. The FDA expects to engage in rulemaking on this subject.

 

Arizona Operations

 

Arizona’s medical cannabis program was introduced in November 2010 when voters approved the Proposition 203 “Arizona Medical Marijuana Initiative” ballot measure that legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

 

The Arizona Department of Health Services has allocated 130 medical cannabis dispensary certificates. Each dispensary certificate permits the license holder to open one dispensary and gives the license holder the option to open one cultivation facility and/or one processing facility. Cultivation and processing sites can be located anywhere in the State and are not restricted based on where the license holder’s dispensary is located. Dispensaries are limited to their district for their first three years of operation. All dispensaries must be not-for-profit. Extracted oils, edibles, and flower products are permitted. Wholesale transactions are permitted. In June 2018, an Arizona appeals court ruled that extracted cannabis oils such as vaporizer cartridges were illegal. In January 2019, the Arizona Supreme Court agreed to review the legality of medical marijuana extracts such as vaporizer cartridges. In May 2019, the Arizona Supreme Court unanimously ruled that medical marijuana extracts are legal, meaning dispensaries can continue to sell oil-based formulations such as vaporizer cartridges.

 

In April 2018, Curaleaf, Inc.’s subsidiary CLF AZ acquired Swell Farmacy, a holding company that operated four licensed dispensaries through Master Services Agreements. The dispensaries are located in the Phoenix area, which boasts 173,000 of the State’s 260,000 patients. In May 2018, the Company entered into a 10-year lease to operate a 100,000 square foot indoor cultivation facility, 50,000 square feet of which is already constructed for cultivation on a 68-acre plot of land with the prospect of further expansion, including greenhouse and outdoor grows. In November 2018, the Company acquired Midtown Roots, a holding company operating the only dispensary located in downtown Phoenix. In May 2019, the Company acquired the exclusive rights to operate the Emerald dispensary, the only dispensary in the town of Gilbert, which is located in the Metro Phoenix area. In June 2019, the Company announced two separate acquisitions, Glendale Greenhouse, a vertically integrated cannabis business operating a cultivation and processing facility, as well as a dispensary, and Phytotherapeutics Management Services, LLC, which operates a dispensary that was subsequently moved to a newly developed, flagship dispensary located at 2175 N 83rd Avenue, which has close access to the I-10 Freeway. The Company may acquire additional dispensaries in this market, which is one of the biggest programs in the U.S.

 

In February 2020, the Company closed the acquisition of Cura Partners, owners of the Select brand. Select is a wholesale brand in Arizona, among other States.

 

In July 2020, the Company acquired a medical cannabis dispensary license in Arizona. The Company expects to open this new dispensary location in the metro-Phoenix area in early 2021.

 

Arkansas Operations

 

Arkansas’s medical cannabis program was introduced in November 2016 when 53% of voters approved Issue 6, the “Medical Marijuana Amendment,” which legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in May 2019.

 

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The Arkansas Department of Health (“AR DOH”) is the regulatory agency that oversees the program. The market is divided into two main classes of licenses: cultivation/processing and dispensary. The AR DOH has awarded 5 cultivation/processing licenses and 32 dispensary licenses. As of June 30, 2020, there were 24 operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-State operator in Arkansas, among other States, which manages one medical cannabis dispensary license in Arkansas. The dispensary is operational and is located in Little Rock, Arkansas.

 

California Operations

 

California’s medical cannabis program was introduced in 1996 when voters passed the Proposition 215 ballot initiative, that allowed patients with a valid doctor’s recommendation to possess and cultivate cannabis for personal medical use. In October 2015, Governor Brown signed the Medical Cannabis Regulation and Safety Act into law, which provided a regulatory framework around the longstanding, though unregulated, medical cannabis industry. In November 2016, voters approved Proposition 64, the Adult Use of Marijuana Act, with 57% of the vote, legalizing adult-use cannabis in the State. Dispensaries began selling to customers 21 years of age and older in January 2018.

 

The Medicinal and Recreational Cannabis Regulation and Safety Act creates the general framework for the regulation of commercial medicinal and adult-use cannabis in California. Three State agencies are responsible for licensing and regulating each aspect of the industry: the Bureau of Cannabis Control regulates retailers, distributors, testing labs, microbusinesses, and temporary cannabis events; the Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, regulates manufacturers of cannabis-infused edibles for both medical and nonmedical use; and the California Department of Food and Agriculture regulates cultivators of medicinal and adult-use cannabis.

 

Permitted products include oil-based formulations, edibles, and flower. Wholesaling and home delivery are permitted.

 

In December 2018, Curaleaf, Inc. received a manufacturing, distribution, and mobile dispensing license from the City of Davis, California. In January 2019, the Company received its California State licenses for manufacturing and distribution. In April 2019, the Company acquired Eureka, a Monterey County, California, based operator with a cultivation facility in the Salinas Valley.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., owners of the Select brand. Select is a leading wholesale brand in California, among other states, with a processing facility in Sacramento, CA.

 

Colorado Operations

 

Colorado’s medical cannabis program was introduced in November 2000, when 54% of voters approved “Amendment 20”. Colorado became the first State in the nation to legalize adult-use cannabis when 55% of voters approved “Amendment 64” in November 2012. The first adult-use dispensaries opened in January 2014.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

 

In February 2020, the Company signed a definitive agreement to acquire Blue Kudu, a Colorado-licensed processor and producer cannabis edibles, operating an 8,400 sq.ft. facility in Denver, Colorado. The closing of this transaction occurred in July 2020.

 

In February 2020, the Company closed the acquisition of Cura Partners, a wholesale brand in Colorado, among other states.

 

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Connecticut Operations

 

Connecticut’s medical cannabis program was introduced in May 2012 when the General Assembly passed legislation PA 12-55 ‘An Act Concerning the Palliative Use of Marijuana.’ The program is divided into two classes of licenses: producers and dispensaries. Producers cultivate and process medicinal cannabis and wholesale to dispensaries. Dispensaries sell cannabis directly to patients and must have a pharmacist on staff.

 

The program launched with six dispensary licensees and four producer licensees. The first dispensaries sold to patients in September 2014.

 

In January 2016, the Connecticut Department of Consumer Protection (the “CTDCP”), the agency that oversees the program, approved three additional dispensary licenses. In December 2018, the CTDCP issued nine additional dispensary licenses, bringing the total to 18 licensed dispensaries in the State. As at the date hereof, all 18 of these dispensaries were operational.

 

Extracted oils and flower products are permitted. Edibles are permitted with the exception of confectionaries.

 

Curaleaf holds one of the four approved producer licenses in the State. The Company began wholesaling in October 2014 and now sells to all 18 of the State’s operational dispensaries. Curaleaf previously operated a 40,000 square-foot facility but has recently moved to a new 60,000 square-foot facility which includes cultivation space, extraction, purification facilities, and a commercial kitchen for the production of edibles. In April 2020, the Company acquired Arrow Alternative Care, the largest dispensary chain in the State with three dispensaries operating across the key metro areas of Stamford, Milford, and Hartford.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-State operator with one medical cannabis dispensary license in Connecticut, among other states. The dispensary is operational and is located in Groton, Connecticut.

 

Florida Operations

 

Florida’s medical cannabis program was introduced in June 2014 when the Florida Legislature passed the Compassionate Medical Cannabis Act of 2014 (“CMCA”). The CMCA permitted low-THC cannabis oils to be dispensed and purchased by patients suffering from cancer and epilepsy. Under this program, six organizations called Medical Marijuana Treatment Centers (“MMTCs”) were licensed to dispense low-THC cannabis to patients.

 

In November 2016, Florida voters approved the Amendment 2 “Expand Medical Marijuana” ballot measure with 71% of the vote. This constitutional amendment expanded the program by legalizing cannabis oils for individuals with specific debilitating diseases or conditions, including chronic pain, as determined by a licensed State physician. In June 2018, Governor Scott signed Senate Bill 8-A: “Medical Use of Marijuana,” which outlined how patients can qualify and receive medical cannabis under the State’s constitutional amendment. The bill also increased the number of available MMTC licenses to 17, with 14 of these licenses issued as of year end 2018. In April 2019, as the result of a joint settlement, the State awarded additional licenses, and as at the date hereof a total of 22 licenses have been granted in the State.

 

A single MMTC license allows for the cultivation, processing, and dispensing of cannabis products. Originally, each MMTC was permitted to open up to 25 dispensaries statewide. With each additional 100,000 qualified patients, the dispensary cap increased by five for each MMTC. However, the limit on dispensaries per MMTC no longer applies, as it expired on April 1, 2020.

 

Permitted products originally included oil-based formulations. Rules permitting the sale of edible medical cannabis products are under development. In May 2018, a district court judge ruled that Florida’s medical cannabis constitutional amendment requires the Department of Health to permit sales of smokable

 

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medical cannabis flower. Smokable flower was introduced as a permitted form factor in March 2019, shortly after Governor DeSantis signed a bill that repealed the State’s ban on smokable medical cannabis flower.

 

Each MMTC is required to cultivate and process all medical cannabis products they dispense. Wholesale transactions are permitted on a case by case basis to alleviate shortages. Home delivery is permitted.

 

The Company holds one of the original six vertically-integrated medical cannabis licenses issued in the State. In October 2016, Curaleaf’s Florida business became the third license holder to begin sales to patients. As at the date hereof, Curaleaf operated a 24,000 square-foot indoor growing facility, a 278,000 square-foot greenhouse growing facility, a 50,000 square-foot indoor growing facility, and 29 dispensaries, with plans to open additional dispensaries in 2020.

 

Illinois Operations

 

In 2013, the Illinois General Assembly passed the Compassionate Use of Medical Cannabis Pilot Program Act (410 ILCS 130), Public Act 98-0122 (the “Illinois Act”), which was signed into law by the Governor on August 1, 2013 and went into effect on January 1, 2014. The Illinois Act allows an individual who is diagnosed with a debilitating condition to register with the state to obtain cannabis for medical use. The program currently allows 60 Dispensing Organizations (each, a “DO”) and 22 cultivation centers state-wide; all separately registered in a non-vertically integrated model. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower. Overall, the program is administered by the Illinois Department of Public Health (the “IDPH”), the Illinois Department of Financial and Professional Regulations (the “IDFPR”) is the regulatory agency overseeing the medical marijuana program for DOs and the Illinois Department of Agriculture (the “IDOA”) is the regulatory agency overseeing the medical marijuana program for cultivation centers.

 

In June 2019, Illinois governor signed legislation legalizing marijuana for recreational use. The Cannabis Regulation and Tax Act, legalizing and regulating marijuana for recreational use, went into effect on June 25, 2019, however recreational sales of marijuana began in the state on January 1, 2020. The adult use program allowed existing medical marijuana license holders to apply for Early Approval Adult Use Dispensing Organization (“EAAUDO”) licenses to be able to sell adult use product at existing medical marijuana dispensaries (known as “co-located” or “same site” dispensaries) on January 1, 2020, and to have the privilege of opening a secondary adult use only retail site for every medical marijuana dispensary location the DO already had in its portfolio. All EAAUDO license holders were also required to commit to the state’s groundbreaking Social Equity program either through a financial contribution, grant agreement, donation, incubation program, or sponsorship program. IDFPR will also be issuing an additional 75 Adult Use Dispensing Organization (“AUDO”) licenses in 2020. IDFPR is also expected to issue an additional 110 AUDO licenses by December 21, 2021. No single person or entity can have direct or indirect financial interest in more than 10 adult use dispensary licenses.

 

On July 23, 2020, the Company completed the acquisition of Grassroots, a cannabis multi-state operator in Illinois, among other states. Grassroots owns a cultivation and processing facility in Illinois and its acquisition of five dispensary licenses from associated individuals is currently pending receipt of regulatory approval. Five dispensaries currently operate under those licenses, which permit up to ten dispensaries to be operated.

 

Kentucky Operations

 

Kentucky’s hemp program was introduced in 2013 when the Kentucky state legislature passed Senate Bill 50, “An Act Relating to Industrial Hemp.” The program is regulated by the Kentucky Department of Agriculture. The market is divided into two main classes of licenses: growers, and processor/handlers. As of July 2020, there were 970 licensed growers, and 170 licensed processor/handlers.

 

Curaleaf holds a hemp processor/handler license in Kentucky and leases a 74,000 square foot facility in Lexington. This industrial scale manufacturing facility distributes hemp-derived products, mainly cannabinoids such as CBD and CBG, at wholesale quantities to certain Curaleaf licensed medical cannabis facilities in other states, as permitted by applicable federal and state regulations. In addition, this facility serves as a centralized hub for key equipment and supplies to support Curaleaf’s national operations. During the early onset of the Covid-19 pandemic, the facility also produced and distributed hand sanitizer to Curaleaf facilities across the U.S.

 

Maine Operations

 

Maine’s medical cannabis program was introduced in November 1999 when voters approved Question 2, the ‘Maine Medical Marijuana for Specific Illnesses Initiative,’ with 61% of the vote. This program permitted qualified patients, or their designated caregiver, to grow and consume cannabis, but did not create a licensing structure whereby entities could apply to cultivate, process, and/or dispense cannabis.

 

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In November 2009, Maine voters expanded the medical program by passing Question 5, the ‘Maine Medical Marijuana Initiative, with 59% of the vote, which established a licensing structure in which eight vertically-integrated, not-for-profit dispensaries could sell cannabis directly to registered patients. The first dispensary opened to patients in October 2010. Medical dispensaries are vertically-integrated and cultivate, process, and dispense products to patients. Wholesaling is only permitted in emergency situations. Extracted oils, edibles, and flower products are permitted.

 

In November 2016, Maine voters approved Question 1, the ‘Maine Marijuana Legalization Measure,’ which legalized adult-use cannabis sales in the State. In May 2018, the Maine legislature overrode a veto by Governor LePage to formally approve the cannabis legalization legislation that lays the groundwork for the adult-use market. The law passed in May 2018 establishes separate classes of licenses (dispensaries, cultivators, processors) with no caps in place on the number of licenses that can be issued. In February 2019, the Department of Administrative and Financial Services, which oversees both the medical and adult-use programs, selected a consultant to write the rules and regulations for the adult-use program. Draft rules were released in April 2019, finalized and signed by the Governor in June 2019. The Office of Marijuana Policy is now accepting and processing adult-use applications and have issued at least 31 conditional adult-use licenses to date. The first adult-use stores were expected to open in June 2020, though the current timetable is unclear as a result of the COVID-19 pandemic.

 

Each medical licensee is permitted to open one dispensary. In July 2018, the Maine legislature overrode yet another veto by Governor LePage to formally approve a sweeping medical marijuana reform bill that regulates caregiver operations and approves the issuance of six new dispensary licenses. The bill also removes the requirement that medical cannabis license holders operate as not-for-profit entities, paving the way for the conversion of existing license holders to for-profit corporations. This bill went into effect in December 2018, though rules around the issuance of new medical licenses are still under development. As of June 30, 2020, there were still eight vertically-integrated medical dispensaries in Maine.

 

The Company plans to open adult-use locations in Maine, and is actively applying for adult-use licenses and identifying adult-use locations so it can participate in the adult-use market once sales begin.

 

The Company provides management services to two of the eight integrated medical cannabis licensees in the State: MEOT and Remedy. MEOT operates a 30,000 square-foot indoor grow facility and a dispensary. Remedy operates a small grow facility and a dispensary and obtains most of its product wholesale via MEOT. MEOT and Remedy have both been serving patients since 2010.

 

In February 2020, the management services agreement entered among the Company and Remedy in October 2016 was terminated and the Company entered into the Remedy Operating Agreement. Under the Remedy Operation Agreement, the Company has acquired operational control and substantially all of the economic benefit of Remedy's business. The entering into of the Remedy Operating Agreement resulted in the Company controlling Remedy in accordance with IFRS 10. The Company retains a right to acquire Remedy for nominal value at such time as the residency requirement for ownership is lifted.

 

In July 2020, the original management agreement entered into by the Company with MEOT in January 2017 was terminated, and MEOT entered into a new management agreement with Verdure, an entity in which the Company’s CEO, Joseph Lusardi had a 50% ownership interest. The Company acquired Verdure in July 2020, allowing the Company to acquire operational control and substantially all of the economic benefit of MEOT’s business. The acquisition of Verdure resulted in the Company controlling MEOT in accordance with IFRS 10. The Company retains a right to acquire MEOT for nominal value at such time as the residency requirement for ownership is lifted.

 

Maryland Operations

 

Maryland’s medical cannabis program was introduced in May 2013 when then Governor O’Malley signed House Bill 1101 into law. The Maryland Medical Cannabis Commission issued preliminary licenses to 102 dispensaries, 15 cultivators, and 15 processors in 2016. The first dispensaries opened to patients in December 2018.

 

The market is divided into three classes of licenses: dispensaries, cultivators, and processors. Wholesaling occurs between cultivators and processors, cultivators and dispensaries, and processors and dispensaries. Originally, no one company could directly control multiple licenses of the same class, but this restriction was changed in May 2019 when Governor Hogan signed a bill that permitted a single company

 

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to own up to four dispensaries. Dispensary locations are tied to the Senate District in which they were awarded, with the exception of dispensary licenses that were awarded to applicants who also were awarded a cultivation license — these dispensaries can be located at the discretion of the license holder. Permitted products include oil-based formulations and flower. Edibles are prohibited.

 

In April 2018, the Maryland House and Senate approved a bill, which was later signed by Governor Hogan, that expanded the license pool, adding seven additional cultivation licenses, for a total of 22, and 13 additional processing licenses, for a total of 28. As of June 30, 2020, there were approximately 92 operational dispensaries, 17 operational cultivators, and 18 operational processors.

 

Curaleaf received one of 102 preliminary medical cannabis dispensary licenses in December 2016. The Company launched its dispensary in the first quarter of 2018, shortly after the market launched in December 2017. The Company also acquired a company holding a cannabis processing license, which began operations in the first quarter of 2018.

 

In January 2019, the Company completed a convertible debt financing with the owners of the HMS/MI Businesses which consist of one cultivation, one processing, and two dispensaries. Concurrently with completion of the convertible debt financing, the Company entered into supply, offtake, branding and services agreements with the HMS/MI Businesses.  Conversion of the debt into the equity of the HMS/MI Businesses is expected, subject to regulatory approval, when the licenses become subject to transfer under current law, starting in August 2020. The Company also announced in January 2019 that it had entered into an option purchase agreement to purchase all of Town Center Wellness, LLC, subject to regulatory approval, which operates a dispensary located in Takoma Park, Maryland, that has since been rebranded as Curaleaf Takoma.

 

In May 2019, Maryland passed legislation allowing for the sale of edibles in the market, and the Company has constructed a processing and manufacturing facility at Curaleaf’s Frederick facility in anticipation of the implementation of these rules.

 

In February 2020, the Company closed the acquisition of Cura Partners, a recently-launched wholesale brand in Maryland, among other states.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-state operator. In connection with the acquisition, the Company acquired the right to purchase entities affiliated with certain former Grassroots shareholders that own a cultivation and processing facility and a dispensary in Maryland and that manage another dispensary.

 

As at the date hereof, the Company has been exploring the sale of HMS Health, LLC, cultivation operations and HMS Processing, LLC (together with HMS Health, LLC, the “HMS Assets”), processing operations. Such a sale would enable the Company to acquire the cultivation and processing assets that were previously owned by Grassroots while complying with limits on license ownership in the state of Maryland. The cultivation and processing assets of Grassroots in Maryland were spun out prior to the acquisition of Grassroots by the Company but the Company intends to purchase those assets when allowed and approved by the Maryland regulators. The Company continues to receive indications of interest for the HMS Assets with the intent of divesting these assets and acquiring the Maryland business formerly held by Grassroots. As a result, the Company classified these assets as held for sale.

 

In addition to the HMS Assets, the Company intends to divest Curaleaf Maryland, Inc., its licensed processing business in Maryland, to ensure compliance with Maryland regulations. The Company has signed definitive documents to sell 100% of Curaleaf Maryland, Inc. and are awaiting regulatory approval from the state of Maryland to complete the transaction. As a result, the Company classified these assets as held for sale.

 

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Massachusetts Operations

 

Massachusetts’ medical cannabis program was established by “An Act for the Humanitarian Medical Use of Marijuana” in November 2012 when voters passed Ballot Question 3 “Massachusetts Medical Marijuana Initiative” with 63% of the vote. The first dispensary opened in June 2015.

 

In November 2016, Massachusetts voters legalized adult-use cannabis by passing ballot Question 4 — Legalize Marijuana with 54% of the vote. In July 2018, Governor Baker signed legislation that laid the groundwork for the adult-use market. In March 2018, the CCC, the regulatory body, was set up to regulate the adult-use market and approve the rules that will govern the industry. While the CCC originally aimed to officially launch adult-use sales on July 1, 2018, issues such as a lack of licensed testing labs and disagreements with city and town officials over agreements with cannabis businesses slowed the rollout, and the first adult-use sale did not take place until November 2018.

 

The Department of Health originally oversaw the medical cannabis program, but in December 2018 transferred oversight to the CCC, a change which was mandated by the aforementioned July 2018 legislation. Each medical licensee must be vertically-integrated and may have up to three medical dispensaries. Licensed medical dispensaries are given priority in adult-use licensing. As of June 30, 2020, there were 47 adult-use dispensaries permitted to open across the State; however, as a result of the COVID-19 pandemic, Gov. Charlie Baker ordered the closure of all adult-use dispensaries, effective from March 24, 2020 through May 25, 2020. All adult-use sales were prohibited through the duration of the order, though medical dispensaries were permitted to remain open for medical sales. As at the date hereof, all adult-use dispensaries are permitted to resume adult-use sales.

 

The CCC oversees the adult-use cannabis program. Adult-use cultivators are grouped into 11 tiers of production—ranging from up to 5,000 square feet to no larger than 100,000 square feet — and regulators will bump a licensee down to a lower tier if that licensee has not shown an ability to sell at least 70% of what it produces. Medical dispensaries that wish to add the ability to sell cannabis products to non-patients will be required to reserve 35% of their inventory or the six-month average of their medical cannabis sales for medical cannabis patients. In order to achieve an adult-use license, a prospective licensee must first sign a “Host Community Agreement” with the town in which it wishes to locate. Roughly two-thirds of municipalities in the State have a ban or a moratorium in place that prohibits cannabis businesses from operating within their jurisdiction.

 

In both the medical and adult-use markets, extracted oils, edibles, and flower products are permitted. Wholesaling is also permitted.

 

The Company holds an integrated medical cannabis license and operates a 104,000 square-foot indoor grow and four dispensaries, one licensed for medical and adult-use sales in Oxford, one licensed for medical sales in Hanover, one licensed for adult-use sales in Provincetown, and one licensed for adult-use sales in Ware. In February 2019, Curaleaf exercised an option to purchase an adjacent unit in its cultivation facility, thereby expanding its cultivation facility from 54,000 to 104,000 square feet.

 

On August 9, 2019, the Company announced that it had been granted approval by the CCC for the Company’s Reverse Takeover transaction, which the CCC deemed a change of ownership and control.

 

The Company expects to acquire ATG, another licensed medical cannabis operator in Massachusetts, which operates a 53,000 square foot cultivation facility and processing facility.

 

Michigan Operations

 

Michigan’s medical cannabis program was introduced in November 2008, when 63% of voters approved the “Michigan Compassionate Care Initiative.” In November 2018, 56% of voters approved the “Michigan Regulation and Taxation of Marihuana Act,” which legalized adult-use cannabis in the State. The first adult-use dispensaries opened in December 2019.

 

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The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

 

In February 2020, the Company closed the acquisition of Cura Partners, a wholesale brand in Michigan, among other states.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-State operator in Michigan, among other states. After the closing of Grassroots, the Company operates four dispensaries in Michigan, located in Kalamazoo, Ann Arbor, Bangor, and Battle Creek, and holds preliminary licensure for a 42,000 square foot cultivation and processing facility located in Lansing.

 

Missouri Operations

 

Missouri’s medical cannabis program was introduced in November 2018 when 66% of voters approved Amendment 2, the “Medical Marijuana and Veteran Healthcare Services Initiative,” which legalized medical cannabis for patients with certain qualifying conditions. The first dispensary is expected to open by the end of 2020.

 

The Missouri Department of Health and Senior Services (“MO DHSS”) is the regulatory agency that oversees the program. The market is divided into three main classes of licenses: cultivation, processing, and dispensary. The MO DHSS has awarded 60 cultivation, 86 processing, and 192 dispensary licenses. As of June 30, 2020, there were no operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-State operator in Missouri, among other states, which holds the right to acquire five dispensary licenses and one processing license in Missouri.

 

Nevada Operations

 

Nevada’s medical cannabis program was introduced in June 2013 when the legislature passed SB374, legalizing the medicinal use of cannabis for certified patients. The first dispensaries opened to patients in August 2015.

 

In November 2016, Nevada voters approved Question 2 with 55% of the vote, legalizing adult-use cannabis in the State. Adult-use sales launched under an “early-start” program on July 1, 2018. This market is divided into five classes of licenses: dispensaries, cultivators, distribution, product manufacturing, and testing. Licenses are tied to the locality in which they were awarded. In December 2018, the Nevada Department of Taxation, the agency which oversees the cannabis program, issued 61 new dispensary licenses. As of June 30, 2020, there were approximately 68 operational dispensaries, 134 operational cultivators, and 96 operational processors. Effective March 20, 2020, Governor Steve Sisolak ordered the closure of all dispensary storefronts, meaning that, through the duration of the order, all cannabis sales in Nevada were made via delivery. On May 1, 2020, Governor Sisolak permitted cannabis dispensaries to offer curbside pickup, in addition to delivery. On May 9, 2020, Governor Sisolak permitted the resumption of in-store sales, with certain health and safety limits, as part of the governor’s plan to reopen the state.

 

Extracted oils, edibles, and flower products are permitted. Wholesaling is permitted.

 

In 2018, Curaleaf, Inc. agreed to acquire a 10,000 square-foot licensed indoor cannabis cultivation and a licensed dispensary, operating in Las Vegas, Nevada. Both businesses are licensed for both medical and adult-use sales. Each of these transactions is subject to regulatory approval. In March 2019, the Company agreed to acquire Acres, a company with a 269,000 square-foot operating cultivation facility and further expansion as needed on 37 acres of land in Amargosa Valley, Nevada, a large dispensary located in the Las Vegas, Nevada, and a dispensary license for a site in Ely, Nevada. The transaction consisted of two stages, with the Company closing the acquisition of the cultivation and processing assets of Acres in October 2019. The Acres businesses financial results were consolidated as of November 2019 in conjunction with completion of the cultivation and processing component of the transaction.  The acquisition of the Acres dispensaries and processing facility closed in January 2020.

 

In February 2020, the Company closed the acquisition of Cura Partners, a leading wholesale brand in Nevada, among other states.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-State operator in Nevada, among other states. The closing of the Grassroots Transaction provides the Company with rights to seven additional cannabis dispensary licenses in Nevada.

 

New Jersey Operations

 

New Jersey’s medical cannabis program was introduced in January 2010 when then Governor Corzine signed the New Jersey Compassionate Use Medical Marijuana Act (“NJCUMMA”) into law. The NJCUMMA legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

 

In March 2018, under the direction of Governor Murphy, who campaigned on a platform that included cannabis legalization, the New Jersey Department of Health (“NJDOH”) issued the Executive

 

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Order 6 Report, which immediately expanded the medical cannabis program in numerous ways, including adding chronic pain and anxiety as qualifying conditions, doubling the monthly product limit, and permitting current licensees to open satellite dispensaries. In August 2018, the NJDOH began accepting applications for the licensing of six additional ATCs. These licenses were awarded in December 2018, and as of June 30, 2020, there were nine operational ATCs dispensing medical cannabis to patients from a total of 11 dispensaries. In December 2019, the New Jersey State legislature passed a bill to add an initiative to the November 2020 ballot that will allow voters to decide whether to legalize the sale of adult-use cannabis in the State.

 

A single ATC license allows for the cultivation, processing, and dispensing of medical cannabis products. Originally, each ATC was permitted to open one dispensary, located within the same facility in which the ATC cultivated and processed. With the Executive Order 6 Report, each ATC can now open two additional satellite dispensaries within their NJDOH-designated region for a total of three dispensaries each, as well as satellite production facilities. Wholesaling is permitted with approval from the NJDOH.

 

Extracted oils and flower products are permitted. The Executive Order 6 Report recommended adding edibles as a permitted product, with rulemaking for edibles the responsibility of the State legislature. As at the date hereof, the legislature has yet to develop rules for edibles, and a timeline for edibles rulemaking is yet to be determined.

 

Originally, ATCs were required to be non-profit entities. However, pursuant to the Jake Honig Act, signed into law on July 2, 2019, ATCs are permitted to sell or transfer their license to a for-profit entity, pending NJDOH approval.

 

In July 2020, pursuant to the CLNJ APA, the Company announced the completion of the acquisition of the assets of Curaleaf NJ, a vertically integrated medical cannabis non-profit corporation that holds one of the original six medical licenses in New Jersey. The Company now owns 100% of the Curaleaf NJ ATC operations, assets and licenses in New Jersey, for which it previously provided management services. Curaleaf NJ owns a property that includes 46,800 square feet of cultivation space. Curaleaf NJ also owns an adjacent 12,000 square foot facility, of which 4,000 square feet is utilized for dispensary operations, with the remainder used for ancillary operations such as packaging and storage. Since the start of sales in October 2015, Curaleaf NJ has established itself as a market leader, dispensing 36% of all products sold in the state in 2018. In accordance with recently adopted regulations described above, Curaleaf NJ plans to open two more dispensary locations in the state, as well as an additional cultivation facility, for which the Company has secured a 111,000 square foot facility in the township of Winslow, NJ.

 

New York Operations

 

New York’s medical cannabis program was introduced in July 2014 when Governor Cuomo signed the Compassionate Care Act, which legalized cannabis oils for patients with certain qualifying conditions. Under this program, five organizations, called Registered Organizations (each, a “RO”) were licensed to dispense cannabis oil to patients, with the first sale to a patient completed in January 2016.

 

In December 2016, the New York State Department of Health (“NYSDOH”) added chronic pain as a qualifying condition. In the month-and-a-half following the addition of chronic pain, the number of registered patients increased by 18%. In August 2018, the NYSDOH granted licenses to five additional ROs. A single RO license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four dispensaries in NYSDOH-designated regions throughout the State. Each RO is permitted to open one cultivation/processing facility. Each RO is required to cultivate and process all medical cannabis products they dispense; however, wholesale transactions are permitted with approval from the State.

 

In November 2018, Governor Cuomo signed a bill to add post-traumatic stress disorder as a qualifying condition. In July 2018, the NYSDOH added opioid replacement as a qualifying condition, meaning any condition for which an opioid could be prescribed is now a qualifying condition for medical

 

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cannabis. In August 2018, Governor Cuomo, prompted by a NYSDOH study which concluded the “positive effects” of cannabis legalization “outweigh the potential negative impacts,” appointed a group to draft a bill for regulating legal adult-use cannabis sales in New York. During the 2019 State legislative session, Governor Cuomo proposed adult-use legalization in his budget proposal, though the legislature failed to include legalization in the final budget, and also failed to pass a legalization bill during the session. In January 2020, Governor Cuomo again included cannabis legalization in his budget proposal, a proposal which, as at the date hereof, is still being considered by the legislature.

 

Permitted products include oil-based formulations (vaporizer cartridges, tinctures, capsules), and ground-flower sold in tamper-proof vessels. Home delivery is also permitted.

 

The Company was awarded a vertically-integrated license in May 2018 with the right to open four dispensaries. The Company is only one of ten license holders in the State. Curaleaf currently operates four dispensaries located in Newburgh, Plattsburgh, Queens, and Nassau County, as well as a 72,000 square foot cultivation and manufacturing facility in Ravena, New York.

 

North Dakota Operations

 

North Dakota’s medical cannabis program was introduced in November 2016 when 64% of voters approved Measure 5, “Medical Marijuana,” which legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in March 2019.

 

The North Dakota Department of Health (“ND DOH”) is the regulatory agency that oversees the program. The market is divided into two main classes of licenses: cultivation/processing and dispensary. The ND DOH has awarded two cultivation/processing licenses and 8 dispensary licenses. As of June 30, 2020, all 8 dispensaries were operational. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-state operator in North Dakota, among other states, with four dispensary licenses and one cultivation and processing facility in North Dakota. The four dispensaries are operational and located in Minot, Devil’s Lake, Jamestown, and Dickinson. The cultivation and processing facility, located in Fargo, is 33,000 square feet and is also operational.

 

Ohio Operations

 

Ohio’s medical cannabis program was introduced in June 2016 when House Bill 523 was signed into law. In November 2018, the State issued 12 ‘Level I’ cultivation licenses, which permit up to 25,000 square feet of canopy, and 12 ‘Level II’ cultivation licenses, which permit up to 3,000 square feet of canopy. In June 2018, the State issued 56 dispensary licenses. In August 2018, the State issued seven processing licenses, and over the next few months issued seven additional processing licenses. In January 2019, the State issued an additional 26 processing licenses for a total of 40 across the State. Due to controversies around the scoring of applications and ensuing appeals, there are currently 57 dispensaries licenses, 19 ‘Level I’ cultivation licenses, 13 ‘Level II’ cultivation licenses, and 43 processing licenses in the State. The first dispensaries opened in January 2019.

 

The Ohio Department of Commerce is responsible for regulating cultivators and processors. The Ohio State Board of Pharmacy is responsible for regulating dispensaries and the patient and caregiver registry. The Ohio State Medical Board is responsible for certifying physicians and reviewing petitions to add qualifying medical conditions.

 

Extracted oils, edibles, and non-combustible flower products are permitted.

 

The Company was awarded a preliminary processing license in Amelia, Ohio in early 2019. The Company has relinquished this license due to the dissolution of the Village of Amelia and the absorption of the licensed processor site into a town that does not permit cannabis activities. In May 2019, the Company entered into an agreement granting it an option to acquire the licenses and operations of OGT, a holder of one of the 19

 

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Level 1 cultivation licenses and a processing license. OGT has completed construction on a 32,000 square-foot production facility in Johnstown, Ohio, and received its final licenses on July 1, 2020. The transfer of the OGT licenses and operations to the Company is pending receipt of regulatory approval.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-State operator in Ohio, among other states, with rights to acquire one cultivation facility and processing facility and two dispensaries in Ohio. The Company will own and operate the dispensaries upon receipt of regulatory approval. Due to license ownership limitations in Ohio, the Company is planning to dispose of its rights in the cultivation and processing facility.

 

Oklahoma Operations

 

Oklahoma’s medical cannabis program was introduced in June 2018, when 57% of voters approved Oklahoma State Question 788, the “Medical Marijuana Legalization Initiative.” The first medical dispensaries opened in October 2018.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

 

In May 2020, the Company announced the expansion of the Select brand to the Oklahoma medical cannabis market.

 

On July 23, 2020, the Company closed the acquisitions of Grassroots, a cannabis multi-State operator in Oklahoma, among other states. Grassroots, through its subsidiaries and subject to final regulatory approval and licensing, at one point held seven medical cannabis dispensary licenses and operated three medical cannabis dispensaries in the state. However, due to saturation of the Oklahoma medical cannabis dispensary market, where over 2,000 dispensary licenses have been awarded, as at the date hereof, the Company only operates one Oklahoma dispensary, located in Broken Arrow, and does not plan to develop the remaining Grassroots medical cannabis dispensary licenses in Oklahoma.

 

Oregon Operations

 

Oregon’s medical cannabis program was introduced in November 1998 when voters approved Measure 67, the Oregon Medical Marijuana Act.

 

In November 2014, voters approved Measure 91, the ‘Oregon Legalized Marijuana Initiative’, which legalized adult-use cannabis in the State. In October 2015, the first adult-use dispensaries opened.

 

The market is divided into six classes of licenses: dispensaries, cultivators, wholesalers, processors, laboratories and research. To date the market has had a more relaxed licensing structure which has led to an oversupply of product. In 2018, Oregon cultivators grew three times the amount of cannabis that could legally be consumed in the market. In response to a report highlighting the issues in Oregon, the U.S. Attorney for Oregon, Billy Williams, said, “The recent HIDTA Insight Report on marijuana production, distribution, and consumption in Oregon confirms what we already know—it is out of control.”

 

In June 2018, the Oregon Liquor Control Commission, which regulates the adult-use program, announced they would not process any new adult-use license applications in order to work through the backlog that has developed as the result of 3,432 applications being submitted as of May 2018. In July 2018, the Oregon Health Authority, which regulates the medical program, conceded in a report that it has not provided effective oversight of growers and others in the industry.

 

Extracted oils, edibles, and flower products are permitted.

 

The Company holds a producer license and a processing license for adult-use and operates a 20,000 square foot outdoor cultivation center and an adjacent 17,000 square-foot indoor facility for indoor growing and large-scale CO2 extraction and manufacturing. In July 2018, the Company acquired a dispensary, which launched operations in Portland, Oregon at the end of 2018.

 

In February 2020, the Company completed the acquisition of Cura Partners, owners of the leading Select wholesale brand in Oregon, among other states, with processing facilities in Portland, Oregon.

 

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Pennsylvania Operations

 

Pennsylvania’s medical cannabis program was introduced in April 2016 when Governor Wolf signed into law SB 3 “Medical Marijuana Act”, which legalized medical cannabis oils for patients with certain qualifying conditions. The law also called for a class of licenses, called “clinical registrant” licenses, whereby accredited medical institutions in the State can partner with medical cannabis companies to conduct research. There are two primary classes of licenses: licenses to grow/process cannabis products, and licenses to dispense cannabis products to patients. Grower/processors wholesale products to dispensaries. In June 2018, the Pennsylvania Department of Health (“PADOH”) awarded licenses to 12 grower/processors as well as 27 dispensary licensees. Each dispensary license permits the licensee to open up to three dispensaries in the region in which the license was awarded. In February 2018, the first dispensaries opened to patients.

 

In May 2018, a Commonwealth Court judge halted the PADOH’s planned “clinical registrant” program whereby up to eight Pennsylvania medical schools would partner with licensed medical cannabis organizations to conduct research. In June 2018, Governor Wolf signed a bill to re-implement the clinical registrant program. In June 2018, the PADOH awarded licenses to an additional 13 grower/processors. In December 2018, the PADOH awarded an additional 23 dispensary licenses. In June 2019, the PADOH awarded three clinical registrant licenses. In February 2020, the PADOH awarded four additional clinical registrant licenses. In August 2020, the PADOH awarded the eighth and final clinical registrant license.

 

Originally, only oil-based formulations were permitted. In April 2018, the PADOH approved flower as a permitted medical cannabis product offering, and dispensaries began to offer flower to patients in August 2018.

 

The Company has partnered with an accredited medical school to obtain a “Clinical Registrant” license in Pennsylvania. In February 2020, the Company’s Pennsylvania subsidiary was approved as a Clinical Registrant in Pennsylvania by the Commonwealth’s Department of Health, Office of Medical Marijuana. Under this designation, the Pennsylvania subsidiary is entitled to open a cultivation and processing facility and up to six dispensaries, under the Commonwealth’s medical marijuana research program. Pennsylvania’s medical cannabis program has created this class of license to promote cooperation between industry and academia in the research of medical benefits of cannabis. To support its presence in Pennsylvania, the Pennsylvania subsidiary has leased a 49,200 square-foot production facility in King of Prussia, Pennsylvania.

 

On July 23, 2020, the Company closed the acquisition of Grassroots, a cannabis multi-State operator in Pennsyvlania, among other states. Grassroots subsidiaries hold cultivation, processing and three dispensary licenses, and also the rights to acquire a fourth dispensary license. Each dispensary license entitles the license holder to operate up to three dispensaries. As at the date hereof, the Pennsylvania subsidiaries operate a cultivation and processing facility and nine dispensaries.

 

Utah Operations

 

Utah’s medical cannabis program was introduced in November 2018, when 53% of voters approved “Proposition 2, Medical Marijuana Initiative”. In December 2018, the State legislature passed a bill that legalized medical cannabis, but implemented several changes to the Proposition 2 ballot erasure, including removing home cultivation rights for patients and adding a requirement that dispensaries employ pharmacists.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. In July 2019, the Utah Department of Agriculture and Food (“UDAF”) awarded eight cultivation licenses. In January 2020, the Utah Department of Health awarded 14 retail licenses. The UDAF has been issuing processing licenses on a rolling basis throughout early 2020. All medical cannabis form factors are permitted, as is wholesaling. The market is expected to begin sales in 2020.

 

In January 2020, the Company was awarded a medical cannabis retail license from the Utah Department of Health. Also in January 2020, the Company announced that it received preliminary approval for a processing license by the UDAF. The notice grants Curaleaf

 

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permission to begin the build out of its processing facility, which is scheduled to open in mid-September 2020, in North Salt Lake City. The Company also opened its first retail location in the Utah market with a new pharmacy in Lehi on August 31, 2020.

 

Vermont Operations

 

Vermont’s medical cannabis program was introduced in May 2004 when Senate Bill 76 was approved by the Vermont House and Senate and became law without the governor’s signature. This legislation permitted state-qualified patients to grow and possess marijuana for medicinal purposes. This legislation was expanded in June 2007 when Senate Bill 7 was approved by the Vermont House and Senate and again became law without the governor’s signature. Senate Bill 7 expanded the list of qualifying conditions and increased the number of plants that patients may legally cultivate, among other things. In June 2011, the Vermont legislate passed Senate Bill 17, the “Vermont Marijuana for Symptom Relief Act,” which, among other things, authorized a state-regulated system for medical cannabis sales through licensed dispensaries. The first sales were made to patients in 2012. In January 2018, Vermont became the first state to legalize cannabis via the legislature when Governor Scott signed H. 511, which legalized possession of up to one ounce of cannabis, among other things, though did not create a state-regulated system for adult-use sales. As of June 30, 2020, there is still no system for commercial adult-use sales in Vermont.

 

The Vermont Department of Public Safety (“VT DPS”) is the regulatory agency that oversees the medical program. The market consists of five vertically integrated licenses. Each license permits the owner to operate a grow/processing facility and up to two dispensaries. As of June 30, 2020, there were 7 operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

On July 23, 2020, the Company completed the acquisition of Grassroots, which operate two dispensaries and one cultivation and processing facility in Vermont.

 

RISK FACTORS

 

The following are certain factors relating to the Company and its business. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or currently deemed immaterial by the Company, may also impair the operations of the Company. If any such risks actually occur, shareholders of the Company could lose all or part of their investment and the business, financial condition, liquidity, results of operations and prospects of the Company could be materially adversely affected and the ability of the Company to implement its growth plans could be adversely affected.

 

The acquisition of any of the securities of the Company is speculative, involving a high degree of risk and should be undertaken only by persons whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the securities of the Company should not constitute a major portion of an individual’s investment portfolio and should only be made by persons who can afford a total loss of their investment. Shareholders should evaluate carefully the following risk factors associated with the Company’s securities, along with the risk factors described elsewhere in this Annual Information Form.

 

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General Business Risks

 

COVID-19 Pandemic

 

The novel coronavirus commonly referred to as “COVID-19” was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

 

The rapid development of the COVID-19 pandemic and the measures being taken by governments and private parties to respond to it are extremely fluid. While the Company has continuously sought to assess the potential impact of the pandemic on its financial and operating results, any assessment is subject to extreme uncertainty as to probability, severity and duration. The Company has attempted to assess the impact of the pandemic by identifying risks in the following principle areas.

 

·                  Mandatory Closure. In response to the pandemic, many states and localities have implemented mandatory closure of business to prevent spread of COVID-19. While in most of the states of the Company’s operation, the Company’s business has been deemed an “essential service”, permitting us to stay open despite the mandatory closure of non-essential businesses. While the Company continues to work closely with state and local regulators to remain operational, there is no guarantee further measures may nevertheless require us to shut operations in some or all states. Effective March 20, 2020, Nevada Governor Steve Sisolak ordered the closure of all dispensary storefronts thereby requiring all cannabis sales in Nevada to be made via delivery. On May 1, 2020, Governor Sisolak permitted cannabis dispensaries to offer curbside pickup, in addition to delivery. The Company’s dispensary locations in Nevada continued operations during the mandatory shut down by conducting delivery and, once permitted, curbside services. On May 9, 2020, Governor Sisolak permitted the resumption of in-store sales, and the Company’s Nevada dispensary locations opened for in-store sales immediately after. Effective March 24, 2020, Massachusetts Governor Charlie Baker ordered the closure of all adult-use dispensaries. Although medical dispensary sales were permitted, all adult-use sales were prohibited through the duration of the order. The Company’s medical dispensary locations in Oxford and Hanover Massachusetts continued to serve medical patients during this time, though the Company’s adult-use dispensaries in Provincetown and Ware were forced to close, and adult-use sales at the Company’s Oxford location were prohibited. On May 25, 2020, Governor Charlie Baker permitted the resumption of adult-use sales, and all of the Company’s Massachusetts dispensaries resumed sales immediately after. The Company’s ability to generate revenue would be materially impacted by any future shut down of its operations.

 

·                  Customer Impact. While the Company has not experienced an overall downturn in demand for its products in connection with the pandemic, if its customers become ill with COVID-19, are forced to quarantine, decide to self-quarantine or not to visit its stores or distribution points to observe “social distancing”, it may have material negative impact on demand for its products while the pandemic continues. While the Company has implemented measures, where permitted, such as “curb side” sales and delivery, to reduce infection risk to our customers, regulators may not permit such measures, or such measures may not prevent a reduction in demand.

 

·                  Supply Chain Disruption. The Company relies on third party suppliers for equipment and services to produce its products and keep its operations going. If its suppliers are unable to

 

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continue operating due to mandatory closures or other effects of the pandemic, it may negatively impact its own ability to continue operating. At this time, the Company has not experienced any failure to secure critical supplies or services. However, disruptions in our supply chain may affect our ability to continue certain aspects of the Company’s operations or may significantly increase the cost of operating its business and significantly reduce its margins.

 

·                  Staffing Disruption. The Company is, for the time being, implementing among its staff where feasible “social distancing” measures recommended by such bodies as the Center of Disease Control, the Presidential Administration, as well as state and local governments. The Company has cancelled non-essential travel by employees, implemented remote meetings where possible, and permitted all staff who can work remotely to do so. For those whose duties require them to work on-site, measures have been implemented to reduce infection risk, such as reducing contact with customers, mandating additional cleaning of workspaces and hand disinfection, providing masks and gloves to certain personnel. Nevertheless, despite such measures, the Company may find it difficult to ensure that its operations remain staffed due to employees falling ill with COVID-19, becoming subject to quarantine, or deciding not to come to come to work on their own volition to avoid infection. At certain locations, the Company has experienced increased absenteeism due to the pandemic. If such absenteeism increases, the Company may not be able, including through replacement and temporary staff, to continue to operate in some or all locations.

 

·                  Regulatory Backlog. Regulatory authorities, including those that oversee the cannabis industry on the state level, are heavily occupied with their response to the pandemic. These regulators as well as other executive and legislative bodies in the states in which we operate may not be able to provide the level of support and attention to day-to-day regulatory functions as well as to needed regulatory development and reform that they would otherwise have provided. Such regulatory backlog may materially hinder the development of the Company’s business by delaying such activities as product launches, facility openings and approval of business acquisitions, thus materially impeding development of its business.

 

The Company is actively addressing the risk to business continuity represented by each of the above factors through the implementation of a broad range of measures throughout its structure and is re-assessing its response to the COVID-19 pandemic on an ongoing basis. The above risks individually or collectively may have a material impact on the Company’s ability to generate revenue. Implementing measures to remediate the risks identified above may materially increase our costs of doing business, reduce our margins and potentially result in losses. While the Company is not currently in financial distress, if the Company’s financial situation materially deteriorates as a result of the impact of the pandemic, the Company could eventually be unable to meet its obligations to third parties, including observing financial covenants under the Facility, which in turn could lead to insolvency and bankruptcy of the Company..

 

Failure to Complete Acquisitions

 

The Company currently expects to complete certain transactions in the future. These acquisitions are subject to a number of customary closing conditions including in certain instances, regulatory approval and may not close for a variety of reasons including if the closing conditions are not satisfied or waived, some of which may not be within the control of the Company. In addition, even if these transactions were to be completed, they may not close on terms or within the timing currently expected. If one or more of these transactions do not close or are completed pursuant to terms or timelines different than expected, it could have an adverse effect on the Company’s future capital plans and require the Company to reallocate funds.

 

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Future Acquisitions or Dispositions

 

Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) the Company may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; and (v) loss or reduction of control over certain of the Company’s assets. Additionally, the Company may issue additional Subordinate Voting Shares in material amounts which would dilute the current Shareholders’ holdings in the Company or indirect holdings in the Company.

 

The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.

 

Acquisition Integration and Management of Growth

 

The Company may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the Company to deal with this growth may have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Achievement of the benefits of acquisitions depends in part on successfully consolidating functions, integrating and leveraging operations, procedures and personnel in a timely and efficient manner, as well as the Company’s ability to share knowledge and realize revenues, synergies and other growth opportunities from combining acquired businesses and operations with those of the Company. Failure by the Company to effectively integrate acquisitions could lead to a failure to realize anticipated benefits of one or more acquisitions. The integration of any acquired business into the Company includes the combination of systems and personnel. The successful integration of an acquired business is subject to the risk that personnel and professionals from the acquired business and the Company may not be able to work together successfully, which could affect the Company’s operations. In particular, the Company may seek to require as a condition of its acquisitions that key personnel and professionals enter into employment agreements for specified post-acquisition periods and/or non-competition undertakings, however there are risks that such commitments will not be fulfilled or that the personnel and professionals subject to same or other personnel and professionals will not be successfully integrated as productive contributors to the Company’s business. Integration requires the dedication of substantial management effort, time and resources, which may divert Management’s focus and resources from other strategic opportunities and from operational matters during the process. The acquisition integration process may also result in the disruption of ongoing business, customer, employee and other relationships that may adversely affect the Company’s ability to achieve the anticipated benefits of a given acquisition, including the ability to realize the anticipated synergies from combining the acquired business into the Company. In particular, major clients of the acquired businesses may not be retained following the acquisition of such businesses There is no assurance that the Company will be able to successfully integrate past acquisitions. Each year, the Company incurs acquisition-related integration costs which may be material. In addition, the overall integration may result in unanticipated operational problems, including the Company’s own operational, financial and management systems which may be incompatible with or inadequate to effectively integrate and manage the acquired businesses.

 

Management believes that growth through acquisitions can provide certain benefits to the Company. A variety of factors may also adversely affect the anticipated benefits of an acquisition or prevent these from materializing or occurring within the time periods anticipated by the Company. In connection with acquisitions made by the Company, there may also be liabilities and contingencies that the Company

 

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failed to discover or was unable to quantify in the due diligence conducted prior to closing of an acquisition and which could have a material adverse effect on the Company’s business, financial condition or future prospects.

 

Risks Related to Term Loan Facility

 

The Term Loan Facility requires the Company to satisfy certain negative covenants, including restrictions on its ability to pay dividends, to conduct transactions with affiliates, to modify any organizational documents, to invest in non-wholly owned entities and to incur subordinated and non-subordinated debt and certain covenant tests. Further, the Term Loan Facility imposes certain financial covenants, including minimum annual cash earnings and maintenance of unrestricted cash and cash equivalents. In addition, the Term Loan Facility is subject to potential mandatory quarterly amortization, the amount of which, if any, is determined by a quarterly leverage ratio test. The Term Loan Facility is non-callable in the first two years and from year 2 to 3 is payable at par + ½ coupon, from year 3 to 3 ½ at par + ¼ coupon and at par from year 3 ½ to maturity. The covenants and restrictions under the Term Loan Facility may prevent the Company from taking actions that it believes would be in the best interest of its business and may make it difficult for it to execute its business strategy successfully or effectively compete with businesses that are not subject to the same restrictions. The Company’s ability to comply with these covenants may be affected by economic, financial and industry conditions beyond its control, including credit or capital market disruptions. The breach of any of the covenants contained in the Term Loan Facility could result in a default that would permit the lenders under the Term Loan Facility to declare all  amounts outstanding to be due and payable, together with accrued and unpaid interest. There is no assurance that the Company will be able to secure additional financing to repay the Term Loan Facility should cash flows from operations be insufficient to repay the indebtedness, whether it is in default or not. If the Company is unable to repay the indebtedness, the Term Loan Lenders could proceed against the collateral securing the indebtedness. This could have serious consequences to the Company’s financial position and results of operations and could cause it to become bankrupt or insolvent. See “General Development of the Business – Three Year History – 2019 – Senior Secured Term Loan Facility” for more information on the Term Loan Facility.

 

Unproven Business Strategy

 

While the Company has existing operations and is generating revenues, it plans to significantly expand its operations and staff to meet the requirements of its business initiatives. The commercial response to the product offerings is still uncertain, and although the Company believes that its strategy incorporates advantages compared to other medical cannabis business models, if patients or consumers do not respond favorably to the Company’s products or if they take longer to develop its products or establish its customer base or it proves to be more costly than currently anticipated to develop its businesses, revenues may be adversely affected.

 

Service Providers

 

As a result of any adverse change to the approach in enforcement of U.S. cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse change in public perception in respect of the consumption of marijuana or otherwise, third party service providers to the Company could suspend or withdraw their services, which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.

 

Enforceability of Contracts

 

It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal at a federal level, judges may refuse to enforce contracts in connection with activities that violate federal law, even if there is no violation of State law. There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into if necessary. The Company cannot be assured that it will have a remedy for breach of contract, the lack of which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.

 

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Resale of the Subordinate Voting Shares on the CSE

 

The Company understands that almost all major securities clearing firms in the U.S. refuse to facilitate transactions related to securities of Canadian public companies involved in the marijuana industry. This is due to the fact that marijuana continues to be listed as a controlled substance under U.S. federal law, with the result that marijuana-related practices or activities, including the cultivation, possession or distribution of marijuana, are illegal under U.S. federal law. Accordingly, U.S. residents who acquire Subordinate Voting Shares as “restricted securities” may find it difficult — if not impossible — to resell such shares over the facilities of any Canadian stock exchange on which the Subordinate Voting Shares may then be listed including the CSE. It remains unclear what impact if any, this and any future actions among market participants in the U.S. will have on the ability of U.S. residents to resell any Subordinate Voting Shares that they may acquire in open market transactions.

 

Reliance on Management

 

The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results, financial condition or prospects.

 

Competition

 

The cannabis industry remains quite nascent, and so what the landscape will be in the future remains largely unknown, which in itself is a risk. Potential competitors, which in the future may include pharmaceutical companies, are also larger and better capitalized than the Company, may have longer operating histories and have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources. The market for the products that the Company offers or intends to offer is competitive. The competition will most likely increase as more U.S. states permit the use of medicinal cannabis and new industry participants emerge. Increased competition may hinder the Company’s ability to successfully market its products and services. The Company may not have the resources, expertise or other competitive requirements to compete successfully in the future.

 

Risks Inherent in an Agricultural Business

 

The Company’s business involves the cultivation of the cannabis plant. The cultivation of this plant is subject to agricultural risks related to insects, plant diseases, unstable growing conditions, water and electricity availability and cost, and force majeure events. Although the Company cultivates its cannabis plants in indoor, climate-controlled rooms staffed by trained personnel and in the future plans to cultivate cannabis plants in greenhouses, there can be no assurance that agricultural risks will not have a material adverse effect on the cultivation of its cannabis. The Company may in the future cultivate cannabis plants outdoors, which would also subject it to related agricultural risks.

 

Unfavorable Publicity or Consumer Perception

 

The Company believes the adult-use and medical marijuana industries are highly dependent upon consumer perception regarding the safety, efficacy and quality of the marijuana produced. In particular, the Company’s financial performance in each State will depend on whether patients and physicians view its products as effective and safe for use. Under the laws of the states in which the Company and its affiliates operate, the participation of physicians and health care providers in the certification process is voluntary and therefore depends on a number of variables, including: medical professionals’ views as to the use of medical cannabis to treat qualifying conditions; the risks and benefits to individual patients or patient groups; the policies of particular medical practices; and patient demand. If physicians and other medical professionals do not certify patients where certification is required under State law, the Company’s business, financial position and results of operations may be negatively affected.

 

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Public perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of marijuana products. There can be no assurance that future scientific research or findings, regulatory investigations, litigation, media attention or other publicity will be favorable to the marijuana market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory investigations, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or other publicity could have a material adverse effect on the demand for adult-use or medical marijuana and on the business, results of operations, financial condition, cash flows or prospects of the Company.

 

Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect. There is no assurance that such adverse publicity reports or other media attention will not arise. A negative shift in the public’s perception of cannabis in the U.S. or any other applicable jurisdiction could cause State jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new State jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy and may have a material adverse effect on the Company’s business, results of operations or prospects.

 

Product Liability

 

As a manufacturer and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of marijuana involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of marijuana alone or in combination with other medications or substances could occur. As a manufacturer, distributor and retailer of adult-use and medical marijuana, or in its role as an investor in or service provider to an entity that is a manufacturer, distributor and/or retailer of adult-use or medical marijuana, the Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

 

A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations, financial condition or prospects of the Company. There can be no assurances that the Company will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Company’s potential products or otherwise have a material adverse effect on the business, results of operations, financial condition or prospects of the Company.

 

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 labeling disclosure. Such recalls cause unexpected expenses of the recall and any legal proceedings that might arise in connection with the recall. This can cause loss of a significant amount of sales. In addition, a product recall may require significant management attention. Although the Company has detailed procedures in place for testing its products, 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.

 

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Additionally, if one of the Company’s products were subject to recall, the image of that product and the Company could be harmed. Additionally, product recalls can lead to increased scrutiny of operations by applicable regulatory agencies, requiring further management attention and potential legal fees and other expenses.

 

Results of Future Clinical Research

 

Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated CBD and THC remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC) and future research and clinical trials may discredit the medical benefits, viability, safety, efficacy, and social acceptance of cannabis or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of the Company’s securities should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this Annual Information Form or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Difficulty Attracting and Retaining Personnel

 

The Company’s success depends to a significant degree upon its ability to attract, retain and motivate highly skilled and qualified personnel. Failure to attract and retain necessary technical personnel, sales and marketing personnel and skilled management could adversely affect the Company’s business. If the Company fails to attract, train and retain sufficient numbers of these highly qualified people, its prospects, business, financial condition and results of operations will be materially and adversely affected.

 

Dependence on Suppliers

 

The ability of the Company to compete and grow will be dependent on it 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 its required supply of equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Company’s capital expenditure plans may be significantly greater than anticipated by the Company’s management, and may be greater than funds available to the Company, in which circumstance the Company may curtail, or extend the timeframes for completing, its capital expenditure plans. This could have an adverse effect on the business, financial condition, results of operations or prospects of the Company.

 

Reliance on Inputs

 

The marijuana business is dependent on a number of key inputs and their related costs including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the Company. In addition, any restrictions on the ability to secure required supplies or utility services or to do so on commercially acceptable terms could have a materially adverse impact on the business, financial condition and operating results. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services or to do so on appropriate terms and/or agreeable terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the Company.

 

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Limited Market Data and Difficulty to Forecast

 

As a result of recent and ongoing regulatory and policy changes in the medical and adult-use marijuana industry, the market data available is limited and unreliable. Federal and State laws prevent widespread participation and hinder market research. Therefore, the Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the industry. Market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of the Company’s management team as of the date they are made. A failure in the demand for its products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations, financial condition or prospects of the Company.

 

Intellectual Property Risks

 

The Company’s ability to compete in the future partly depends on the superiority, uniqueness and value of its intellectual property and technology, including both internally developed technology and technology licensed from third parties. To the extent the Company is able to do so, in order to protect its proprietary rights, the Company will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with its employees and third parties, and protective contractual provisions which may prove insufficient to protect the Company’s proprietary rights.

 

Third parties may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to the Company’s proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on the Company’s business, results of operations or prospects.

 

As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the CSA, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to the Company. As a result, the Company’s intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third-parties. In addition, since the regulatory framework of the cannabis industry is in a constant State of flux, the Company can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal, State or local level. While many states do offer the ability to protect trademarks independent of the federal government, patent protection is wholly unavailable on a State level, and State-registered trademarks provide a lower degree of protection than would federally-registered marks.

 

Constraints on Marketing Products

 

The development of the Company’s business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the U.S. limits companies’ abilities to compete for market share in a manner similar to other industries. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Company’s sales and results of operations could be adversely affected.

 

Fraudulent or Illegal Activity by Employees, Contractors and Consultants

 

The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for the Company to identify and deter misconduct by its

 

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employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Company’s business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Information Technology Systems and Cyber-Attacks

 

The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, information technology systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses.

 

In addition, the Company collects and stores personal information about its patients and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the Company’s business, financial condition and results of operations.

 

The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

 

Security Breaches

 

Given the nature of the Company’s products and its lack of legal availability outside of channels approved by the government of the U.S., as well as the concentration of inventory in its facilities, there remains a risk of shrinkage as well as theft. If there was a breach in security systems and the Company becomes victim to a robbery or theft, the loss of cannabis plants, cannabis oils, cannabis flowers and cultivation and processing equipment or if there was a failure of information systems or a component of information systems, it could, depending on the nature of any such breach or failure, adversely impact the Company’s reputation, business continuity and results of operations. A security breach at one of the Company’s facilities could expose the Company to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Company’s products.

 

Reliance on Management Services Agreements with Subsidiaries and Affiliates

 

The Company’s subsidiaries and other affiliates engage in the medicinal cannabis business through management services agreements entered into with State-licensed entities. Under such agreements, its

 

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subsidiaries and affiliates perform a number of services, including cultivation, growing and handling of marijuana plants, trimming, curing and packaging of dry flower, patient advisory, lab and scientific research services, consultation on regulatory issues and a variety of management functions. In exchange for providing these services, the Company’s subsidiaries and affiliates receive management fees which are a key source of revenue. Payment of such fees is dependent on the continuing validity and enforceability of the relevant management services agreements. If such agreements are found to be invalid or unenforceable, or are terminated by the counterparty, this could have a material adverse effect on the business, prospects, financial condition, and operating results.

 

Website Accessibility

 

Internet websites are visible by people everywhere, not just in jurisdictions where the activities described therein are considered legal. As a result, to the extent the Company sells services or products via web-based links targeting only jurisdictions in which such sales or services are compliant with State law, the Company may face legal action in other jurisdictions which are not the intended object of any of the Company’s marketing efforts for engaging in any web-based activity that results in sales into such jurisdictions deemed illegal under applicable laws.

 

High Bonding and Insurance Coverage

 

There is a risk that a greater number of State regulatory agencies will begin requiring entities engaged in certain aspects of the business or industry of legal marijuana to post a bond or significant fees when applying, for example, for a dispensary license or renewal as a guarantee of payment of sales and franchise tax. The Company is not able to quantify at this time the potential scope for such bonds or fees in the States in which it currently or may in the future operate. Any bonds or fees of material amounts could have a negative impact on the ultimate success of the Company’s business.

 

The Company’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labor disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability.

 

Although the Company maintains insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance does not cover all the potential risks associated with its operations. The Company may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards encountered in the operations of the Company is not generally available on acceptable terms. The Company might also become subject to liability for pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon its business, results of operations, financial condition or prospects.

 

Risks of Leverage

 

Although the Company will seek to use leverage in connection with its investments in a manner it believes is prudent, such leverage will increase the exposure of an investment to adverse economic factors such as downturns in the economy or deterioration in the condition of the investment. If the Company defaults on unsecured indebtedness, the terms of the loan may require the Company to repay the principal amount of the loan and any interest accrued thereon in addition to heavy penalties that may be imposed. Because the Company may engage in financings where several investments are cross-collateralized, multiple investments may be subject to the risk of loss. As a result, the Company could lose its interest in

 

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performing investments in the event such investments are cross-collateralized with poorly performing or nonperforming investments.

 

In addition to leveraging the Company investments, the Company may borrow funds in its own name for various purposes, and may withhold or apply from distributions amounts necessary to repay such borrowings. The interest expense and such other costs incurred in connection with such borrowings may not be recovered by income from investments purchased by the Company. If investments fail to cover the cost of such borrowings, the value of the investments held by the Company would decrease faster than if there had been no such borrowings. Additionally, if the investments fail to perform to expectation, the interests of investors in the Company could be subordinated to such leverage, which will compound any such adverse consequences.

 

Past Performance Not Indicative of Future Results

 

The prior investment and operational performance of the Company is not indicative of the future operating results of the Company. There can be no assurance that the historical operating results achieved by the Company or its affiliates will be achieved by the Company, and the Company’s performance may be materially different.

 

Financial Projections May Prove Materially Inaccurate or Incorrect

 

The Company’s financial estimates, projections and other forward-looking information or statements included in this Annual Information Form are based on assumptions of future events that may or may not occur, which assumptions may not be disclosed in this Annual Information Form. Shareholders should inquire of the Company and become familiar with the assumptions underlying any estimates, projections or other forward-looking information or statements. Projections are inherently subject to varying degrees of uncertainty and their achievability depends on the timing and probability of a complex series of future events. There is no assurance that the assumptions upon which these projections are based will be realized. Actual results may differ materially from projected results for a number of reasons including increases in operation expenses, changes or shifts in regulatory rules, undiscovered and unanticipated adverse industry and economic conditions, and unanticipated competition. Accordingly, the Shareholders should not rely on any projections to indicate the actual results the Company might achieve.

 

Business Interruption Risks

 

The Company may be impacted by business interruptions resulting from pandemics and public health emergencies, including those related to COVID-19. An outbreak of infectious disease, a pandemic or a similar public health threat, such as the recent outbreak of the novel coronavirus known as COVID-19, or a fear of any of the foregoing, could adversely impact the Company by causing operating, manufacturing supply chain, and project development delays and disruptions, labour shortages, travel and shipping disruption and shutdowns (including as a result of government regulation and prevention measures). It is unknown whether and how the Company may be affected if such an epidemic persists for an extended period of time. The Company may incur expenses or delays relating to such events outside of its control, which could have a material adverse impact on its business, operating results and financial condition.

 

Unionization of Employees at Dispensaries

 

Employees in our New York facilities are unionized. If additional employees at our dispensaries or processing or cultivation facilities were to unionize, our relationship with our employees could be adversely affected. We would also face an increased risk of work stoppages and higher labor costs wherever labor is organized. Accordingly, unionization of our employees could have a material adverse impact on our operating costs and financial condition and could force us to raise prices on our products or curtail operations.

 

Natural Disasters and Terrorism Risk

 

The occurrence of one or more natural disasters, such as hurricanes and earthquakes, unusually adverse weather, pandemic outbreaks, including the COVID-19 pandemic, boycotts and geo-political events, such as civil unrest, riots, war and acts of terrorism, or similar disruptions could materially adversely affect the Company’s business, results of operations or financial condition. These events could result in physical damage to one or more of the Company’s properties, increases in energy prices, temporary or permanent closure of one or more of the Company’s facilities, labour shortages, temporary or long-term disruption in the supply of raw materials and other inputs, disruption in the Company’s distribution network or disruption to the Company’s information systems, any of which could have a material adverse effect on the Company’s business, operating results and financial condition.

 

Conflicts of Interest

 

Conflicts of interest may arise as a result of the directors, officers and promoters of the Company also holding positions as directors or officers of other companies. They also invest and may invest in businesses, including in the cannabis sector, that compete directly or indirectly with the Company or act as customers or suppliers of the Company. Some of the individuals that are directors and officers of the Company have been and will continue to be engaged in the identification and evaluation of assets, businesses and companies on their own behalf and on behalf of other companies, and situations may arise where the directors and officers of the Company will be in direct competition with the Company. Conflicts,

 

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if any, will be subject to the procedures and remedies provided under the Business Corporations Act (British Columbia).

 

To the best of the Company’s knowledge, other than as disclosed below and elsewhere in this Annual Information Form, there are no known existing or potential material conflicts of interest among the Company or a subsidiary of the Company and a director or officer of the Company or a subsidiary of the Company as a result of their outside business interests except that: (i) certain of the Company’s or its subsidiaries’ directors and officers serve as directors and officers of other companies, and therefore it is possible that a conflict may arise between their duties to the Company and their duties as a director or officer of such other companies, and (ii) certain of the Company’s or its subsidiaries’ directors and officers have portfolio investments consisting of minority stakes in businesses that may compete directly or indirectly with the Company or act as a customer of, or supplier to, the Company.

 

The Company has entered into the Cura Merger Agreement for the acquisition of Cura Partners, a corporation in which Mr. Boris Jordan, a Principal Shareholder and Executive Chairman of the Company, holds an indirect interest. See the “General Developments of the Business — Recent Developments — Cura Partners” section of this Annual Information Form.

 

In February 2020, the Company closed the acquisition of Cura Partners, a corporation in which Mr. Boris Jordan, a Principal Shareholder and Executive Chairman of the Company, held an indirect interest. Further, in July 2020, the Company acquired Verdure, an entity in which the Company’s CEO, Joseph Lusardi held a 50% ownership interest. Also, in August 2018, Curaleaf acquired the remaining interest of Curaleaf MA from PT Holdings, LLC, a which the Company’s CEO, Joseph Lusardi, is a member. See the “General Developments of the Business — Recent Developments” and “General Developments of the Business — Three Year History — 2018” sections of this Annual Information Form.

 

Business Structure Risks

 

Holding Company Structure

 

Curaleaf Holdings, Inc. is a holding company as all of its assets are the capital stock of its subsidiaries in each of the markets the Company operates in and/or holds licenses in the adult-use and/or medicinal cannabis marketplace in Arizona, Arkansas, California, Colorado, Connecticut, Florida, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Oklahoma,  Oregon, Pennsylvania, Utah and Vermont; and has no material assets other than: (a) cash on hand; and (b) ownership of its subsidiaries, stakes in joint ventures and minority interests in certain operating companies. As a result, investors in the Company are subject to the risks attributable to its subsidiaries. As a holding company, the Company conducts substantially all of its business through its subsidiaries, which generate substantially all of its revenues. Consequently, the Company’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings to the Company. To the extent that the Company requires funds, and its subsidiaries and such other entities are restricted from making such distributions by applicable law, regulation or contract, or are otherwise unable to provide such funds, it could materially adversely affect the Company’s liquidity and financial condition, as well as its ability to make distributions to its shareholders. In the event of a bankruptcy, liquidation or reorganization of any of the Company’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before the Company.

 

The Company has no Dividend Record

 

The Company has no dividend record, and the ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. Dividends paid by the Company would be subject to tax and, potentially, withholdings. The Company does not anticipate paying any dividends on the Subordinate Voting Shares in the foreseeable future. Please see “Risk Factors — Anti-Money Laundering Laws and Regulations”.

 

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Risks Related to Legality of Cannabis

 

Cannabis Continues to be a Controlled Substance under the CSA

 

The Company is engaged directly and indirectly in the medical and adult-use cannabis industry in the U.S. where only State law permits such activities. Investors are cautioned that in the U.S., cannabis is largely regulated at the State level. To the Company’s knowledge, some form of cannabis has been legalized in 33 states and Washington, D.C., Puerto Rico and Guam as of March 2020. Additional states have pending legislation regarding the same. Notwithstanding the permissive regulatory environment of cannabis at the State level, cannabis continues to be categorized as a controlled substance under the CSA and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the U.S.

 

The DOJ, under the current administration, could allege that the Company has “aided and abetted” in violations of federal law by providing financing and services to its portfolio cannabis companies. Under these circumstances, the federal prosecutor could seek to seize the assets of the Company, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing financing or services. In these circumstances, the Company’s operations would cease, shareholders may lose their entire investment and directors, officers and/or shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, be sent to federal prison.

 

Notwithstanding the foregoing, as part of the Congressional omnibus-spending bill, Congress renewed, through September 30, 2020, the Rohrabacher-Farr amendment, which prohibits the DOJ from expending any funds for the prosecution of medical cannabis businesses operating in compliance with State and local laws (the “Rohrabacher Farr Amendment”). At such time, it may or may not be included in the omnibus appropriations package or a continuing budget resolution once the current continuing resolution expires. Should the Rohrabacher-Farr Amendment not be renewed upon expiration in subsequent spending bills, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favor of the Company.

 

Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical and adult-use cannabis licenses in the U.S., the listing of its securities on the CSE, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

 

Enforcement of Cannabis Laws Could Change

 

As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the U.S. are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the Cole Memorandum acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the U.S., several states have enacted laws relating to cannabis for medical purposes.

 

The Cole Memorandum outlined certain enforcement priorities for the DOJ relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have

 

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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 DOJ did not provide specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard.

 

In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis. states where cannabis had been legalized were not characterized as a high priority. In March 2017, then newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit. However, he disagreed that it had been implemented effectively and, on January 4, 2018, Mr. Sessions the Sessions Memo that rescinded and superseded the Cole Memorandum, effective as at such date. The Sessions Memo stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by U.S. Congress and to follow well-established principles when pursuing prosecutions related to cannabis activities. U.S. Attorney General Jeff Sessions resigned on November 7, 2018. As of his resignation, Matthew Whitaker was the acting U.S. Attorney General until William Barr was appointed as the U.S. Attorney General on February 14, 2019.  In an April 10, 2019 Senate Appropriations Subcommittee meeting to discuss the Justice Department’s budget 2020, in response to a question about his position on the proposed Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, Attorney General Barr stated: “Personally, I would still favor one uniform federal rule against marijuana,” “But if there is not sufficient consensus to obtain that then I think the way to go is to permit a more federal approach so states can, you know, make their own decisions within the framework of the federal law. So we’re not just ignoring the enforcement of federal law.” The STATES Act, if it were to pass, would allow states to determine their own approaches to marijuana.  Attorney General Barr said the legislation is still being reviewed by his office but that he would “much rather... the approach taken by the STATES Act than where we currently are.” It is unclear what impact this development will have on U.S. federal government enforcement policy. The inconsistency between federal and state laws and regulations is a major risk factor.

 

As a result of the Sessions Memo, federal prosecutors may use their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws permitting such activity. No direction was given to federal prosecutors in the Sessions Memo as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memo did not discuss the treatment of medical cannabis by federal prosecutors. Under the Rohrabacher-Farr Amendment, federal prosecutors are prohibited from expending federal funds against medical cannabis activities that are in compliance with state law. Dozens of U.S. Attorneys across the country have affirmed that their view of federal enforcement priorities has not changed. In Washington, Annette Hayes, U.S. Attorney for the Western District of Washington, released a statement affirming that her office will continue to investigate and prosecute “cases involving organized crime, violent and gun threats, and financial crimes related to marijuana” and that “enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve.” However, in California, at least one U.S. Attorney has made comments indicating a desire to enforce the CSA: Adam Braverman, Interim U.S. Attorney for the Southern District of California, has been viewed as a potential “enforcement hawk” after stating that the rescission of the 2013 Cole Memorandum “returns trust and local control to federal prosecutors” to enforce the CSA. Additionally, Greg Scott, the Interim U.S. Attorney for the Eastern District of California, has a history of prosecuting medical cannabis activity: his office published a statement that cannabis remains illegal under federal law, and that his office would “evaluate violations of those laws in accordance with our district’s federal law enforcement priorities and resources”. 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.

 

Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have an adverse

 

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effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation and prospects, even if such proceedings were concluded successfully in favor of the Company. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Company or the seizure of its corporate assets.

 

Renewal of Rohrabacher-Farr Amendment Would Protect the Medical Cannabis Industry

 

The Rohrabacher-Farr Amendment, as discussed above, prohibits the DOJ from spending funds appropriated by Congress to enforce the tenets of the CSA against the medical cannabis industry in states which have legalized such activity. This amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. The Rohrabacher-Farr Amendment will remain in effect until September 30, 2020. At such time, it may or may not be included in the omnibus appropriations package or a continuing budget resolution, and its inclusion or non-inclusion, as applicable, is subject to political changes.

 

Market for Cannabis Could Decline due to Regulatory Changes

 

There can be no assurance that the number of states that allow the use of medicinal cannabis will increase. Furthermore, there can be no assurance that the existing states, districts and territories that permit the use of medicinal cannabis will not reverse their position. If either of these things happens at any future time, then growth of the Company’s business may be materially impacted. The Company may not be able to achieve targeted revenue levels and may experience declining revenue as the potential market for its products and services diminishes.

 

Financing Risks

 

Risks Related to Additional Financing

 

The Company will require equity and/or debt financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There can be no assurance that additional financing will be available to the Company when needed or on terms which are acceptable. The Company’s inability to raise financing through traditional banking to fund on-going operations, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

 

If additional funds are raised through further issuances of equity or convertible debt securities, existing Company Shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to existing holders of Subordinate Voting Shares.

 

Restricted Access to Banking

 

In February 2014, the FinCEN bureau of the U.S. Treasury Department issued guidance (which is not law) with respect to financial institutions providing banking services to cannabis businesses, including burdensome due diligence expectations and reporting requirements. The FinCEN Guidance remains effective to this day, in spite of the fact that the 2014 Cole Memorandum was rescinded and replaced by the Sessions Memo. The FinCEN Guidance does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the DOJ, FinCEN or other federal regulators, though. Thus, most banks and other financial institutions in the U.S. do not appear to be comfortable providing banking services to cannabis-related businesses, or relying on this guidance, which can be amended or revoked at any time by the Trump administration. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company may have limited or no access to banking or other financial services in the U.S. The inability or limitation in the Company’s ability to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

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On September 26, 2019, the U.S. House of Representatives passed the SAFE Banking Act, which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

General Regulatory and Legal Risks

 

Risk of Civil Asset Forfeiture

 

Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or were purchased using the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.

 

Anti-Money Laundering Laws and Regulations

 

The Company is subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Sections 1956 and 1957 of U.S.C. Title 18 (the Money Laundering Control Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada. Further, under U.S. federal law, banks and 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, aiding and abetting or conspiracy.

 

In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the U.S. were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while there are no current intentions to declare or pay dividends on the Subordinate Voting Shares in the foreseeable future, in the event that a determination was made that the Company’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

 

Lack of Access to U.S. Bankruptcy Protections

 

Because the use of cannabis is illegal under federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Company were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to the Company’s U.S. operations, which would have a material adverse effect on the Company, its lenders and other stakeholders.

 

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Heightened Scrutiny by Regulatory Authorities

 

For the reasons set forth above, the Company’s existing operations in the U.S., and any future operations or investments of the Company, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to operate or invest in any other jurisdictions, in addition to those described herein.

 

Further to the indication by CDS, Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets that it would refuse to settle trades for cannabis issuers that have investments in the U.S., the TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S., despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.

 

On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“MOU”) with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the U.S. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented at a time when the Subordinate Voting Shares are listed on a stock exchange, it would have a material adverse effect on the ability of holders of Subordinate Voting Shares to make and settle trades. In particular, the Subordinate Voting Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of securities through the facilities of the applicable stock exchange. Curaleaf has obtained eligibility with DTC for its Subordinate Voting Shares quotation on the OTCQX and such eligibility provides another possible avenue to clear the Subordinate Voting Shares in the event of a CDS ban. Revocation of DTC eligibility or implementation by DTC of a ban on the clearing of securities of issuers with cannabis-related activities in the United States would similarly have a material adverse effect on the ability of holders of the Subordinate Voting Shares to make and settle trades.

 

Risk of Legal, Regulatory or Political Change

 

The success of the business strategy of the Company depends on the legality of the marijuana industry. The political environment surrounding the marijuana industry in general can be volatile and the regulatory framework remains in flux. To the Company’s knowledge, some form of cannabis has been legalized in 33 states and Washington, D.C., Puerto Rico and Guam as of March 2020. However, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting the Company’s business, results of operations, financial condition or prospects.

 

Delays in enactment of new State or federal regulations could restrict the ability of the Company to reach strategic growth targets. The growth strategy of the Company is contingent upon certain federal and State regulations being enacted to facilitate the legalization of medical and adult-use marijuana. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, the growth targets of the Company, and thus, the effect on the return of investor capital, could be detrimental. The Company is unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.

 

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Further, there is no guarantee that State laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of State laws within their respective jurisdictions. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable State laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects would be materially adversely affected. It is also important to note that local and city ordinances may strictly limit and/or restrict disbursement of marijuana in a manner that will make it extremely difficult or impossible to transact business in that jurisdiction, which may adversely affect the Company’s continued operations. Federal actions against individuals or entities engaged in the marijuana industry or a repeal of applicable marijuana legislation could adversely affect the Company and its business, results of operations, financial condition and prospects.

 

The Company is also aware that multiple states are considering special taxes or fees on businesses in the marijuana industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. Should such special taxes or fees be adopted, this could have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

 

The commercial medical and adult-use marijuana industry is in its infancy and the Company anticipates that such regulations will be subject to change as the jurisdictions in which the Company does business matures. The Company has in place a detailed compliance program headed by its VP of Compliance who oversees, maintains, and implements the compliance program and personnel. Compliance officers in each operating subsidiary are charged with knowing the local regulatory process and monitoring developments with their governing bodies. Each compliance officer regularly reports regulatory developments to the VP of Compliance or enforcement by regulators in certain states against such services arrangements through written and oral communications and is charged with the creation and implementation of plans regarding any regulatory developments. In addition to the Company’s robust legal and compliance departments, the Company also has local legal/regulatory counsel engaged in every jurisdiction in which it operates. Company’s compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Additionally, the Company has created comprehensive standard operating procedures that include detailed descriptions and instructions for monitoring inventory at all stages of development and distribution. The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program, standard operating procedures, and any changes to regulation in the marijuana industry.

 

Overall, the medical and adult-use marijuana industry is subject to significant regulatory change at both the State and federal level. The inability of the Company to respond to the changing regulatory landscape may cause it to not be successful in capturing significant market share and could otherwise harm its business, results of operations, financial condition or prospects.

 

General Regulatory and Licensing Risks

 

The Company’s business is subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of marijuana, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the Company’s business objectives are contingent, in part, upon compliance with applicable regulatory requirements and obtaining all requisite regulatory approvals. Changes to such laws, regulations and guidelines due to matters beyond the control of the Company may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

The Company is required to obtain or renew further government permits and licenses for its current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time-consuming process potentially involving numerous regulatory agencies, involving public hearings and costly undertakings on the Company’s part. The duration and success of the

 

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Company’s efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within its control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority. The Company may not be able to obtain, amend or renew permits or licenses that are necessary to its operations or to achieve the growth of its business. Any unexpected delays or costs associated with the permitting and licensing process could impede the ongoing or proposed operations of the Company. To the extent necessary permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Company may be curtailed or prohibited from proceeding with its ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Several of the Company’s licenses are subject to renewal on an annual or periodic basis; however, they are generally renewed, as a matter of course, if the license holder continues to operate in compliance with applicable legislation and regulations and without any material change to its operations.

 

While the Company’s compliance controls have been developed to mitigate the risk of any material violations of any license it holds arising, there is no assurance that the Company’s licenses will be renewed by each applicable regulatory authority in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process for any of the licenses held by the Company could impede the ongoing or planned operations of the Company and have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Company to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition, results of operations or prospects.

 

Limitations on Ownership of Licenses

 

In certain states, the cannabis laws and regulation limit, not only the number of cannabis licenses issued, but also the number of cannabis licenses that one person may own. For example, in Massachusetts, no person may have an ownership interest, or control over, more than three license holders in any category — cultivation, processing or medical dispensing. In Maryland, the Department of Health has taken the position that the law prevents having a material ownership interest in more than one cultivation or processing license holder and more than four dispensing license holders in any one of these three categories. In New Jersey, there are restrictions on overlapping ownership of license holders. In Florida, there are also limitations on owning more than one of the vertically-integrated medical cannabis licenses offered in that State. The Company believes that, where such restrictions apply, it may still capture significant share of revenue in the market through wholesale sales, exclusive marketing relations, provision of management or support services, franchising and similar arrangement with other operators. Nevertheless, such limitations on the acquisition of ownership of additional licenses within certain states or enforcement by regulators in certain States against such services arrangements may limit the Company’s ability to grow organically or to increase its market share in such states.

 

Regulatory Action and Approvals from the Food and Drug Administration

 

The Company’s cannabis-based products are supplied to patients diagnosed with certain medical conditions. However, the Company’s cannabis-based products are not approved by the FDA as “drugs” or for the diagnosis, cure, mitigation, treatment, or prevention of any disease. Accordingly, the FDA may regard any promotion of the cannabis-based products as the promotion of an unapproved drug in violation of the Food, Drug and Cosmetic Act (“FDCA”).

 

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CBD is one of the non-psychotropic cannabinoids in industrial hemp from the plant species Cannabis sativa L. There has been growing interest in CBD in recent years. CBD is increasingly used as an ingredient in food and beverages, as an ingredient in dietary supplements and as an ingredient in cosmetics, thereby generating new investments and creating employment in the cultivation and processing of hemp and hemp-derived products. Pharmaceutical products with CBD as an active ingredient have also been developed, including one product approved by the FDA (Epidiolex®). Foods and beverages, dietary supplements, pharmaceuticals, and cosmetics containing CBD are all subject to regulation under the FDCA. The FDA has asserted that CBD is not a lawful ingredient in foods and beverages, supplements and pharmaceuticals (unless FDA-approved), although FDA has generally refrained from taking enforcement action against those products. CBD-containing products may also be subject to the jurisdiction of sale and local health authorities.

 

In recent years, the FDA has issued letters to a number of companies selling products that contain CBD oil derived from hemp warning them that the marketing of their products violates the FDCA. FDA enforcement action against the Company could result in a number of negative consequences, including fines, disgorgement of profits, recalls or seizures of products, or a partial or total suspension of the Company’s production or distribution of its products. Any such event could have a material adverse effect on the Company’s business, prospects, financial condition, and operating results.

 

On December 20, 2018, the 2018 Farm Bill, which included the language of the Hemp Farming Act of 2018, removed industrial hemp and hemp-derived products with a THC concentration of not more than 0.3 percent (dry weight basis) from Schedule I of the CSA. This has the effect of legalizing the cultivation of industrial hemp for commercial purposes, including the production of CBD and other cannabinoids, except for THC, subject to regulations to be developed by the U.S. Department of Agriculture.

 

The Company sells and distributes certain products containing CBD. There is a risk that the FDA or State or local Departments of Health will seek to stop the Company from selling its CBD products or seek to have the claims made for those products revised.

 

Litigation

 

The Company may become threatened by a party, or otherwise become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for the Subordinate Voting Shares. Even if the Company is involved in litigation and is successful, such litigation could redirect significant company resources.

 

Constraints on Marketing Products

 

The development of the Company’s business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the U.S. limits companies’ abilities to compete for market share in a manner similar to other industries. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Company’s sales and results of operations could be adversely affected.

 

European Anti-Money Laundering Laws and Regulation

 

European laws, regulations and their enforcement, particularly those pertaining to anti-money laundering, relating to making and/or holding investments in cannabis-related practices or activities are in flux and vary dramatically from jurisdiction to jurisdiction across Europe (including without limitation, the United Kingdom). The enforcement of these laws and regulations and their effect on shareholders are uncertain and involve considerable risk. In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations

 

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are found to be in violation of such laws or regulation, such transactions (including holding of shares in the Company) could expose any shareholder(s) in that jurisdiction to potential prosecution and/or criminal and civil sanction.

 

Loss of Foreign Private Issuer Status

 

The Company is a Foreign Private Issuer as defined in Rule 405 under the Securities Act and Rule 3b-4 under the Exchange Act. If, as of the last business day of the Company’s second fiscal quarter for any year, more than 50% of the Company’s outstanding voting securities (as determined under Rule 405 of the Securities Act) are directly or indirectly held of record by residents of the United States, the Company will no longer meet the definition of a Foreign Private Issuer, which may have adverse consequences on the Company’s ability to raise capital in private placements or Canadian prospectus offerings. In addition, the loss of the Company’s Foreign Private Issuer status may likely result in increased reporting requirements and increased audit, legal and administration costs. These increased costs may significantly affect the Company’s business, financial condition and results of operations.

 

The term “Foreign Private Issuer” is defined as any non-U.S. corporation, other than a foreign government, except any issuer meeting the following conditions:

 

(a)         more than 50 percent of the outstanding voting securities of such issuer are, directly or indirectly, held of record by residents of the United States; and

 

(b)         any one of the following:

 

(i)                                     the majority of the executive officers or directors are United States citizens or residents, or

 

(ii)                                  more than 50 percent of the assets of the issuer are located in the United States, or

 

(iii)                               the business of the issuer is administered principally in the United States.

 

A “holder of record” is defined by Rule 12g5-1 under the Exchange Act. Generally speaking, the holder identified on the record of security holders is considered as the record holder. In December 2016, the SEC issued a Compliance and Disclosure Interpretation to clarify that issuers with multiple classes of voting stock carrying different voting rights may, for the purposes of calculating compliance with this threshold, examine either (i) the combined voting power of its share classes, or (ii) the number of voting securities, in each case held of record by U.S. residents. Based on this interpretation, each issued and outstanding Multiple Voting Share is counted as one voting security and each issued and outstanding Subordinate Voting Shares is counted as one voting security for the purposes of determining the 50 percent U.S. resident threshold and the Company is a ‘‘Foreign Private Issuer”. Should the SEC’s guidance and interpretation change, it is likely the Company will lose its Foreign Private Issuer status.

 

Status as an “Emerging Growth Company” under U.S. Securities Laws

 

The Company is an “emerging growth company” as defined in section 3(a) of the Exchange Act (as amended by the JOBS Act, enacted on April 5, 2012), and the Company will continue to qualify as an emerging growth company until the earliest to occur of: (a) the last day of the fiscal year during which the Company has total annual gross revenues of US$1.07 billion (as such amount is indexed for inflation every five years by the SEC) or more; (b) the last day of the fiscal year of the Company following the fifth anniversary of the date of the first sale of common equity securities of the Company pursuant to an effective registration statement under the U.S. Securities Act; (c) the date on which the Company has, during the previous three year period, issued more than US$1 billion in non-convertible debt; and (d) the date on which the Company is deemed to be a “large accelerated filer”, as defined in Rule 12b—2 under the U.S. Exchange Act.  The Company will qualify as a large accelerated filer (and would cease to be an emerging growth

 

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company) at such time when on the last business day of its second fiscal quarter of such year the aggregate worldwide market value of its common equity held by non-affiliates will be US$700 million or more.

 

For so long as the Company remains an emerging growth company, it is permitted to and intends to rely upon exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the JOBS Act. The Company takes advantage of some, but not all, of the available exemptions available to emerging growth companies. The Company cannot predict whether investors will find the Subordinate Voting Shares less attractive because the Company relies upon certain of these exemptions. If some investors find the Subordinate Voting Shares less attractive as a result, there may be a less active trading market for the Subordinate Voting Shares and the price per Subordinate Voting Share may be more volatile. On the other hand, if the Company no longer qualifies as an emerging growth company, the Company would be required to divert additional management time and attention from the Company’s development and other business activities and incur increased legal and financial costs to comply with the additional associated reporting requirements, which could negatively impact the Company’s business, financial condition and results of operations.

 

Limited Trademark Protection

 

The Subsidiaries will not be able to register any U.S. federal trademarks for their cannabis products. Because producing, manufacturing, processing, possessing, distributing, selling, and using cannabis is illegal under the CSA, the United States Patent and Trademark Office will not permit the registration of any trademark that identifies cannabis products. As a result, the Subsidiaries likely will be unable to protect their cannabis product trademarks beyond the geographic areas in which they conduct business. The use of its trademarks outside the states in which they operate by one or more other persons could have a material adverse effect on the value of such trademarks.

 

Civil Asset Forfeiture

 

Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or were purchased using the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.

 

Laws and Regulations Affecting the Cannabis Industry are Constantly Changing

 

The constant evolution of laws and regulations affecting the cannabis industry could detrimentally affect the Company. The current and proposed operations of the Subsidiaries are subject to a variety of local, state and federal medical cannabis laws and regulations relating to the manufacture, management, transportation, storage and disposal of cannabis, as well as laws and regulations relating to consumable products health and safety, the conduct of operations and the protection of the environment. These laws and regulations are broad in scope and subject to evolving interpretations, which could require the Company to incur substantial costs associated with compliance or alter certain aspects of their business plans. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the business plans of the Company and result in a material adverse effect on certain aspects of their planned operations. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Company’s profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the FDA, SEC, the DOJ, the Financial Industry Regulatory Advisory or other federal or applicable state or nongovernmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or adult use purposes in the United States. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the industry may adversely affect the

 

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business and operations of the Company, including without limitation, the costs to remain compliant with applicable laws and the impairment of its business or the ability to raise additional capital. In addition, the Company will not be able to predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to its business.

 

Environmental Risks

 

Environmental Regulation

 

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

 

Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical marijuana or from proceeding with the development of its operations as currently proposed.

 

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. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

 

Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

 

Unknown Environmental Risks

 

There can be no assurance that the Company will not encounter hazardous conditions at the facilities where it operates its businesses, including, without limitation, its medical cannabis cultivation and dispensary facilities, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Company may be suspended. The presence of other hazardous conditions may require significant expenditure of the Company’s resources to correct the condition. Such conditions could have a material impact on the investment returns of the Company.

 

Tax Risks

 

Section 280E of the Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the CSA). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable State laws. 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

 

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cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses. Further, there are several pieces of legislation being considered by the U.S. Congress that could change the interpretation of Section 280E by removing its applicability to the legalized cannabis industry. Given these facts, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the Company.

 

Under Section 382 of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. The Company has not completed a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” as defined in Section 382. Future changes in the Company’s stock ownership, which may be outside of the Company’s control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the net operating loss carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to the Company.

 

DIVIDENDS

 

The Company has not declared or paid any cash dividends on its securities in Fiscal 2017, Fiscal 2018 and Fiscal 2019, and does not currently anticipate paying any dividends on its securities, in the near term. The Company currently intends to reinvest its earnings to finance the growth of its business. Any future determination to pay dividends on its securities will be at the discretion of the Board of Directors and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirement and surplus, financial condition, contractual restrictions and financing agreement covenants, solvency tests imposed by corporate laws and other factors that the Board of Directors may deem relevant. See “Risk Factors”.

 

DESCRIPTION OF THE CAPITAL STRUCTURE

 

The following is a summary of the material attributes and characteristics of the Company’s authorized share capital. This summary may not be complete and is subject to, and qualified in its entirety by reference to, the terms and provisions of the Company’s articles, available on SEDAR on the Company’s profile at www.sedar.com.

 

Authorized and Issued Share Capital

 

The Company’s authorized share capital consists of (i) an unlimited number of Multiple Voting Shares; and (ii) an unlimited number of Subordinate Voting Shares. As at August 31, 2020, 93,970,705 Multiple Voting Shares and 564,198,417 Subordinate Voting Shares were issued and outstanding.

 

Multiple Voting Shares

 

Holders of Multiple Voting Shares are entitled to fifteen (15) votes in respect of each Multiple Voting Share held at all meetings of holders of shares, other than meetings at which only the holders of another class or series of shares are entitled to vote separately as a class or series. The holders of the Multiple Voting Shares are entitled to receive any dividend, in cash or in property of the Company, declared by the Board of Directors in respect of the Subordinate Voting Shares (on an as-converted to Subordinate Voting Share basis), subject to the rights of the holders Subordinate Voting Shares. No dividend will be declared or paid on the Multiple Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares. In the event of the payment of a dividend in the form of shares, holders of Multiple Voting Shares shall receive Multiple Voting Shares, unless otherwise determined by the Board of Directors of the Company. The Multiple Voting Shares are convertible into Subordinate Voting Shares on a one-for-one basis at any time at the option of the holder. The Multiple Voting Shares do not carry any pre-emptive, redemption, exchange or retraction rights, nor do they contain any purchase for cancellation or surrender provisions, sinking or purchase fund provisions, provisions permitting or restricting the issuance of additional securities and any other material restrictions, or provisions requiring a securityholder to contribute additional capital.

 

Subordinate Voting Shares

 

Holders of Subordinate Voting Shares are entitled to one (1) vote in respect of each Subordinate Voting Share held at all meetings of holders of shares, other than meetings at which only the holders of another class or series of shares are entitled to vote separately as a class or series. The holders of the Subordinate Voting Shares are entitled to receive any dividend declared, in cash or in property of the Company, by the Board of Directors in respect of the Subordinate Voting Shares, subject to the rights of the holders Multiple Voting Shares. No dividend will be declared or paid on the Subordinate Voting Shares

 

65

 

unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Multiple Voting Shares. In the event of the payment of a dividend in the form of shares, holders of Subordinate Voting Shares shall receive Subordinate Voting Shares, unless otherwise determined by the Board of Directors. The holders of the Subordinate Voting Shares will be entitled to receive, subject to the rights of the holders of Multiple Voting Shares, the remaining property and assets of the Company available for distribution, after payment of liabilities, upon the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary. The Subordinate Voting Shares do not carry any pre-emptive, redemption, conversion, exchange or retraction rights, nor do they contain any purchase for cancellation or surrender provisions, sinking or purchase fund provisions, provisions permitting or restricting the issuance of additional securities and any other material restrictions, or provisions requiring a securityholder to contribute additional capital.

 

Options & RSUs

 

As at August 31, 2020, there were 29,146,736 options exercisable for Subordinate Voting Shares (the “Options”) issued and outstanding, and there were 3,246,105 restricted stock units (“RSUs”) issued and outstanding. Each RSU gives its holder the right to receive a Subordinate Voting Share or a cash payment equivalent to the Fair Market Value (as defined in the Plan) of a Subordinate Voting Share.

 

Stock and Incentive Plan

 

The Company’s 2018 Stock and Incentive Plan (the “Plan”) provides that the Board may, from time to time by resolution, grant to directors, officers, employees and consultants (who are natural persons) of the Company Options, Stock Appreciation Rights, Restricted Stock and RSUs, Performance Awards, Dividend Equivalents and Other Stock-Based Awards, as such terms are defined in the Plan. The purpose of the Plan is to promote the interests of the Company and its shareholders by aiding the Company in attracting and retaining employees, officers, consultants, advisors and Non-Employee Directors capable of assuring the future success of the Company, to offer such persons incentives to put forth maximum efforts for the success of the Company’s business and to compensate such persons through various stock and cash-based arrangements and provide them with opportunities for stock ownership in the Company, thereby aligning the interests of such persons with the Company’s shareholders. The maximum number of Subordinate Voting Shares reserved for issuance under the Plan at any point and time is 10% of the issued and outstanding Subordinate Voting Shares, including the aggregate number of Subordinate Voting Shares issuable on conversion of the Multiple Voting Shares. A copy of the Plan is available on SEDAR on the Company’s profile at www.sedar.com.

 

Constraints

 

There are no constraints imposed on the ownership of securities of Curaleaf to ensure a certain level of Canadian ownership of Curaleaf.

 

Ratings

 

Curaleaf has not requested nor, to management’s knownledge, has Curaleaf received any ratings from any rating organizations in respect of any securities of the Company.

 

NCIB

 

Pursuant to the NCIB, the Company was allowed to purchase Subordinate Voting Shares through the facilities of the CSE and/or alternative trading systems, from time to time over the 12-month period ending December 14, 2019, which purchases did not exceeded 5% of the issued and outstanding Subordinate Voting Shares in the aggregate.

 

For the fiscal year ended December 31, 2019, the Company repurchased an aggregate of 147,800 Subordinate Voting Shares for a purchase price of $5.97 per share, or an aggregate total amount of $883,000.

 

MARKET FOR SECURITIES AND TRADING PRICE AND VOLUME

 

Trading Price and Volume

 

The Subordinate Voting Shares are listed and traded under the symbol “CURA” on the CSE. The following table shows the monthly range of high and low prices per Subordinate Voting Share at the close of market (CSE), as well as monthly volumes and average daily volumes of the Subordinate Voting Shares

 

66

 

traded on the CSE from January 2, 2019, being the date of the first trading day of Fiscal 2019, to December 31, 2019, being the end of the Company’s most recently completed fiscal year:

 

Month

 

Price per
Common
Share (C$)
Monthly High

 

Price per
Common
Share (C$)
Monthly Low

 

Subordinate Voting
Shares
Total Monthly
Volume

 

Subordinate Voting
Shares
Average Daily
Volume

 

January 2019

 

$

8.51

 

$

6.86

 

9,194,215

 

417,919

 

Febrary 2019

 

$

10.52

 

$

9.07

 

10,409,092

 

547,847

 

March 2019

 

$

12.90

 

$

8.43

 

31,460,390

 

1,498,114

 

April 2019

 

$

15.00

 

$

11.25

 

22,070,601

 

1,050,981

 

May 2019

 

$

15.10

 

$

11.15

 

21,941,701

 

957,350

 

June 2019

 

$

11.65

 

$

9.33

 

9,232,158

 

461,608

 

July 2019

 

$

10.79

 

$

8.37

 

20,487,158

 

931,234

 

August 2019

 

$

10.35

 

$

8.45

 

11,093,195

 

528,247

 

September 2019

 

$

10.63

 

$

7.17

 

16,156,919

 

850,364

 

October 2019

 

$

9.07

 

$

6.27

 

10,882,950

 

494,680

 

November 2019

 

$

8.64

 

$

6.11

 

10,058,909

 

478,996

 

December 2019

 

$

8.05

 

$

6.94

 

4,005,269

 

210,804

 

 

The Company’s Subordinate Voting Shares were also listed on the OTCQX under the symbol “CURLF”.

 

The Multiple Voting Shares are not listed for trading on any stock exchange.

 

Prior Sales

 

The following tables summarize details of the following securities that are not listed or quoted on a market place issued by Curaleaf, during the most recently completed financial year end.

 

Options

 

Pursuant to the Plan, during the most recently completed financial year, the Company issued the following Options:

 

Date of Issuance

 

Number of
Options(1)

 

Exercise Price

 

Expiry Date

 

Grant Date Fair Value

 

March 28, 2019

 

1,152,573

 

$

12.29

 

March 28, 2029

 

$

9.95

 

August 30, 2019

 

453,806

 

$

9.27

 

August 30, 2029

 

$

6.98

 

November 22, 2019

 

712,634

 

$

8.20

 

November 22, 2029

 

$

6.15

 

December 12, 2019

 

551,975

 

$

8.00

 

December 10, 2029

 

$

6.00

 

 

Note:

 

(1) Vested and non-vested.

 

RSUs

 

Pursuant to the Plan, during the most recently completed financial year, the Company issued the following RSUs:

 

Date of Issuance

 

Number of
RSUs

 

Exercise Price

 

Expiry Date

 

Grant Date Fair Value

 

March 28, 2019

 

908,789

 

N/A

 

March 28, 2029

 

$

12.29

 

August 30, 2019

 

146,611

 

N/A

 

August 30, 2029

 

$

9.27

 

November 22, 2019

 

700,307

 

N/A

 

November 22, 2029

 

$

8.20

 

December 12, 2019

 

414,357

 

N/A

 

December 10, 2029

 

$

8.00

 

 

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ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

 

Certain directors, officers and significant shareholders of the Company entered into lock-up agreements pursuant to which such parties have agreed, subject to customary carve-outs and exceptions, not to sell any Subordinate Voting Shares (or announce any intention to do so), or any securities issuable in exchange therefor. Further, certain securities of the Company are held in escrow by Odysser Trust Company, as escrow agent. To the Company’s knowledge, the following securities are therefore in escrow or subject to contractual restrictions on transfer:

 

Class of Securities

 

Number of Securities in Escrow or Subject to a
Contractual Restriction on Transfer

 

Percentage of
Class

Multiple Voting Shares

 

72,478,020

 

77.13%

Subordinate Voting Shares

 

320,413,967(1) 

 

56.79%

 

Note:

 

(1) Include 12,851,005 Subordinate Voting Shares escrowed in connection with the Grassroots Transaction, as described in “General Development of the Business — Recent Developments — GR Companies, Inc.”. These Subordinate Voting Shares are escrowed pursuant to an escrow agreement dated July 2020 entered between the Company, the Seller Representative (as such term is defined in the Grassroots Agreement) and Odyssey Trust Company, as escrow agent. Pursuant to the Grassroots Agreement, the escrowed Subordinate Voting Shares will be released on the 180th day following the first anniversary of the closing of the Grassroots Transaction, for distributions to the former holders of common stock of Grassroots.

 

DIRECTORS AND OFFICERS OF THE COMPANY

 

The following table sets out, for each of the Company’s directors and executive officers, the person’s name, age, State and country of residence, position with the Company, principal occupation(s) during the last five (5) years, and the date on which the person became an officer or director. The Company’s directors are elected annually and, unless re-elected, will retire from office at the end of the next annual general meeting of shareholders.

 

All of the directors and executive officers of the Company, collectively as a group, beneficially own, directly or indirectly, or exercise control or direction over, an aggregate of 79,417,660 Subordinate Voting Shares (or approximately 14.1% of Subordinate Voting Shares) and 93,670,705 Multiple Voting Shares (or 100.0% of Multiple Voting Shares).

 

Under NI 52-110, an independent director is one who is free from any direct or indirect relationship which could, in the view of the Board of Directors, be reasonably expected to interfere with a director’s exercise of independent judgment. Mr. Boris Jordan, a principal shareholder and the Executive Chairman of the Company, Joseph Lusardi, President and CEO of the Company, and Mitchell Kahn, director of the Company and co-founder and CEO of Grassroots, are not considered independent and Jaswinder Grover, Karl Johansson and Peter Derby are considered independent.

 

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Directors

 

Name and State
and Country of
Residence

 

Age

 

Position(s) with the
Company

 

Director/Officer
of the Company
Since

 

Principal Occupation(s)
for Past Five (5) Years

Boris Jordan,
Florida, USA

 

54

 

Executive Chairman

 

Jan-13

 

The Sputnik Group, Founder; Renaissance Insurance, Founder and Chairman

Joseph Lusardi
Massachusetts, USA

 

46

 

President, CEO, and Director

 

Mar-16

 

Massapoag Advisors, Principal and Founder

Jaswinder Grover
North Carolina, USA

 

54

 

Director

 

Feb-20

 

Allegiant Institute and the Smoke Ranch Surgery Center, Founder, Developer and Owner at

Karl Johansson
Minnesota, USA

 

69

 

Director

 

Oct-18

 

Ernst & Young, Managing Partner

Peter Derby
New York, USA

 

59

 

Director

 

Oct-18

 

Concinnity Advisors, LP, Founder

Mitchell Kahn
Illinois, USA

 

59

 

Director

 

Jul-20

 

Grassroots,
Co-founder and CEO; Greenhouse Group LLC, Principal and CEO; Frontline Real Estate Partners, Principal and CEO.

 

Executive Officers who do not also serve as Directors

 

Joseph Bayern
Massachusetts, USA

 

56

 

President

 

Dec-19

 

Indus, President; VOSS, CEO and COO; Dr. Pepper Snapple Group, Executive VP, and Cadbury

Jim Shorris
Massachusetts, USA

 

59

 

Chief Compliance Officer

 

Mar-20

 

BMO Capital Markets, Vice President & Chief Compliance Officer; and Programs at Citizen’s Bank, Chief Compliance Officer of Enterprise Regulatory

Neil Davidson
Massachusetts, USA

 

48

 

Chief Operating Officer

 

Jan-19

 

Deluxe Entertainment Services Group, Chief Financial Officer, Strategic Advisor, Bally Technologies, Chief Financial Officer

Michael Carlotti

 

49

 

Chief Financial Officer

 

Jan-20

 

Indus Holdings, CFO; MGM Resorts International, SVP and Treasurer

Jason White

 

43

 

Chief Marketing Officer

 

Feb-20

 

Cura Cannabis Solutions, Chief Marketing Officer; Apple, Senior Director

Peter Clateman
Massachusetts, USA

 

51

 

Interim General Counsel

 

Jul-17

 

The Sputnik Group, General Counsel and Chief Compliance Officer; Renaissance Capital, and VR Capital

 

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Biographies

 

The following are brief profiles of the Company’s directors and executive officers.

 

Directors

 

Boris Jordan, Executive Chairman of the Board of Directors (Age 54)

 

Mr. Jordan is an American businessman, co-founder of Renaissance Capital Group and The Sputnik Group, two international investment and advisory firms. In the early 1990’s, Mr. Jordan was considered a key player in the development of the Russian stock market and was a leader in the privatization of Russian State assets. Mr. Jordan is a longstanding Member of the Council on Foreign Relations and a member of The Board of Trustees of New York University. After founding The Sputnik Group in 1999, Mr. Jordan has led the company in its investments in emerging industries, including investments in Renaissance Insurance, a company where Mr. Jordan is President and the Chairm of the Board. Mr. Jordan built Renaissance Insurance into one of the leading insurance groups in the Russian market. Since acquiring majority control of Curaleaf in 2014, Mr. Jordan has been impactful in the Company’s emergence as an industry leader. Mr. Jordan serves as a member of the Audit Committee of the Company, as well as a member of the Compensation Committee. Mr. Jordan holds a B.A. from New York University.

 

Joseph F. Lusardi, President, Chief Executive Officer and Director (Age 46)

 

Mr. Lusardi is a pioneer in the U.S. cannabis industry and is credited with opening one of the first medical cannabis operations on the East Coast. Mr. Lusardi has almost a decade of cannabis experience through which he has cultivated bottom-up expertise in cannabis company implementation and management, as well as 20 years’ experience in finance, private equity and entrepreneurship. He previously held executive positions at financial services companies including Liberty Mutual Group, Fidelity Investments, and Affiliated Managers Group. At Curaleaf, Mr. Lusardi has been instrumental in developing an organizational strategy focused on bringing the Company’s commitment to the advancement of cannabis science to all Curaleaf subsidiaries, and, ultimately, patients in need of medical cannabis. To support this effort, he raised over $100 million dollars to invest into the Company’s infrastructure, research and development, and staff. Mr. Lusardi continues to guide corporate strategy with a focused view on the continual improvement of best practices. Mr. Lusardi has a B.B.A. from The Catholic University of America and an M.B.A. from Boston College.

 

Jaswinder Grover, MD (Age 54)

 

Jaswinder Grover, MD is an orthopedic and spine surgeon who has practiced in Las Vegas, Nevada for the past 25 years.   Dr Grover is the founder, developer, and the owner of the Allegiant Institute and the Smoke Ranch Surgery Center, a referral center for patients with spine and pain disorders, which together employ more than 100 people in Las Vegas, Nevada. Originally from India, he spent his childhood in England and migrated to the United States as a teenager.  He was invited to attend UCLA School of Medicine as an early acceptance for gifted students after only three years of college graduating with his MD at the age of 23. He performed his residency in orthopedic and trauma surgery at the USC - Los Angeles County Medical Center for five years. He thereafter served as fellow of spinal cord injury at the University of British Columbia, fellow of cervical spine reconstructive surgery at McGill University, Montreal, and fellow of spinal deformity and lumbar reconstruction surgery Nottingham Center for spine surgery in England. He started his practice in Las Vegas, Nevada in 1995 as associate professor of orthopedic surgery at the University Medical Center attending to the most complex spine and pelvis injuries. In 2004, he began the Nevada Spine Clinic and Center for Special Surgery, a private practice dedicated to the evaluation, care and treatment for patients with spinal disorders.  The center has since evolved to become the Allegiant Institute, a comprehensive referral center for patients with spine, musculoskeletal, and pain disorders both

 

70

 

acute and chronic, providing complete assessment and treatment options for affected patients. The Institute encompasses imaging and MRI facilities, a pain management division offering both pharmacological and advanced interventional options, regenerative and stem cell therapies, and advanced surgical solutions both major reconstructive when necessary, and when possible minimally invasive outpatient technologies.   The Institute is associated with the Smoke Ranch Surgery Center, a Joint Commission for the Accreditation for Hospitals accredited center. Over his career, Doctor Grover has personally performed over 12,000 spine surgeries and has pioneered various outpatient techniques in minimally invasive spine surgery. He is a member of the American Medical Association, the North American Spine Society, and a fellow of the American Academy of Orthopedic Surgeons. Doctor Grover remains actively involved as a consultant and surgeon.

 

Karl Johansson, Director (Age 69)

 

Mr. Johansson has broad experience in multinational accounting and the co-ordination of international tax engagements, mergers and acquisitions, and due diligence projects in key global markets. From 1995 to 2000, Mr. Johansson was a Managing Partner of Ernst & Young CIS, after which he was a Regional Partner for Eastern Europe countries, including CIS (Vienna, Austria). From 2006 to 2014, he worked as a Managing Partner of Ernst & Young CIS in Moscow. While in Russia, he was a coordinator of the Foreign Investment Advisory Council (FIAC). Mr. Johansson has been a member of the Emerging Europe Business Council and Corporate Governance Task Force of the World Economic Forum, as well as the Foreign Investment Advisory Councils of Kazakhstan, Ukraine and Latvia. Mr. Johansson serves as the Chair of the Audit Committee of the Company, as well as a member of the Compensation Committee. Mr. Johansson received a Bachelor’s degree from the University of Minnesota and a Juris Doctor degree from the University of Pennsylvania.

 

Peter Derby, Director (Age 59)

 

Peter Derby is a founding partner of Concinnity Advisors, LP, the sub-advisor with investment discretion for the Capital Stewardship Strategy, which was formed in 2011. From 2008 to 2011, Mr. Derby was a portfolio manager at Diamondback Advisors NY, LLC. From 2007 to 2008, he was a founding member of The Concinnity Group, LLC. During William H. Donaldson’s tenure as Chairman of the Securities Exchange Commission, from 2003 to 2005, Mr. Derby served as the Securities Exchange Commission’s Managing Executive for Operations and Management. In 1989, he participated in the founding of DialogBank, the first private Russian bank to receive an international banking license. At DialogBank, Mr. Derby served as Chairman of the board of directors from 1997 to 1998, as President and Chief Executive Officer from 1991 to 1997 and as Chief Financial Officer from 1990 to 1991. Mr. Derby also founded the first Russian investment firm in 1991, Troika Dialog, where he served as Chairman of the board of directors from 1996 to 1997 and as President and Chief Executive Officer from 1991 to 1996. Prior to his tenure in Russia, he was a Corporate Finance Officer at National Westminster Bank USA from 1985 to 1990 and an Auditor at Chase Manhattan Bank from 1983 to 1985. Mr. Derby serves as the Chair of the Compensation Committee of the Company, as well as a member of the Audit Committee. Mr. Derby earned a B.S. in accounting, finance and international finance from New York University in 1983.

 

Mitchell Kahn (Age 59)

 

Over his career, Mitchell Kahn has demonstrated a successful track record of business management, strong leadership, and entrepreneurship. Kahn graduated from University of Wisconsin School of Business and received his JD from Northwestern University Law School.  After beginning his career as a transactional attorney focused on both real estate and corporate M&A transactions, he served as Senior Vice President at Sportmart, growing the company’s retail footprint from 20 to 70 stores. He then co-founded Hilco, a leading real estate restructuring, disposition valuation and appraisal firm. Kahn served as President and CEO and grew the business to more than 30 employees and annual revenues in excess of $15,000,000. In 2010, Kahn co-founded Frontline Real Estate Partners, a real estate investment and advisory company with expertise in the acquisition, development, management, disposition and leasing of commercial real estate properties throughout the United States. The company has acquired properties valued at more than $125,000,000 and has built a successful brokerage and property management business currently managing more than two million square feet of properties. Kahn actively serves as Chairman of Frontline Real Estate Partners.  In 2014, Kahn co-founded Grassroots Cannabis to provide safe and efficacious cannabinoid products to consumers. As CEO of the largest private, vertically integrated, cannabis operation in the United States, he established operations in 11 states, obtained more than 60 licenses, and empowered over 1100 employees. Today, Kahn serves on multiple Boards and is actively involved in numerous charitable and community organizations.

 

Executive Officers who do not also serve as Directors

 

Joseph Bayern, President (Age 56)

 

Mr. Bayern has over 20 years of executive leadership experience in consumer-packaged goods companies, and is responsible for driving overall operational excellence and revenue growth at Curaleaf.  He joins Curaleaf from INDUS Holdings, a vertically integrated cannabis company, where he served as President since January 2019. Before INDUS, Mr. Bayern served as chief executive officer and chief

 

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operating officer of the global beverage leader VOSS of Norway. Prior to this, he spent 15 years playing an integral role in several large-scale business transformations, with achievements that include the creation of the $6 billion Dr. Pepper Snapple Group, and the transformation of Cadbury into a singularly focused confectionary leader. Mr. Bayern has a Bachelor of Business Administration in Accounting from Adelphi University

 

Neil Davidson, Chief Operating Officer (Age 48)

 

Mr. Davidson is an accomplished financial professional with experience leading publicly-traded and private equity owned businesses. He is responsible for leading and managing the Company’s finance function and actively partnering with the executive leadership team on financial and overall business issues, including the strategic direction of the Company. Prior to joining Curaleaf, Mr. Davidson served as Chief Financial Officer for Deluxe Entertainment Services Group. Prior to that, he spent nine years at Bally Technologies, Inc. where he rose through the ranks to become its Chief Financial Officer. During that time, he gained extensive experience driving capital market and M&A activities for the company and was instrumental in orchestrating the sale of the business to Scientific Games Corporation (NASDAQ: SGMS).

 

Peter Clateman, Interim General Counsel (Age 51)

 

Peter Clateman has more than 20 years of legal experience in investing and investment funds, including more than 15 years as general counsel. He has served as GC and CCO of The Sputnik Group and Renaissance Capital, as well as VR Capital, an award-winning, distressed-asset fund with more than $2 billion under management. Mr. Clateman also served as head of Legal and was a Management Board Member of UC Rusal during its acquisition of SUAL and assets of Glencore to become the world’s biggest aluminum company. He previously was an associate with Skadden Arps Slate Meagher and Flom.

 

Michael Carlotti, Chief Financial Officer (Age 49)

 

Michael Carlotti is Curaleaf’s Chief Financial Officer, responsible for leading the Company’s finance, capital markets, M&A, treasury and investor relations functions. Prior to joining Curaleaf, Mr. Carlotti was the Chief Financial Officer for a Nevada-based cannabis company. Mr. Carlotti spent nearly a decade in the gaming industry including having served as Senior Vice President and Treasurer at MGM Resorts International, an S&P 500 global entertainment company. He began his career in investment banking with positions at Smith Barney, Donaldson, Lufkin & Jenrette and Wachovia Securities. Mr. Carlotti holds a Masters in Business Administration from the University of California, Los Angeles.

 

Jim Shorris (Age 59)

 

Jim Shorris is Curaleaf’s Chief Compliance Officer. Before joining Curaleaf, Jim was most recently Chief Compliance Officer of BMO Capital Markets in NY and Toronto. He was responsible for developing, implementing, and managing global capital markets compliance programs with a team of more than 60 professionals. Prior to that, Jim was Chief Compliance Officer of Enterprise Regulatory Programs at Citizen’s Bank. He also served as Executive Director of Enforcement for the regulator FINRA for seven years.  Jim began his career as an Assistant District Attorney in Manhattan. Jim holds a BA from Macalester College and a JD from Case Western Reserve University School of Law.

 

Jason White (Age 43)

 

Jason White is Curaleaf's Chief Marketing Officer. He brings 20 years of experience as an awardwinning marketing professional and has built a highly acclaimed career creating culture-shaping ideas for Fortune 100 companies. Prior to joining Select in January 2019, Mr. White was the Global Head of Marketing for Beats by Dre, which was acquired by Apple in 2014. He also served as Managing Director at Wieden + Kennedy Shanghai for lead client Nike as they prepared for the 2008 Beijing Olympics and as Global Account Director on Nike at Wieden + Kennedy in Portland, Oregon, developing campaigns for LeBron James, Kobe Bryant and Tiger Woods. He is currently a board member at The Initiative, Marcus Graham Project and the digital lab Chinatown Bureau, as well as founder and board member of Possible Plan. Jason holds a BA from Georgetown University.

 

Cease Trade Orders, Bankruptcy/Insolvency Proceedings, Penalties and Sanctions

 

None of the Company’s directors or executive officers has, within the 10 years prior to the date of this Annual Information Form, been a director or officer of any company (including the Company) that, while such person was acting in that capacity (or after such person ceased to act in that capacity but resulting from an event that occurred while that person was acting in such capacity) was the subject of a cease trade

 

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order, an order similar to a cease trade order, or an order that denied the company access to any exemption under securities legislation, in each case for a period of more than 30 consecutive days.

 

None of the Company’s directors or executive officers has, within the 10 years prior to the date of this Annual Information Form, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of such director or executive officer, been a director or executive officer of any company, that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

 

No director or executive officer of the Company has: (i) been subject to any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

 

Conflicts of Interest

 

Conflicts of interest may arise as a result of the directors, officers and promoters of the Company also holding positions as directors or officers of other companies. They also invest and may invest in businesses, including in the cannabis sector, that compete directly or indirectly with the Company or act as customers or suppliers of the Company. Some of the individuals that are directors and officers of the Company have been and will continue to be engaged in the identification and evaluation of assets, businesses and companies on their own behalf and on behalf of other companies, and situations may arise where the directors and officers of the Company will be in direct competition with the Company. Conflicts, if any, will be subject to the procedures and remedies provided under BCBCA.

 

To the best of the Company’s knowledge, other than as disclosed below and elsewhere in this Annual Information Form, there are no known existing or potential material conflicts of interest among the Company or a subsidiary of the Company and a director or officer of the Company or a subsidiary of the Company as a result of their outside business interests except that: (i) certain of the Company’s or its subsidiaries’ directors and officers serve as directors and officers of other companies, and therefore it is possible that a conflict may arise between their duties to the Company and their duties as a director or officer of such other companies, and (ii) certain of the Company’s or its subsidiaries’ directors and officers have portfolio investments consisting of minority stakes in businesses that may compete directly or indirectly with the Company or act as a customer of, or supplier to, the Company.

 

In February 2020, the Company closed the acquisition of Cura Partners, a corporation in which Mr. Boris Jordan, a Principal Shareholder and Executive Chairman of the Company, held an indirect interest. Further, in July 2020, the Company acquired Verdure, an entity in which the Company’s CEO, Joseph Lusardi held a 50% ownership interest. Also, in August 2018, Curaleaf acquired the remaining interest of Curaleaf MA from PT Holdings, LLC, a which the Company's CEO, Joseph Lusardi, is a member. See the “General Developments of the Business — Recent Developments” and “General Developments of the Business – Three Year History – 2018” sections of this Annual Information Form.

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

The Company may from time to time be involved in legal administrative and other proceedings of a nature considered normal to our business. Other than the legal proceedings described below, we believe that none of the litigation in which we are currently involved, or have been involved since the beginning of the most recently completed financial year is, individually or in the aggregate, material to our combined financial condition or results of operations. For further discussion, see “Risk Factors”.

 

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Connecticut

 

Curaleaf is currently undergoing an appraisal process in accordance with a previous agreement between Curaleaf and certain former minority shareholders of its Connecticut operations. Pursuant to the Second Amended and Restated Operating Agreement of Doubling Road Holdings, LLC, the holders of a majority of the Series A-2 Units of Doubling Road Holdings, LLC (collectively, the “Holders”) had the right to require that PalliaTech CT or any of its affiliates purchase (the “Put Right”) all of the Series A-2 Units in exchange for shares of PalliaTech, Inc. (now Curaleaf, Inc.), the parent of PalliaTech CT, pursuant to a defined “Buy-Out Exchange Ratio.”  On October 25, 2018, the Holders, Curaleaf, and others entered into a Stipulation of Settlement in order to resolve a dispute with respect to the applicable Buy-Out Exchange Ratio for the Put Right.  The Stipulation of Settlement provided, among other things, that PalliaTech CT, would purchase the Holders’ interests in exchange for (1) a payment of $40.14 million; (2) 4,755,548 Subordinate Voting Shares; and (3) the potential for additional equity in Curaleaf depending on the results of a “Settlement Second Appraisal.”  Pursuant to the Settlement Second Appraisal, dated December 12, 2019, and the terms of the Stipulation of Settlement, the Holders received 2,016,859 additional Subordinate Voting Shares.  On January 23, 2020, the Holders filed new claims in arbitration including for fraudulent inducement and breach of contract, relating primarily to a lock-up agreement that the Holders signed in connection with the Stipulation of Settlement. A schedule for the arbitration has not yet been established.

 

Florida

 

Curaleaf’s subsidiaries in Florida was involved in an arbitration and litigation against certain minority shareholders of its Florida operations. On December 10, 2018, Jayson Weisz (“Weisz”) and SRC Medical Partners, LLC (“SRC”) initiated an arbitration against PalliaTech Florida.  On March 19, 2019, Weisz and SRC derivatively, on behalf of PalliaTech Florida filed a complaint against defendants Curaleaf Florida, LLC, Palliatech Florida, Inc., Joseph Lusardi, and Boris Jordan in the Complex Business Litigation Section in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. Plaintiffs’ derivative Complaint seeks the judicial dissolution of Curaleaf Florida LLC and asserts various causes of action against the defendants, including  for breach of contract, civil conspiracy, breach of fiduciary duty, fraudulent transfer, and a declaratory judgment appointing Robins to the Board of Managers.  On January 10, 2020, Weisz, JRF Group, and the Curaleaf entities entered into a Stipulation of Settlement pursuant to which all claims of Weisz and JRF Group against the Company and its affiliates were release without compensation and the Company purchased JRF Group’s interest in PalliaTech Florida for consideration of 1,772,062 Subordinate Voting Shares and $2.5 million in cash. During February 2020, SRC, PalliaTech Florida, PalliaTech Florida, Inc., and Lusardi participated in a final arbitration hearing. In June 2020, the arbitrator issued a final order regarding SRC’s claims in the dispute. While no damages were awarded, the Company was ordered to buyout SRC’s interest in PalliaTech Florida. Based on the order, the parties agreed that Curaleaf would acquire SRC’s interest in PalliaTech Florida for no cash and 2,375,000 Subordinate Voting Shares. In addition, in connection with this transaction, the Company agreed to pay SRC $1.75 million in cash to retire principal and interest on the half of the Secured Promissory Note — 2029 held by SRC. The acquisition and retirement of the note were completed on August 17, 2020. See “General Development of the Business — Recent Developments — PalliaTech Florida”.

 

Securities Class Action

 

On August 5, 2019, a purported class action was filed against Curaleaf, Joseph Lusardi, Neil Davidson, and Jonathan Faucher in the United States District Court for the Eastern District of New York on behalf of persons or entities who purchased or otherwise acquired publicly traded securities of the Company from November 21, 2018 to July 22, 2019. On January 6, 2020, an Amended Class Action Complaint was filed against the defendants. The Amended Class Action Complaint alleges that the defendants made materially false and/or misleading statements regarding Curaleaf’s CBD products based on a July 22, 2019 letter received from the U.S. Food and Drug Administration (“FDA Letter”). According to the Amended Class Action Complaint, the FDA Letter states that several of the CBD products sold on Curaleaf’s website were “misbranded drugs” in violation of the Federal Food, Drug, and Cosmetic Act. The Amended Class Action Complaint asserts claims (1) against all Defendants for alleged violations of Section 10(b) of the Exchange Act and (2) against Lusardi, Davidson, and Faucher for alleged violations of Section 20(a) of the Exchange Act. On March 6, 2020, the Defendants filed a motion to dismiss arguing that the Amended  Class

 

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Action Complaint failed to allege (1) any false or misleading statement or omission, (2) scienter, (3) any domestic transactions, or (4) control person liability.

 

Massachusetts Cannabis Control Commission

 

On August 8, 2019, the CCC issued an order and stipulation of agreement whereby the CCC and Curaleaf MA agreed that Curaleaf MA had violated the CCC regulations by closing the Business Combination before seeking approval from the CCC by way of an Application for Change of Ownership and Control. As resolution of any further administrative enforcement action from Curaleaf MA’s violation, Curaleaf MA agreed to make a monetary fine in the amount of $250,000 no later than thirty days after the Application for Change of Ownership and Control is approved by the CCC. In its order, the CCC acknowledged, amongst other things, that (i) Curaleaf MA’s violation was the result of Curaleaf MA’s good-faith but mistaken interpretation of the CCC’s regulations; (ii) Curaleaf MA had fully cooperated with the CCC’s investigation; (iii) as a result of the application, Curaleaf MA was able to comply with its disclosure and background check obligations under the regulations; (iv) all of the individuals and entities disclosed in the application had satisfied their background checks; (v) Curaleaf MA’s deficiencies did not put public health or safety at risk; (vi) as a provisional licensee, at no time was Curaleaf MA operating adult-use facilities without having disclosed its ownership structure; (vii) Curaleaf MA and Curaleaf, Inc. had demonstrated a commitment to compliance through their cooperation with the CCC and their dedication of significant resources to hiring compliance personnel; (viii) Curaleaf MA had taken all possible corrective actions to remedy its violations; and (ix) Curaleaf MA’s submission of the Application for a Change of Ownership and Control Request shall be deemed an acceptable plan of correction.

 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

 

Other than as described elsewhere in this Annual Information Form, there are no material interests, direct or indirect, of any anticipated or current director or executive officer of the Company, any shareholder that beneficially owns, or controls or directs (directly or indirectly) more than 10% of any class or series of the Company’s outstanding voting securities, or any associate or affiliate of any of the foregoing persons, in any transaction within the three years before the date hereof that has materially affected or is reasonably expected to materially affect the Company or a subsidiary of the Company.

 

Companies affiliated with Mr. Boris Jordan, a principal shareholder and Executive Chairman of the Company, have provided consulting services to Curaleaf, Inc. related to financial analysis, business planning, recruiting, logistical support and other matters. Consulting fees and expense reimbursement paid by Curaleaf, Inc. for such services were, $422,222, $3,152,303, and $1,135,329 in Fiscal 2017, Fiscal 2018 and Fiscal 2019 respectively.

 

In February 2020, the Company closed the acquisition of Cura Partners, a corporation in which Mr. Boris Jordan, a Principal Shareholder and Executive Chairman of the Company, held an indirect interest. Further, in July 2020, the Company acquired Verdure, an entity in which the Company’s CEO, Joseph Lusardi held a 50% ownership interest. Also, in August 2018, Curaleaf acquired the remaining interest of Curaleaf MA from PT Holdings, LLC, a company of which the Company's CEO, Joseph Lusardi, is a member. See the “General Developments of the Business – Recent Developments” and “General Developments of the Business – Three Year History – 2018” sections of this Annual Information Form.

 

INDEPENDENT AUDITOR, TRANSFER AGENT AND REGISTRAR

 

The auditor of the Company is Antares Professional Corporation, Chartered Professional Accountant (“PKF Antares”), and the transfer agent and registrar for the Subordinate Voting Shares is Odyssey Trust Company at its principal offices in Calgary, Alberta and Vancouver, British Columbia.

 

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PROMOTER

 

No person or company has been within two years immediately preceding the date of this Annual Information Form, a promoter of the Company.

 

MATERIAL CONTRACTS

 

The following are the only material contracts, other than those contracts entered into in the ordinary course of business, which the Company or one of its subsidiaries has entered into within the last financial year or before the last financial year, but which are still in effect and which is required to be filed with Canadian securities regulatory authorities in accordance with Section 12.2 of National Instrument 51-102 — Continuous Disclosure Obligations:

 

·                  the Cura Merger Agreement (described under “General Development of the Business — Recent Developments — Cura Partners, Inc., an Oregon corporation”);

 

·                  the Grassroots Merger Agreement (described under “General Development of the Business — Recent Developments — GR Companies, Inc., a Delaware corporation”); and

 

·                  the Financing Agreement, as amended pursuant to the Financing Agreement Amendment (described under “General Development of the Business — Three Year History — 2019 — Senior Secured Term Loan Facility”).

 

Copies of the above material contracts are available on the Company’s SEDAR profile at www.sedar.com.

 

INTEREST OF EXPERTS

 

No person or company who is named as having prepared or certified a report, valuation, statement or opinion described or included in, or referred to in, a filing made under National Instrument 51-102 — Continuous Disclosure Obligations by the Company during, or relating to, our most recently completed financial year, or whose profession or business gives authority to such report, valuation, statement or opinion, holds any registered or beneficial interest, direct or indirect, in any of our securities or other property of our Company or one of our associates or affiliates and no such person or company, or a director, officer or employee of such person or company, is expected to be elected, appointed or employed as one of our directors, officers or employees or as a director, officer or employee of any of our associates or affiliates and no such person is one of our promoters or the promoter of one of our associates or affiliates.

 

PFK Antares has performed the audit in respect of the audited annual consolidated financial statements of the Company for the year ended December 31, 2019 and issued independent auditor’s reports thereon.

 

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PFK Antares has also confirmed that it is independent with respect to the Company in accordance with the ethical requirements that are relevant to its audits of the Company’s consolidated financial statements in Canada.

 

AUDIT COMMITTEE

 

The Audit Committee assists the Board of Directors in fulfilling its responsibilities for oversight of financial and accounting matters. The Audit Committee is responsible for monitoring the Company’s systems and procedures for financial reporting and internal control, reviewing certain public disclosure documents, including the Company’s annual audited consolidated financial statements and unaudited interim consolidated financial statements, and monitoring the performance and independence of the Company’s external auditors. The Audit Committee is responsible for reviewing with management the Company’s risk management policies, the timeliness and accuracy of the Company’s regulatory filings and all related party transactions as well as the development of policies and procedures related to such transactions.

 

The Audit Committee also pre-approves all non-audit services to be provided to the Company or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities.

 

The Audit Committee of the Company is comprised of the following three directors. Also indicated is whether they are “independent” and “financially literate” within the meaning of NI 52-110.

 

Name of Member

 

Independent(1)

 

Financially Literate(2)

Boris Jordan

 

No

 

Yes

Peter Derby

 

Yes

 

Yes

Karl Johansson(3)

 

Yes

 

Yes

 

Notes:

 

(1).      A member of the Audit Committee is independent if he or she has no direct or indirect “material relationship” with the Company. A material relationship is a relationship which could, in the view of the Board of Directors, reasonably interfere with the exercise of a member’s independent judgment. An executive officer of the Company, such as the President or Secretary, is deemed to have a material relationship with the Company.

 

(2).      A member of the Audit Committee is financially literate if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements.

 

(3).      Chair of the Audit Committee.

 

The Audit Committee operates under a written charter, which is attached hereto as Appendix A and which sets forth the purpose, composition, authority and responsibility of the Audit Committee. Further, the Audit Committee adopted a whistleblower policy to handle complaints, reports and concerns by any individual regarding actual or potential violations of any applicable law and other suspected wrongdoing, including questionable accounting practices and conduct prohibited under the Company's policies.

 

Independent Auditors Fees

 

In Fiscal 2019 and Fiscal 2018, the Company was billed the following fees by its external auditors:

 

($’000)

 

Fiscal 2019

 

Fiscal 2018

 

Audit Fees(1)

 

534

 

539

 

Audit-Related Fees(2)

 

216

 

95

 

Tax Fees(3)

 

—

 

—

 

All Other Fees(4)

 

6

 

—

 

Total Fees Paid

 

756

 

634

 

 

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Notes:

 

(1)                                 Fees necessary to perform the annual audit or quarterly review of our consolidated financial statements.

 

(2)                                 Fees for assurance and related services that are reasonably related to the performance of the audit and review of our financial statements other than those included in “Audit Fees”.

 

(3)                                 Fees for tax compliance, tax advice and tax planning, for example in the context of internal reorganizations or acquisitions.

 

(4)                                 All other fees not included above.

 

ADDITIONAL INFORMATION

 

Additional information relating to the Company may be found on SEDAR at www.sedar.com under the Company’s profile.

 

Additional information, including, without limitation, directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under equity compensation plans, is contained in the Company’s information circular for its annual meeting of shareholders.

 

Additional information is provided in the audited consolidated financial statements and management’s discussion and analysis of the Company for Fiscal 2019.

 

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GLOSSARY OF TERMS

 

“Acres” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Amalgamation” has the meaning ascribed thereto under “Corporate Structure — Incorporation and Office”.

 

“Amended Complaint” has the meaning ascribed thereto under “Legal Proceedings and Regulatory Actions — Florida”.

 

“Annual Information Form” has the meaning ascribed thereto under “Explanatory Notes — Introductory Information”.

 

“AR DOH” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Arkansas Operations”.

 

“Arizona Convertible Note” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Arrow Companies” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“ATC” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“ATC Permits” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“ATG” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“ATG Acquisition” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Audit Committee” means the audit committee of Company.

 

“AUDO” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Illinois Operations”.

 

“Bank Secrecy Act” means the United States Currency and Foreign Transactions Reporting Act of 1970.

 

“Base Price” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“BCBCA” means the Business Corporations Act (British Columbia), as amended.

 

“Blackjack” means Naturex II, LLC, doing business as Blackjack Collective.

 

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“Blue Kudu” has the meaing ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Board of Directors” means the board of directors of the Company.

 

“Business Combination” has the meaning ascribed thereto under “Corporate Structure — Incorporation and Office”.

 

“CBD” means cannabidiol.

 

“CBP” has the meaning ascribed thereto under “Business of the Company — Compliance and Monitoring”.

 

“CCC” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“CDS” means CDS Clearing and Depository Services Inc.

 

“Cetus” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Cetus Senior Debt” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Claimants” has the meaning ascribed thereto under “Legal Proceedings and Regulatory Actions — Florida”.

 

“CLF AZ” means CLF AZ, Inc., a subsidiary of the Company, formerly named PalliaTech AZ, Inc.

 

“CLNJ APA” has the meaning ascribed thereto under “General Development of the Business – Recent Developments”.

 

“CMCA” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Florida “Operations”.

 

“Code” means the United States Internal Revenue Code of 1986, as amended.

 

“Cole Memorandum” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally”.

 

“Company” has the meaning ascribed thereto under “Explanatory Notes — Introductory Information”.

 

“Compensation Committee” means the compensation committee of the Company.

 

“Complaint” has the meaning ascribed thereto under “Legal Proceedings and Regulatory Actions — Florida”.

 

“COVID-19” means the novel coronavirus, identified in December 2019 in Wuhan, China.

 

“CSA” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally”.

 

“CSE” means the Canadian Securities Exchange.

 

“CTDCP” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Connecticut Operations”.

 

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“Cura Merger Agreement” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Cura Partners” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Cura Transaction” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Curaleaf” has the meaning ascribed thereto under “Explanatory Notes — Introductory Information”.

 

“Curaleaf FinCo” has the meaning ascribed thereto under “Corporate Structure — Incorporation and Office”.

 

“Curaleaf FinCo Shares” has the meaning ascribed thereto under “Corporate Structure — Incorporation and Office”.

 

“Curaleaf Florida” means Curaleaf Florida, LLC.

 

“Curaleaf, Inc.” means Curaleaf, Inc., a corporation existing under the laws of the State of Delaware (formerly, PalliaTech, Inc.), and following the Business Combination, a subsidiary of the Company.

 

“Curaleaf MA” means Curaleaf Massachusetts, Inc., a subsidiary of the Company.

 

“Curaleaf NJ” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“DEA” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally”.

 

“DO” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Illinois Operations”.

 

“DOJ” has the meaning ascribed thereto under “ Business of the Company — Compliance and Monitoring”.

 

“DRH” means Doubling Road Holdings, LLC, a subsidiary of the Company.

 

“DRH Minority Members” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“DRH Minority Membership Units” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“DTC” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“EAAUDO” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Illinois Operations”.

 

“Earn-Out Payment” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Earn-Out Shares” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

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“Emerald” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Eureka” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Exchange Act” means the United States Securities Exchange Act of 1934, as amended from time to time.

 

“FDA” has the meaning ascribed thereto under “Business of the Company — About Curaleaf”.

 

“FDA Letter” has the meaning ascribed thereto under “Risk Factors — General Regulatory and Legal Risks — Litigation”.

 

“FDCA” has the meaning ascribed thereto under “Risk Factors — General Regulatory and Legal Risks — Regulatory Action and Approvals from the Food and Drug Administration”.

 

“Financing Agreement” has the meaning ascribed thereto under “General Development of the Business — Three Year History — 2019 — Senior Secured Term Loan Facility”.

 

“Financing Agreement Amendment” has the meaning ascribed thereto under “General Development of the Business — Three Year History — 2019 — Senior Secured Term Loan Facility”.

 

“FinCEN” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally”.

 

“FinCEN Guidance” has the meaning ascribed thereto under under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally”.

 

“Fiscal 2017” refers to the fiscal year ended December 31, 2017.

 

“Fiscal 2018” refers to the fiscal year ended December 31, 2018.

 

“Fiscal 2019” refers to the fiscal year ended December 31, 2019.

 

“forward-looking statements” has the meaning ascribed thereto under “Explanatory Notes — Forward-Looking Statements”.

 

“Glendale Greenhouse” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Government” means (a) the government of Canada, the United States or any other foreign country; (b) the government of any Province, State, county, municipality, city, town, or district of Canada, the United States or any other foreign country; and (c) any ministry, agency, department, authority, commission, administration, corporation, bank, court, magistrate, tribunal, arbitrator, instrumentality, or political subdivision of, or within the geographical jurisdiction of, any government described in the foregoing clauses (a) and (b), and for greater certainty, includes the CSE.

 

“Grassroots” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Grassroots Merger Agreement” has the meaing ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Grassroots Transaction” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“GX3” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

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“HMS” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“HMS Assets” has the meaning ascribed thereto under “ United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Maryland Operations”.

 

“HMS/MI Businesses” means the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Holders” has the meaning ascribed thereto under “Legal Proceedings and Regulatory Actions — Connecticut”.

 

“IDFPR” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Illinois Operations”.

 

“IDOA” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Illinois Operations”.

 

“IDPH” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Illinois Operations”.

 

“IFRS” means the International Financial Reporting Standards in effect as of and for the year ended December 31, 2018.

 

“Illinois Act” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Illinois Operations”.

 

“IRS” means the United States Internal Revenue Service.

 

“Jake Honig Act” has the meaning ascribed thereto under “General Development of the Business – Recent Developments”.

 

“LVI” has the meaning ascribed thereto under “Corporate Structure — Incorporation and Office”.

 

“Merger” means the merger between Curaleaf, Inc. and LVI USCo, effected in accordance with the Business Combination pursuant to the applicable laws in the State of Delaware.

 

“MEOT” has the meaning ascribed thereto under “General Development of the Business – Recent Developments”.

 

“MEOT MSA” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“MHC” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“MMTC” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Florida Operations”.

 

“MO DHSS” has the meaning ascribed thereto under “United States Regulatory Overview – Regulation of Cannabis in the United States Federally – Missouri Operations”.

 

“MOU” has the meaning ascribed thereto under “Risk Factors — General Regulatory and Legal Risks — Heightened Scrutiny by Regulatory Authorities”.

 

“MTR” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“MTR Acquisition” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

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“Multiple Voting Shares” has the meaning ascribed thereto under “Corporate Structure — Incorporation and Office”.

 

“NCIB” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“ND DOH” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — North Dakota Operations”.

 

“Nevada Acquisition” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“NI 52-110” means National Instrument 52-110 — Audit Committees.

 

“NJ Board” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“NJCUMMA” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — New Jersey Operations”.

 

“NJDOH” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — New Jersey Operations”.

 

“NJ MSA” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“NJ Note” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“NYSDOH” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — New York Operations”.

 

“Offering” has the meaning ascribed thereto under “General Development of the Business — Recent Developments — Private Placement of Subordinate Voting Shares”.

 

“OGT” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Options” has the meaning ascribed thereto under “Description of the Capital Structure — Options”.

 

“OTCQX” means the OTCQX® Best Market, an over-the-counter stock exchange, by OTC Markets Group.

 

“PADOH” has the meaning ascribed thereto under the “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Pennsylvania Operations”.

 

“PalliaTech CT” means PalliaTech CT, LLC, a subsidiary of the Company.

 

“PalliaTech Florida” means PalliaTech Florida, LLC, a subsidiary of the Company.

 

“person” means any corporation, partnership, limited liability company or partnership, joint venture, trust, unincorporated association or organization, business, enterprise or other entity; any individual; and any Government.

 

“PFK Antares” has the meaning ascribed thereto under “Independent Auditor, Transfer Agent and Registrar”.

 

“Phytotherapeutics” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Plan” has the meaning ascribed thereto under “Description of the Capital Structure – Stock and Incentive Plan”.

 

“Principal” means Boris Jordan.

 

“Private Placement” has the meaning ascribed thereto under “Business of the Company — Reverse Takeover Transaction and Private Placement”.

 

“PT Nevada” means PT Nevada, Inc., a subsidiary of the Company.

 

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“Put Right” has the meaning ascribed thereto under “Legal Proceedings and Regulatory Actions - Connecticut”.

 

“Remaining Florida Minority Holders” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Remedy” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Remedy Operating Agreement” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“RO” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — New York Operations”.

 

“Rohrabacher-Farr Amendment” has the meaning ascribed thereto under “Risk Factors — Risks Relating to Legality of Cannabis — Cannabis Continues to be a Controlled Substance under the CSA”.

 

“RSUs” has the meaning ascribed thereto under “Description of the Capital Structure – Stock and Incentive Plan”.

 

“SAFE Banking Act” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally”.

 

“SEC” means the United States Securities and Exchange Commission.

 

“Securities Act” means the United States Securities Act of 1933, as amended from time to time.

 

“Select” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”.

 

“Sessions Memo” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally”.

 

“Shareholders” means the shareholders of Curaleaf Holdings, Inc.

 

“SRC” has the meaning ascribed thereto under “Legal Proceedings and Regulatory Actions — Florida”.

 

“Staff Notice 51-352” has the meaning ascribed thereto under “United States Regulatory Overview”.

 

“State” means a State of the United States, as the context requires.

 

“Subordinate Voting Shares” has the meaning ascribed thereto under “Corporate Structure — Incorporation and Office”.

 

“subsidiary” means with respect to a specified corporation, any corporation of which more than fifty per cent (50%) of the outstanding shares ordinarily entitled to elect a majority of the board of directors thereof (whether or not shares of any other class or classes shall or might be entitled to vote upon the happening of any event or contingency) are at the time owned directly or indirectly by such specified corporation, and shall include any corporation in like relation to a subsidiary.

 

“Swell” has the meaning ascribed thereto under “General Development of the Business — Three Year History”.

 

“Term Loan Facility” has the meaning ascribed thereto under “General Development of the Business — Three Year History — 2019 — Senior Secured Term Loan Facility”.

 

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“THC” means Tetrahydrocannabinol.

 

“Transaction Agreement” means the transaction agreement dated July 25, 2018 among LVI and Curaleaf, Inc.

 

“UDAF” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally - Utah Operations”.

 

“United States” or “U.S.” means the United States of America, its territories and possessions, any State of the United States and the District of Columbia.

 

“USPTO” has the meaning ascribed thereto under “Business of the Company — Intellectual Property”.

 

“Verdure” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”

 

“Verdure MSA” has the meaning ascribed thereto under “General Development of the Business — Recent Developments”

 

“VSLV” means VSLV Management, LLC.

 

“VT DPS” has the meaning ascribed thereto under “United States Regulatory Overview — Regulation of Cannabis in the United States Federally — Vermont Operations”.

 

“Weisz” has the meaning ascribed thereto under “Legal Proceedings and Regulatory Actions - Florida”.

 

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APPENDIX A
MANDATE OF THE AUDIT COMMITTEE OF CURALEAF HOLDINGS, INC.

 

 

CURALEAF HOLDINGS, INC.

 

AUDIT COMMITTEE CHARTER

 

1.              PURPOSE

 

The Audit Committee (the “Committee”) shall be established by resolution of the Board of Directors (the “Board”) of Curaleaf Holdings, Inc., a corporation existing under the laws of British Columbia (the “Company”).

 

The Committee is responsible for:

 

a)             Assisting the Board in fulfilling its oversight responsibilities as they relate to the Company’s accounting policies and internal controls, financial reporting practices and legal and regulatory compliance, including, among other things:

 

·                  Monitoring the integrity of the Company’s financial statements, corporate accounting and financial reporting processes and financial information that will be provided to shareholders and others;

 

·                  Reviewing the Company’s compliance with certain legal and regulatory requirements;

 

·                  Evaluating the independent auditors’ qualifications and independence; and

 

·                  Monitoring the performance of the Company’s internal audit function and the Company’s independent auditors as well as any other public accounting firm engaged to perform other audit, review or attest services.

 

b)             Providing an open avenue of communication among the independent auditors, financial and senior management and the Board.

 

c)              Annually evaluating the performance of the Committee.

 

While the Committee has the duties and responsibilities set forth in this Charter, the role of the Committee is oversight. The Committee is not responsible for planning or conducting the audit or determining whether the Company’s financial statements are complete and accurate and in accordance with applicable accounting rules. Such activities are the responsibility of the Company’s independent auditors and management. The Committee has direct responsibility for the appointment, compensation, oversight and replacement, if necessary, of the independent auditors, including the resolution of disagreements between

 

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management and the independent auditors regarding financial reporting, and any other registered public accounting firm with respect to which the Committee is required to have such responsibility.

 

The Committee and each of its members shall be entitled to rely on:

 

a)             The integrity of those persons and organizations within and outside of the Company from which it receives information;

 

b)             The accuracy of the financial and other information provided to the Committee by such persons or organizations absent actual knowledge to the contrary (which shall be promptly reported to the Board); and

 

c)              Representations made by management as to any audit and non-audit services provided by the independent auditors to the Company.

 

2.              COMPOSITION AND QUALIFICATIONS

 

The Committee shall be appointed by the Board and shall be comprised of at least three Directors (as determined from time to time by the Board), one of whom shall be appointed by the Board as Chairman of the Committee. If a Chairman is not so appointed, the members of the Committee may elect a Chairman by majority vote. Committee members may be removed by the Board in its discretion.

 

Unless otherwise permitted by applicable phase-in rules and exemptions, each member of the Committee shall meet the ‘independence’ requirements of National Instrument 52-110 Audit Committees of the Canadian Securities Administrators (“NI 52-110”) and all other applicable laws and regulations. The Committee may avail itself of any phase-in compliance periods available to the Company that are afforded by applicable rules of the Canadian Securities Exchange, and all other applicable laws and regulations. The Committee may also avail itself of exemptions available to U.S. listed issuers under NI 52-110.

 

All members of the Committee must (except to the extent permitted by NI 52-110) be “financially literate” (as defined by NI 52-110).

 

A Committee member invited to sit on another public company’s audit committee must notify the Board. If a Committee member or proposed Committee member simultaneously serves on the audit committees of two other public companies, the Board must determine whether or not such simultaneous service would impair the ability of such member to effectively serve on the Committee.

 

No member of the Committee shall receive from the Company or any of its affiliates any compensation other than the fees to which he or she is entitled as a Director of the Company or a member of a committee of the Board. Such fees may be paid in cash and/or shares, options or other in-kind consideration ordinarily available to Directors.

 

3.              MEETINGS

 

The Committee shall meet as frequently as the Chairman of the Committee deems appropriate subject to the provisions of this Charter. The Committee may meet with the independent auditors, internal auditors, and management separately, to the extent the Committee deems necessary and appropriate.

 

A.            Frequency

 

The Committee shall hold regularly scheduled meetings at least quarterly and such special meetings as circumstances dictate. The Chair of the Committee, any member of the Committee, the independent auditors, the Chairman of the Board, the Chief Executive Officer (“CEO”) or the Chief Financial Officer (“CFO”) may call a meeting of the Committee by notifying the Company’s Corporate secretary, who will notify the members of the Committee.

 

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B.            Agenda and Notice

 

The Chairman of the Committee shall establish the meeting dates and the meeting agenda. The Chairman of the Committee or the Company Secretary shall send proper notice of each Committee meeting and information concerning the business to be conducted at the meeting, to the extent practical, to each member prior to each meeting.

 

Any written material provided to the Committee shall be appropriately balanced (i.e. relevant and concise) and shall be distributed in advance of the respective meeting with sufficient time to allow Committee members to review and understand the information.

 

C.            Holding and Recording Meetings

 

Committee meetings may be held in person or telephonically. The Committee shall keep written minutes of its meetings and submit such minutes to the Board.

 

D.            Quorum

 

A majority of the members of the Committee shall constitute a quorum.

 

E.            Executive Sessions

 

The Committee will meet periodically (not less than annually) in separate executive sessions with each of the Chief Financial Officer or any other executive officer, the principal accounting officer and/or the senior internal auditing executive (or any other personnel responsible for the internal audit function), and the independent auditors.

 

4.              COMPENSATION

 

The compensation of Committee members shall be determined by the Board.

 

5.              RESPONSIBILITIES OF THE COMMITTEE

 

A.            System of Financial Controls

 

The Committee shall oversee the process by which management shall design, implement, amend, maintain, and enforce a comprehensive system of financial controls (including the right internal and external people and resources, policies, processes and enforcement) aimed at ensuring the integrity and compliance of the Company’s books and records with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, and sound business practices, as well as protecting the value of the Company’s assets and safeguarding the credibility of its brand, employees, management team, Board, and shareholders.

 

The system of financial controls will embody the adoption of best practices in financial controls and foster honesty, integrity, accuracy, and transparency in all aspects of the Company. Best practices include but are not limited to: setting the right tone at the top; active review of business performance by executive management, with regular reporting to and oversight by the Board; an accurate, stable and reliable general ledger; a robust internal audit function; unambiguous compliance with IFRS; and full transparency and ongoing dialogue with the Board, management and external auditors. Such system shall also incorporate the principles contained within the Code of Business Conduct and Ethics for the Chief Executive Officer and Chief Financial Officer as adopted by the Board.

 

B.            Annual Audit Review

 

The Committee shall review and discuss the annual audited financial statements including the independent auditors’ audit and audit report thereon, and the annual Management’s Discussion and Analysis of Financial

 

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Condition and Results of Operations of the Company with management and the independent auditors. In connection with such review, the Committee will:

 

·                  Review the scope of the audit, the audit plan and the audit procedures utilized.

 

·                  Review with the independent auditors any audit problems or difficulties encountered during their audit, including any change in the scope of the planned audit, any restrictions placed on the scope of the audit or access to requested information, and any significant disagreements with management, and management’s response to such problems or difficulties.

 

·                  Resolve any differences in financial reporting between management and the independent auditors.

 

·                  Review with management, internal auditors, and the independent auditors, the adequacy of the Company’s internal controls, including information systems controls and security and bookkeeping controls and any significant findings and recommendations with respect to such controls.

 

·                  Review reports required to be submitted by the independent auditors concerning:

 

·                  All critical accounting policies and practices used in the preparation of the Company’s financial statements.

 

·                  All alternative treatments of financial information within IFRS that have been discussed with management, ramifications of such alternatives, and the accounting treatment preferred by the independent auditors.

 

·                  Any other material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.

 

·                  Review and discuss the integrity of the annual audited Company financial statements and quarterly financial statements with management and the independent auditors, including the notes thereto and all matters required by applicable auditing standards, and the written disclosures required by applicable auditing standards regarding the independent auditors’ independence.

 

·                  Review and discuss:

 

·                  Major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies.

 

·                  Analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analysis of the effects of alternative IFRS methods on the financial statements and the effects of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company.

 

·                  Inquire about and review with management and the independent auditors any significant risks or exposures faced by the Company and discuss with management the steps taken to minimize such risk or exposure. Such risks and exposures include, but are not limited to, threatened and pending litigation, claims against the Company, tax matters, regulatory compliance and correspondence from regulatory authorities, and environmental exposure.

 

·                  Discuss policies and procedures concerning earnings press releases and review the type and presentation of information to be included in earnings press releases (paying particular attention to any use of “pro forma” and “adjusted” or other non-IFRS information), as well as financial information and earnings guidance provided to analysts and rating agencies.

 

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C.            Quarterly Reviews

 

Review and discuss the quarterly financial statements and the quarterly Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company with management and the internal auditors, and the independent auditors, together with the independent auditors’ review thereof pursuant to professional standards and procedures for conducting such reviews, as established by IFRS and applicable securities laws. In connection with the quarterly reviews, the Committee shall inquire about and review with management and the independent auditors any significant risks or exposures faced by the Company and discuss with management the steps taken to minimize such risk or exposure.

 

D.            Other Financial Information

 

Review and discuss with management, where appropriate, financial information contained in any prospectuses, annual information forms, annual reports to shareholders, management proxy circulars, material change disclosure of a financial nature and similar disclosure and other documents prior to the filing or public disclosure of such documents or information.

 

E.            Oversight of Independent Auditors

 

The Company’s independent auditors shall report directly to and are ultimately accountable to the Committee. In connection with its oversight of the performance and independence of the independent auditors, the Committee will:

 

·                  Have the sole authority and direct responsibility to appoint, retain, compensate, oversee and replace (subject to shareholder approval, if deemed advisable by the Board or if required under applicable law) the independent auditors.

 

·                  Have authority to approve the engagement letter and all audit, audit-related, tax and other permissible non-audit services proposed to be performed by the independent auditors and the related fees for such services in accordance with the Audit and Non-Audit Services Pre-Approval Policy.

 

·                  Obtain confirmation and assurance as to the independent auditors’ independence, including ensuring that they submit on a periodic basis (not less than annually) to the Committee a formal written statement delineating all relationships between the independent auditors and the Company. The Committee shall actively engage in a dialogue with the independent auditors with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditors and shall take appropriate action in response to the independent auditors’ report to satisfy itself of their independence.

 

·                  At least annually, obtain and review a report by the independent auditors describing the firm’s internal quality-control procedures, any material issues raised by the most recent internal quality-control review or peer review of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues.

 

·                  Meet with the independent auditors prior to the annual audit to discuss planning and staffing of the audit.

 

·                  Review and evaluate the performance of the independent auditors, as the basis for a decision to reappoint or replace the independent auditors.

 

·                  Set clear hiring policies for employees or former employees of the independent auditors, including but not limited to, as required by all applicable laws and listing rules.

 

·                  Consider whether rotation of the independent auditors is required to ensure independence.

 

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F.             Oversight of Internal Audit

 

In connection with its oversight responsibilities, the Committee shall have authority over and direct responsibility for the internal audit function at the Company at all times. In the Committee’s discretion, the internal audit function may be outsourced to a third-party vendor, provided that such vendor follows the standards and guidelines established by the Committee. The head of the internal audit function (or the third-party vendor providing internal audit function support, if applicable) will report directly to the Committee or its designee. The head of the internal audit function or the relationship manager of the vendor providing internal audit function support, as applicable, shall report at least annually to the Committee regarding the internal audit function’s organizational structure and personnel.

 

In overseeing internal audit, the Committee will:

 

·                  Review the appointment or replacement of the senior internal auditing executive, if any, or, if outsourced, the third-party vendor providing internal audit services.

 

·                  Review, in consultation with management, the independent auditors and the senior internal auditing executive, if any, the plan and scope of internal audit activities.

 

·                  Review internal audit activities, budget and staffing.

 

·                  Review significant reports to management prepared by the internal auditing department and management’s responses to such reports.

 

G.           Disclosure Controls & Procedures (“DC&P”) and Internal Controls over Financial Reporting (“ICFR”)

 

·                  Monitor and review the Company’s Disclosure Policy and the Mandate of its Disclosure and Policy Compliance Committee, on an annual basis.

 

·                  Receive and review the quarterly report of the Disclosure and Policy Compliance Committee on its activities for the quarter.

 

·                  On a quarterly basis, review management’s assessment of the design effectiveness of the Company’s DC&P and ICFR including any significant control deficiencies identified and the related remediation plans.

 

·                  Review management’s assessment of the operating effectiveness of the Company’s DC&P (quarterly) and ICFR (annually) including any significant control deficiencies identified and the related remediation plans.

 

·                  Review and discuss any fraud or alleged fraud involving management or other employees who have a role in Company’s ICFR and the related corrective and disciplinary actions to be taken.

 

·                  Discuss with management any significant changes in the ICFR that are disclosed, or considered for disclosure on a quarterly basis.

 

·                  Review and discuss with the CEO and the CFO the procedures undertaken in connection with the CEO and CFO certifications for the annual and interim filings with the securities commissions.

 

H.           Risk Assessment and Risk Management

 

The Committee shall discuss the Company’s major business, operational, and financial risk exposures and the guidelines, policies and practices regarding risk assessment and risk management, including derivative policies, insurance programs and steps management has taken to monitor and control major business, operational and financial risks.

 

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I.                Ethical Standards

 

The Committee shall establish, maintain and oversee the Company’s Code of Business Conduct and Ethics (the “Code”), including dealing with issues that may arise under the Code related to executive officers and Directors of the Company. The Committee shall be responsible for reviewing and evaluating the Code periodically and will recommend any necessary or appropriate changes thereto to the Board for consideration. The Committee shall also assist the Board with the monitoring of compliance with the Code and consider any waivers of the Code (other than waivers applicable to the Directors or executive officers, which shall be subject to review by the Board as a whole).

 

J.              Related Party Transactions

 

The Committee shall review and approve related-party transactions or recommend related-party transactions for review by independent members of the Board.

 

K.           Submission of Complaints

 

The Committee shall establish procedures for (a) receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, (b) the confidential, anonymous submission by Directors, officers, employees, consultants and contractors of the Company of concerns regarding questionable accounting or auditing matters and (c) the investigation of such matters with appropriate follow-up actions.

 

L.            Legal Compliance

 

On at least an annual basis, the Committee shall review with the Company’s legal counsel and management, all legal and regulatory matters and litigation, claims or contingencies, including tax assessments, license or concession defaults or notifications, health and safety violations or environmental issues, that could have a material effect upon the financial position of the Company, and the manner in which these matters may be, or have been, disclosed in the financial statements.

 

M.         Regulatory Developments

 

The Committee shall monitor and provide reports to the Board with respect to developments in accounting rules and practices, income tax laws and regulations, and other regulatory requirements that affect matters within the scope of the Committee’s authority and responsibilities.

 

N.            Other Responsibilities

 

The Committee shall perform such other duties as may be required by law or requested by the Board or deemed appropriate by the Committee. The Committee shall discharge its responsibilities, and shall assess the information provided to the Committee, in accordance with its business judgment. The Committee shall have the authority to conduct or authorize investigations into any matters within the scope of its responsibilities as it shall deem appropriate.

 

6.              COMMITTEE ADMINISTRATIVE MATTERS

 

A.            Independent Advisors

 

The Committee shall have authority to engage, provide appropriate funding for and cause the Company to pay the compensation to obtain advice and assistance from outside legal, accounting or other advisors to carry out its responsibilities.

 

B.            Funding

 

The Company shall provide appropriate funding, as determined by the Committee, for payment of compensation to the independent auditors or any other registered public accounting firm engaged for the

 

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purpose of rendering or issuing an audit report or performing other audit, review or attest services for the Company; to any other advisors engaged by the Committee; and for ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

 

C.            Access to Records and Personnel

 

The Committee shall have full access to any relevant records of the Company that it deems necessary to carry out its responsibilities. The Committee may request that any officer or other employee of the Company or any advisor to the Company meet with members of the Committee or its advisors, as it deems necessary to carry out its responsibilities.

 

D.            Reports to Board of Directors

 

The Committee shall report regularly to the Board with respect to Committee activities and its conclusions with respect to the independent auditors, with recommendations to the Board as the Committee deems appropriate.

 

E.            Annual Meeting Planner

 

Prior to the beginning of a fiscal year, the Committee shall submit an annual planner for the meetings to be held during the upcoming fiscal year, for review and approval by the Board to ensure compliance with the requirements of the Committee’s Charter.

 

F.             Education and Orientation

 

Members of the Committee shall be provided with appropriate and timely training to enhance their understanding of auditing, accounting, regulatory and industry issues applicable to the Company.

 

New Committee members shall be provided with an orientation program to educate them on the Company’s business, their responsibilities and the Company’s financial reporting and accounting practices.

 

G.           Review of this Charter

 

The Committee shall review and reassess annually the adequacy of this Committee Charter and recommend any proposed changes to the Board.

 

H.           Evaluation of Committee

 

The Committee is responsible for developing and conducting an annual self-assessment of its performance. The Committee shall report to the full Board on the results of its assessment each year and shall make any appropriate recommendations to further enhance the Committee’s performance.

 

A-8



Exhibit 4.2

 

 

CURALEAF HOLDINGS, INC.

 

Consolidated Financial Statements

As of and for the Years Ended

December 31, 2019 and 2018

 

(Expressed in United States Dollars Unless Otherwise Stated)

 

 

 

Page(s)

 

 

Independent Auditor’s Report

1

 

 

Consolidated Financial Statements

 

 

 

Consolidated Statements of Financial Position

3

 

 

Consolidated Statements of Profits and Losses

4

 

 

Consolidated Statements of Changes in Equity

5

 

 

Consolidated Statements of Cash Flows

6

 

 

Notes to Consolidated Financial Statements

7-46

 

 

 

Independent Auditor’s Report

 

To the Shareholders of Curaleaf Holdings, Inc.:

 

Opinion

 

We have audited the consolidated financial statements of Curaleaf Holdings, Inc. and its subsidiaries (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2019, and the consolidated statements of profits and losses, changes in equity and cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2019, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board.

 

Basis for Opinion

 

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Other Information

 

Management is responsible for the other information. The other information comprises Management’s Discussion and Analysis.

 

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

 

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits or otherwise appears to be materially misstated. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

 

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

 

Antares Professional Corporation, Chartered Professional Accountants (“PKF Antares”) is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms.

 

1

 

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

·      Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

·      Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

·      Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

·      Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

·      Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

·      Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audits.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

The engagement partner on the audit resulting in this independent auditor’s report is Erkin Atakhanov.

 

 

Calgary, Alberta

Chartered Professional Accountants

March 26, 2020

Licensed Public Accountants

 

Antares Professional Corporation, Chartered Professional Accountants

Suite 400, 906 12 Avenue SW, Calgary, Canada T2R 1K7

T: +1 403 375 9955, www.pkfantares.com

 

2

 

Curaleaf Holdings, Inc.

Consolidated Statements of Financial Position

(in thousands)

 

 

 

 

 

December 31,

 

 

 

Note

 

2019

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

42,310

 

$

266,616

 

Accounts receivable

 

 

 

18,335

 

9,402

 

Inventory, net

 

5

 

63,210

 

27,976

 

Biological assets

 

6

 

19,197

 

4,491

 

Prepaid expenses and other current assets

 

 

 

6,479

 

4,975

 

Total current assets

 

 

 

149,531

 

313,460

 

Deferred tax asset

 

14

 

2,628

 

2,556

 

Notes receivable

 

7

 

57,166

 

33,811

 

Property, plant and equipment, net

 

8

 

129,812

 

66,969

 

Right-of-use assets

 

17

 

82,794

 

—

 

Intangible assets, net

 

9

 

185,635

 

52,925

 

Goodwill

 

9

 

69,326

 

47,267

 

Investments

 

4

 

51,209

 

45,408

 

Other assets

 

 

 

8,825

 

7,440

 

Total assets

 

 

 

$

736,926

 

$

569,836

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

 

 

$

12,742

 

$

3,974

 

Accrued expenses

 

 

 

18,016

 

15,721

 

Income tax payable

 

14

 

15,114

 

2,730

 

Current portion of lease liability

 

2,17

 

11,835

 

—

 

Current portion of notes payable

 

4, 10, 18

 

17,000

 

2,403

 

Other current liabilities

 

19

 

31,549

 

—

 

Total current liabilities

 

 

 

106,256

 

24,828

 

Deferred tax liability

 

14

 

22,642

 

6,508

 

Notes payable

 

10

 

87,953

 

81,901

 

Lease liability

 

2,17

 

81,319

 

—

 

Non-controlling interest redemption liability

 

4

 

2,694

 

2,957

 

Contingent consideration liability

 

4, 18

 

32,616

 

18,000

 

Total liabilities

 

 

 

333,480

 

134,194

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Share capital

 

 

 

693,699

 

657,525

 

Treasury shares

 

 

 

(5,208

)

(4,325

)

Reserves

 

 

 

(146,819

)

(146,761

)

Accumulated deficit

 

 

 

(132,910

)

(65,666

)

Total Curaleaf Holdings, Inc. shareholders’ equity

 

11

 

408,762

 

440,773

 

Redeemable non-controlling interest

 

4

 

(2,694

)

(2,957

)

Non-controlling interest

 

4

 

(2,622

)

(2,174

)

Total shareholders’ equity

 

 

 

403,446

 

435,642

 

Total liabilities and shareholders’ equity

 

 

 

$

736,926

 

$

569,836

 

 

Approved and authorized for issue on behalf of the Shareholders on March 26, 2020:

 

“Joseph F Lusardi”

 

“Michael Carlotti”

 

“Neil Davidson”

Chief Executive Officer

 

Chief Financial Officer

 

Chief Operating Officer

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3

 

Curaleaf Holdings, Inc.

Consolidated Statements of Profits and Losses

(in thousands, except for share and per share amounts)

 

 

 

 

 

Year ended

 

 

 

 

 

December 31, 

 

 

 

Note

 

2019

 

2018

 

Revenues:

 

 

 

 

 

 

 

Retail and wholesale revenues

 

 

 

$

173,857

 

$

57,538

 

Management fee income

 

 

 

47,161

 

19,519

 

Total revenues

 

 

 

221,018

 

77,057

 

Cost of goods sold

 

 

 

102,386

 

31,172

 

Gross profit before impact of biological assets

 

 

 

118,632

 

45,885

 

Realized fair value amounts included in inventory sold

 

 

 

(74,757

)

(16,069

)

Unrealized fair value gain on growth of biological assets

 

6

 

97,738

 

16,471

 

Gross profit

 

 

 

141,613

 

46,287

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

13

 

121,022

 

65,312

 

Share-based compensation

 

12

 

16,607

 

2,229

 

Depreciation and amortization

 

8,9

 

31,701

 

7,427

 

Total operating expenses

 

 

 

169,330

 

74,968

 

Loss from operations

 

 

 

(27,717

)

(28,681

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

 

 

9,938

 

4,805

 

Interest expense

 

 

 

(18,396

)

(7,309

)

Interest expense related to lease liabilities

 

17

 

(6,357

)

—

 

Loss on change in fair value of convertible note

 

 

 

—

 

(25,100

)

Other income (expense)

 

 

 

(3,257

)

51

 

Total other expense

 

 

 

(18,072

)

(27,553

)

Loss before provision for income taxes

 

 

 

(45,789

)

(56,234

)

Income tax expense

 

14

 

(24,059

)

(5,643

)

Net loss and comprehensive loss

 

 

 

(69,848

)

(61,877

)

Less: Net loss attributable to non-controlling interest

 

 

 

(2,604

)

(5,410

)

Net loss attributable to Curaleaf Holdings, Inc.

 

 

 

$

(67,244

)

$

(56,467

)

Loss per share attributable to Curaleaf Holdings, Inc. — basic and diluted

 

15

 

$

(0.15

)

$

(0.14

)

Weighted average common shares outstanding — basic and diluted

 

15

 

462,911,053

 

396,498,411

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

 

Curaleaf Holdings, Inc.

Consolidated Statements of Changes in Equity

(in thousands, except for share amounts)

 

 

 

Share Capital
(Note 11)

 

Treasury

 

Share-based

 

Warrant

 

Other

 

 

 

 

 

Total
Curaleaf
Holdings,
Inc.

 

Redeemable
non -
controlling
interest

 

Non-controlling

 

Redeemable
non-
controlling

 

Total

 

 

 

# of Shares

 

 

 

shares

 

reserves

 

reserves

 

reserves

 

Total

 

Accumulated 

 

shareholders’

 

contingency

 

interest

 

interest

 

shareholders’

 

 

 

Common

 

SVS

 

MVS

 

Amount

 

amount

 

(Note 12)

 

(Note 11)

 

(Note 4)

 

reserves

 

deficit

 

equity

 

(Note 4 & 19)

 

(Note 4 & 19)

 

(Note 4 & 19)

 

equity

 

Balances as of December 31, 2017

 

350,945,408

 

—

 

—

 

$

109,855

 

$

(966

)

$

5,035

 

$

369

 

$

—

 

$

5,404

 

$

(8,899

)

$

105,394

 

$

(28,346

)

$

1,335

 

$

26,382

 

$

104,765

 

Warrants issued with financing agreement - 2021, net of issuance costs

 

—

 

—

 

—

 

—

 

—

 

—

 

7,251

 

—

 

7,251

 

—

 

7,251

 

—

 

—

 

—

 

7,251

 

Issuance of shares, net of issuance costs

 

37,641,130

 

—

 

—

 

28,500

 

—

 

—

 

—

 

—

 

—

 

—

 

28,500

 

—

 

—

 

—

 

28,500

 

Repurchase of shares

 

(4,151,486

)

—

 

—

 

—

 

(2,500

)

—

 

—

 

—

 

—

 

—

 

(2,500

)

—

 

—

 

—

 

(2,500

)

Exercise of warrants

 

6,557,235

 

—

 

—

 

7,945

 

—

 

—

 

(7,620

)

—

 

(7,620

)

—

 

325

 

—

 

—

 

—

 

325

 

Exercise of stock options

 

5,527,990

 

—

 

—

 

1,167

 

—

 

(563

)

 

 

—

 

(563

)

—

 

604

 

—

 

—

 

—

 

604

 

Conversion of loan

 

3,715,038

 

—

 

—

 

32,716

 

—

 

—

 

—

 

—

 

—

 

—

 

32,716

 

—

 

—

 

—

 

32,716

 

Conversion of shares

 

(400,235,315

)

278,064,610

 

122,170,705

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Issuance of shares for purchase of LVI

 

—

 

188,646

 

—

 

940

 

—

 

—

 

—

 

—

 

—

 

—

 

940

 

—

 

—

 

—

 

940

 

Issuance of shares in connection with private placement, net of issuance costs

 

—

 

45,422,167

 

—

 

374,132

 

—

 

—

 

—

 

—

 

—

 

—

 

374,132

 

—

 

—

 

—

 

374,132

 

Minority buyouts

 

—

 

11,447,916

 

—

 

100,497

 

—

 

—

 

—

 

(153,459

)

(153,459

)

(300

)

(53,262

)

—

 

(1,335

)

(23,146

)

(77,743

)

Issuance of shares in connection with acquisitions

 

—

 

341,737

 

—

 

1,767

 

—

 

—

 

—

 

—

 

—

 

—

 

1,767

 

—

 

—

 

—

 

1,767

 

Cancellation of redeemable non-controlling interest

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

25,389

 

—

 

—

 

25,389

 

Repurchase of shares

 

—

 

(189,100

)

—

 

—

 

(859

)

—

 

—

 

—

 

—

 

—

 

(859

)

—

 

—

 

—

 

(859

)

Exercise of stock options

 

—

 

16,355

 

—

 

6

 

—

 

(3

)

—

 

—

 

(3

)

—

 

3

 

—

 

—

 

—

 

3

 

Share-based compensation

 

—

 

—

 

—

 

—

 

—

 

2,229

 

—

 

—

 

2,229

 

—

 

2,229

 

—

 

—

 

—

 

2,229

 

Net loss

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(56,467

)

(56,467

)

—

 

—

 

(5,410

)

(61,877

)

Balances as of December 31, 2018

 

—

 

335,292,331

 

122,170,705

 

$

657,525

 

$

(4,325

)

$

6,698

 

$

—

 

$

(153,459

)

$

(146,761

)

$

(65,666

)

$

440,773

 

$

(2,957

)

$

—

 

$

(2,174

)

$

435,642

 

Conversion of shares

 

—

 

18,200,000

 

(18,200,000

)

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Minority buyouts

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(13,877

)

(13,877

)

—

 

(13,877

)

263

 

 

 

—

 

(13,614

)

Redeemable non-controlling interest in connection with acquisition

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

2,156

 

—

 

2,156

 

Issuance of shares in connection with acquisitions

 

—

 

5,698,604

 

—

 

31,049

 

—

 

—

 

—

 

—

 

—

 

—

 

31,049

 

—

 

—

 

—

 

31,049

 

Repurchase of shares

 

—

 

(147,900

)

—

 

—

 

(883

)

—

 

—

 

—

 

—

 

—

 

(883

)

—

 

—

 

—

 

(883

)

Exercise of stock options

 

—

 

7,071,331

 

—

 

5,125

 

—

 

(2,788

)

 

 

—

 

(2,788

)

—

 

2,337

 

—

 

—

 

—

 

2,337

 

Share-based compensation

 

—

 

—

 

—

 

—

 

—

 

16,607

 

—

 

—

 

16,607

 

—

 

16,607

 

—

 

—

 

—

 

16,607

 

Net loss

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(67,244

)

(67,244

)

—

 

—

 

(2,604

)

(69,848

)

Balances as of December 31, 2019

 

—

 

366,114,366

 

103,970,705

 

$

693,699

 

$

(5,208

)

$

20,517

 

$

—

 

$

(167,336

)

$

(146,819

)

$

(132,910

)

$

408,762

 

$

(2,694

)

$

2,156

 

$

(4,778

)

$

403,446

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

 

Curaleaf Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Year ended

 

 

 

December 31, 

 

 

 

2019

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(69,848

)

$

(61,877

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

37,206

 

8,653

 

Share-based compensation

 

16,607

 

2,229

 

Non-cash interest expense

 

6,711

 

2,247

 

Unrealized gain on changes in fair value of biological assets

 

(97,738

)

(16,471

)

Realized fair value amounts included in inventory sold

 

74,757

 

(11,297

)

Loss on change in fair value of convertible debt

 

—

 

25,100

 

(Gain) or loss on sale of property, plant and equipment

 

(118

)

172

 

Other expense

 

—

 

1,203

 

Deferred taxes

 

6,959

 

2,499

 

Write off of acquisition costs

 

1,135

 

—

 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

(6,943

)

(8,142

)

Biological assets

 

8,841

 

25,361

 

Inventory

 

(28,746

)

(13,176

)

Prepaid expenses and other current assets

 

710

 

(3,615

)

Other assets

 

(1,216

)

(120

)

Accounts payable

 

533

 

1,334

 

Income taxes payable

 

12,384

 

1,903

 

Accrued expenses

 

445

 

10,896

 

Net cash used in operating activities

 

(38,321

)

(33,101

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(82,075

)

(44,904

)

Prepayment of acquisition consideration

 

—

 

(43,490

)

Payment in connection with option to acquire an entity

 

(5,966

)

—

 

Net assets acquired from acquisitions, net of cash acquired

 

(80,560

)

(29,674

)

Amounts advanced for notes receivable

 

(35,444

)

(16,198

)

Net cash used in investing activities

 

(204,045

)

(134,266

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of debt, net of issuance costs

 

—

 

104,247

 

Proceeds from private placement offering, net of issuance costs

 

—

 

375,159

 

Cash received from sale leaseback

 

25,245

 

—

 

Minority buyouts

 

(395

)

(66,642

)

Lease liability payments

 

(5,132

)

—

 

Principal payments on debt

 

(3,112

)

(26,300

)

Repurchase of common stock

 

(883

)

(2,670

)

Exercise of stock options

 

2,337

 

604

 

Exercise of warrants

 

—

 

110

 

Issuance of common stock

 

—

 

28,500

 

Net cash provided by financing activities

 

18,060

 

413,008

 

Net change in cash

 

(224,306

)

245,641

 

Cash at beginning of period

 

266,616

 

20,975

 

Cash at end of period

 

42,310

 

266,616

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

9,285

 

$

4,897

 

Cash paid for income tax

 

$

7,200

 

$

1,241

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Warrant reserve recognized in connected with debt issuance

 

$

—

 

$

7,251

 

Notes receivable settled in connection with acquisitions

 

$

—

 

$

6,956

 

Conversion of convertible note

 

$

—

 

$

32,716

 

Cancellation of non-controlling interest put option

 

$

—

 

$

(25,389

)

Non-controlling interest buyout

 

$

13,480

 

$

65,142

 

Issuance of shares in connection with minority buyouts and acquisitions

 

$

31,049

 

$

102,264

 

Recognition of right of use assets and lease liabilities

 

$

93,063

 

$

—

 

Notes issued in connection with acquisition

 

$

35,069

 

$

7,616

 

Contingent consideration incurred in connection with acquisitions

 

$

14,616

 

$

18,000

 

Investment in Freehold Properties

 

$

2,836

 

$

—

 

Non-controlling interest recognized in connection with acquisitions

 

$

2,156

 

$

—

 

Reduction of notes receivable in connection with sale leaseback

 

$

12,090

 

$

—

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 1 — Operations of the company

 

Curaleaf Holdings, Inc. (the “Company”, “Curaleaf”, or the “Group”), formerly known as Lead Ventures, Inc. (“LVI”), was incorporated under the laws of British Columbia, Canada on November 13, 2014. Curaleaf operates as a life science company developing full scale cannabis operations, with core competencies in cultivation, manufacturing, dispensing and medical cannabis research.

 

On October 24, 2018 the Company completed a reverse takeover transaction and private placement further described in Note 3.  Following the transaction, the Company’s subordinate voting shares (“SVS”) were listed on the Canadian Securities Exchange (“CSE”) under the symbol “CURA” and on the OTCQX under the symbol “CURLF”.

 

The head office and principal address of the Company is 301 Edgewater Place #405, Wakefield, MA 01880. The Company’s registered and records office address is located at Suite 1700-666 Burrard Street, Vancouver, British Columbia, Canada.

 

Note 2 — Basis of presentation

 

The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”) in effect as of and for the year ended December 31, 2019.

 

These consolidated financial statements were approved and authorized by the Board of Directors of the Company on [

 

Functional currency

 

The Company and its subsidiaries’ functional currency, as determined by management, is the United States (“U.S.”) dollar. The consolidated financial statements are presented in U.S. dollars unless otherwise stated.

 

Basis of consolidation

 

Affiliates are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and is exposed to the variable returns from its activities. The financial statements of affiliates are included in the consolidated financial statements from the date that control commences until the date that control ceases.

 

7

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

These consolidated financial statements include the accounts of the Company and its directly subsidiaries, indirect subsidiaries that are not wholly owned and other entities consolidate other than on the basis of ownership:

 

 

 

 

 

December 31, 

 

December 31, 

 

 

 

State of

 

2019

 

2018

 

Business name

 

operations

 

ownership%

 

ownership%

 

CLF AZ, Inc.

 

AZ

 

100

%

100

%

CLF NY, Inc.

 

NY

 

100

%

100

%

Curaleaf CA, Inc.

 

CA

 

100

%

100

%

Curaleaf KY, Inc.

 

KY

 

100

%

100

%

Curaleaf Massachusetts, Inc.

 

MA

 

100

%

100

%

Curaleaf MD, LLC

 

MD

 

100

%

100

%

Curaleaf OGT, Inc.

 

OH

 

100

%

100

%

Curaleaf PA, LLC

 

PA

 

100

%

100

%

Curaleaf, Inc.

 

MA

 

100

%

100

%

Focused Investment Partners, LLC

 

MA

 

100

%

100

%

PalliaTech Maine, Inc.

 

ME

 

100

%

100

%

PalliaTech RI, LLC

 

RI

 

100

%

100

%

PalliaTech CT, Inc.

 

CT

 

100

%

100

%

PalliaTech OR, LLC (formerly Groen)

 

OR

 

100

%

100

%

PalliaTech Florida, Inc.

 

FL

 

100

%

100

%

PalliaTech Florida, LLC

 

FL

 

77.2

%

75

%

Curaleaf Florida, LLC

 

FL

 

70

%

70

%

CLF MD Processing, LLC

 

MD

 

100

%

85

%

PT Nevada, Inc. (Note 4)

 

NV

 

100

%

—

 

HMS Health LLC (Note 4)

 

MD

 

—

 

—

 

HMS Processing LLC (Note 4)

 

MD

 

—

 

—

 

HMS Sales LLC (Note 4)

 

MD

 

—

 

—

 

MI Health LLC (Note 4)

 

MD

 

—

 

—

 

Town Center Wellness, LLC (Note 4)

 

MD

 

—

 

—

 

 

All significant intercompany balances and transactions were eliminated on consolidation.

 

Basis of measurement

 

The consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments and biological assets which were measured at fair value.

 

Cash and cash equivalents

 

The Company considers all highly liquid instruments with original maturities at time of purchase of 90 days or less to be cash equivalents.

 

Restricted cash

 

Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. As of December 31, 2019 and 2018, other assets included restricted cash in the amounts of $500 and $3,625, respectively, which is related to amounts that are held in escrow with $125 being transferred to a third party on a monthly

 

8

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

basis for consulting services. The remaining balance in other assets consists primarily of deposits for certain operating leases.

 

Inventory

 

Inventory is stated at lower of cost or net realizable value (“NRV”). NRV is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. Packaging and supplies are initially valued at cost. The Company utilizes the most reliable evidence available to determine if inventory should be written-down below its current carrying value. The direct and indirect costs of inventory initially include the fair value of the biological asset at the time of harvest. They also include subsequent costs such as materials, labor, and depreciation expense on equipment involved in trimming and packaging. All direct and indirect costs related to inventory are capitalized as they are incurred and subsequently recorded within the line item “cost of goods sold” in the consolidated statement of profits and losses at the time the product is sold.

 

Biological assets

 

Expenditures incurred on biological assets are measured on initial recognition and at the end of each reporting period at their fair value less costs to sell in accordance with IAS 41 — Agriculture. The unrealized gain or loss arising on initial recognition of such biological assets at fair value less costs to sell and the change in fair value less costs to sell of biological assets are included in the consolidated statement of profits and losses for the period in which it arises. While the Company’s biological assets are within the scope of IAS 41, the direct and indirect costs of production are determined using an approach similar to the capitalize criteria within the scope of IAS 2 — Inventories. These production costs incurred during the growing process are capitalized and included in the fair value of biological assets. These direct and indirect costs include but are not limited to material, labor, supplies, depreciation expense on production equipment, utilities, and facilities costs associated with cultivation. Capitalized costs are subsequently recorded within the line item “cost of goods sold” in the consolidated statement of profits and losses in the period that the related product is sold. As of December 31, 2019 and 2018, the Company recorded biological assets of $19,197 and $4,491, respectively.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable consists primarily of trade accounts receivable with wholesale customers which are recorded at the invoiced amount and generally do not bear interest and do not require collateral. Past due balances are determined based on the contractual terms of the arrangements. The Company estimates its allowance for doubtful accounts based on lifetime expected credit losses taking into account historical loss experience and financial factors specific to the debtors and general economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company determined there was no allowance for doubtful accounts required as of December 31, 2019 and 2018.

 

Notes receivable

 

Notes receivable are recorded net of any unamortized deferred fees and incremental direct costs. Interest income and amortization of any fees are recorded ratably over the related term of the note. The Company considers these receivables to have similar risk characteristics as its accounts receivable, as they relate to the ongoing business agreements with customers and evaluates them as one collective portfolio segment and class for determining the allowance for doubtful accounts. The Company determined there was no allowance for doubtful accounts required as of December 31, 2019 and 2018.

 

9

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

 

 

Estimated Useful life

 

Information technology

 

5 years

 

Furniture and fixtures

 

7 years

 

Building and improvements

 

15 to 39 years

 

Leasehold improvements

 

Lesser of lease term or 7 to 10 years

 

 

The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively if appropriate. Construction in progress is measured at cost. Upon completion, construction in progress will be reclassified as building or leasehold improvements depending on the nature of the assets and depreciated over the lesser of estimated useful life of the asset or term of the lease.

 

An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising from derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the consolidated statement of profits and losses in the year the asset is derecognized. IAS 36 — Impairment of Assets (“IAS 36”) requires that tangible assets be carried at no more than their recoverable amount. To meet this objective, the Company tests all assets that are within this scope for the existence of potential impairment exist.

 

Intangible assets subject to amortization

 

Intangible assets include intellectual property either owned by the Company or for which the Company has a license. Intangible assets include licenses to cultivate, process and sell cannabis, trade names and non-compete agreements obtained through business acquisitions. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired. Generally, the Company utilizes the discounted cash flow method for valuing licenses, the relief from royalty method for valuing trade names and the with or without cash flow method for valuing non-compete agreements.  Intangible assets with finite lives are amortized over their estimated useful lives and reported net of accumulated amortization, separately from goodwill. Amortization is calculated on the straight-line method based on the following estimated useful lives:

 

Licenses

 

12-20 years

 

Trade names

 

5-15 years

 

Non-compete agreements

 

1-2 years

 

 

The estimated useful lives, residual values, and amortization methods are reviewed at each year-end, and any changes in estimates are accounted for prospectively. During the years ended December 31, 2019 and 2018, the Company did not recognize any impairment losses. IAS 36 requires that intangible assets be carried at no more than their recoverable amount. To meet this objective, the Company tests all assets that are within this scope for potential impairment exist.

 

Goodwill

 

Goodwill represents the excess of the purchase price paid for the acquisition of an entity over the fair value of the net tangible and intangible assets acquired. Goodwill is allocated to the cash generating unit (“CGU” or “CGUs”) which are expected to benefit from the synergies of the combination. Given the nature of the Company’s business, management

 

10

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

generally identifies CGUs based on regional areas. The Company has determined that the goodwill recognized in connection with all acquisitions to date belong to the cannabis operations segment.

 

Goodwill is not subject to amortization and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired in accordance with IAS 36.  Impairment is determined by assessing if the carrying value of a CGU, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell and the value in use. The Company performs the analysis on a CGU level using a discounted cash flow method. Impairment losses recognized in respect of a CGU are first allocated to the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the CGU. Any goodwill impairment loss is recognized in the consolidated statement of profits and losses in the period in which the impairment is identified. Impairment losses on goodwill are not subsequently reversed.

 

Debt with warrants and convertible options

 

The Company issues debt that may have separate warrants, conversion features or no equity-linked attributes which are accounted for as compound or hybrid financial instruments based on its features.

 

Convertible notes and debt with warrants classified as compound financial instruments are accounted for separately by their components: a financial liability and an equity instrument. The liability component is initially recognized at the fair value of a similar liability that does not have an equity conversion option. The equity component is initially recognized at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Subsequent to initial recognition, the liability component is measured at amortized cost using the effective interest method. The equity component is not remeasured. No gain or loss is recognized at maturity or early conversion of the debt.

 

For convertible notes and debt with warrants classified as hybrid financial instruments, the Company elects on an instrument by instrument basis to bifurcate embedded derivatives or fair value of the entire instrument.

 

Leased assets

 

The Company adopted IFRS 16 on January 1, 2019 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17.  Specifically, rent expense will be replaced by associated depreciation of the right-to-use assets and interest expense.

 

Income taxes

 

Income tax expense comprises current and deferred tax. It is recognized in the consolidated statement of profits and losses except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Interest and penalties related to income taxes, including uncertain tax treatments, are accounted for under IAS 37 —  Provision, Contingent Liabilities and Contingent Assets. Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustments to the tax payable or receivable with respect to previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends. Current tax assets and liabilities are offset only if certain criteria are met.

 

11

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Deferred tax is recognized with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:

 

·                  temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

 

·                  temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that the Company is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future; and

 

·                  taxable temporary differences arising on the initial recognition of goodwill.

 

Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Future taxable profits are determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary differences is insufficient to recognize a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on the business plans for individual subsidiaries in the Company. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized; such reductions are reversed when the probability of future taxable profit improves.

 

Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that future taxable profits will be available against which they can be used. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Company expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset only if certain criteria are met.

 

Revenue recognition

 

The Company adopted IFRS 15 — Revenue from Contracts with Customers on January 1, 2018 using the modified retrospective approach where the cumulative impact of adoption is recognized in retained earnings as of January 1, 2018 and comparatives are not restated. The new standard provides for a single model that applies to all contracts with customers with two types of recognition: at a point in time or over time.  Under IFRS 15 the Company’s accounting policy for revenue recognition is as follows: i) identify the contract with the customer; ii) identify the performance obligation(s) in the contract; iii) determine the transaction price; iv) allocate the transaction price to the performance obligation(s); and (v) recognize revenue when (or as) performance obligation(s) are satisfied.

 

Revenue from the sale of cannabis is recognized at the point in time when control over the goods have been transferred to the customer. The Company transfers control and satisfies its performance obligation upon delivery and acceptance by the customer.  Revenue from management services fees are recognized over the term of the arrangement as services are provided. Revenue is presented net of discounts and sales and other related taxes.

 

Share-based payment arrangements

 

The Company measures all share-based payment arrangements to employees and directors at the fair value on the date of the grant. The Company uses the Black-Scholes valuation model to determine the grant-date fair value of options and warrants. The inputs into the Black-Scholes valuation model, including the expected term of the instrument, expected volatility, risk-free interest rate and dividend rate are determined by reference to the underlying terms of the instrument, and the Company’s experience with similar instruments. In instances where stock options have performance or market conditions, the Company utilizes the Monte Carlo valuation model to simulate the various outcomes that affect the value

 

12

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

of the option. The grant-date fair value of equity-settled share-based payment arrangements is generally recognized as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service conditions at the vesting date.

 

Comprehensive loss

 

Comprehensive loss includes net loss as well as other changes in the consolidated statement of changes in equity that result from transactions and economic events other than those with shareholders. There was no difference between net loss and comprehensive loss for each of the periods presented in the accompanying consolidated financial statements.

 

Earnings per share, basic and diluted

 

The Company presents basic and diluted earnings per share. Basic earnings per share is calculated by dividing the profit or loss attributable to shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to shareholders and the weighted average number of shares outstanding, for the effects of all dilutive potential shares, which comprise warrants, convertible debt and options issued. Items with an anti-dilutive impact are excluded from the calculation. The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock method.

 

Related party transactions

 

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

 

Financial instruments

 

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Financial assets and financial liabilities are recognized in the consolidated statement of financial position at the time the Company becomes a party to the contractual provisions of the financial instrument.

 

Initial measurement of financial assets and financial liabilities

 

Financial assets and liabilities are recognized at fair value upon initial recognition plus any directly attributable transaction costs when not subsequently measured at fair value through profit or loss. Transaction costs are expensed in the period incurred through the consolidated statement of profits and losses.

 

Subsequent measurement

 

Measurement in subsequent periods is dependent on the classification of the financial instrument. The Company classifies its financial instruments in the following categories: at Fair Value Through Profit or Loss (“FVTPL”), loans and receivables, held to maturity, available for sale, and other financial liabilities.

 

Financial assets

 

The Company adopted IFRS 9 — Financial Instruments (“IFRS 9”) as of January 1, 2018. IFRS 9 replaces IAS 39 — Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 utilizes a revised model for recognition and

 

13

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

measurement of financial instruments and a single forward-looking “expected loss” impairment model. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9. The adoption of IFRS 9 did not impact the carrying value of any financial assets or financial liabilities on that transition date.

 

The following is the Company’s new accounting policy for financial instruments under IFRS 9.

 

Classification

 

The Company classifies its financial instruments in the following categories: at FVTPL, at fair value through other comprehensive income (loss) (“FVTOCI”) or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate them as at FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or the Company has opted to measure them at FVTPL.

 

Measurement

 

Financial assets at FVTOCI — Elected investments in equity instruments at FVTOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses recognized in other comprehensive income (loss).

 

Financial assets and liabilities at amortized cost — Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.

 

Financial assets and liabilities at FVTPL — Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the consolidated statements of profit or loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the consolidated statements of profit or loss in the period in which they arise. Where management has opted to recognize a financial liability at FVTPL, any changes associated with the Company’s own credit risk will be recognized in other comprehensive income (loss).

 

Impairment of financial assets at amortized cost

 

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to the twelve month expected credit losses. The Company recognizes in the consolidated statements of profit or loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

 

Derecognition

 

Financial assets — The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are generally recognized in the consolidated statements of

 

14

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

profits and losses. However, gains and losses on derecognition of financial assets classified as FVTOCI remain within accumulated other comprehensive income (loss).

 

Financial liabilities — The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statement of profits and losses.

 

Significant accounting judgments, estimates and assumptions

 

The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

 

Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the consolidated financial statements are described below.

 

Discount rate for leases

 

IFRS 16 - Leases requires lessees to discount lease payments using the rate implicit in the lease if that rate is readily available. If that rate cannot be readily determined, the lessee is required to use its incremental borrowing rate. The Company generally uses the incremental borrowing rate when initially recording real estate leases as the implicit rates are not readily available as information from the lessor regarding the fair value of underlying assets and initial direct costs incurred by the lessor related to the leased assets is not available. The Company determines the incremental borrowing rate as the interest rate the Company would pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

 

Estimated useful lives and depreciation of property and equipment

 

Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

 

Estimated useful lives and amortization of intangible assets

 

Amortization of intangible assets is dependent upon estimates of useful lives which are determined through exercise of judgment and do not exceed the contractual period, if any. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired.

 

Biological assets

 

Biological assets are dependent upon estimates of future economic benefits as a result of past events to determine the fair value through an exercise of significant judgment by the Company. In estimating the fair value of an asset or a liability, the Company uses market observable data to the extent it is available. The Company uses the average selling price per

 

15

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

gram in the market in which the biological assets are produced to determine fair value. The Company reevaluates market prices on a quarterly basis in order to ensure biological assets are measured at the most relevant fair value.

 

Business combinations

 

In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 — Financial Instruments with the corresponding gain or loss being recognized in the consolidated statement of profits and losses. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied.

 

Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.

 

Compound financial instruments

 

The identification of components in compound financial instruments is based on interpretations of the substance of the contractual arrangement and therefore requires judgment from management. The separation of the components affects the initial recognition at issuance and the subsequent recognition of interest on the liability component. The determination of the fair value of the liability is also based on a number of assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.

 

Share-based payment arrangements

 

The Company uses the Black-Scholes valuation model to determine the fair value of options granted to employees and directors under share-based payment arrangements, where appropriate. In instances where stock options have performance or market conditions, the Company utilized the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

 

Goodwill impairment

 

Goodwill is tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill has been impaired. In order to determine if the value of goodwill has been impaired, the CGU to which goodwill has been allocated must be valued using present value techniques. When applying this valuation technique, the Company relies on a number of factors, including historical results, business plans, forecasts and market data. Changes in the conditions for these judgments and estimates can significantly affect the assessed value of goodwill.

 

16

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

New, amended and future IFRS pronouncements

 

The following IFRS standards have been recently issued by the IASB. The Company is assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein.

 

IFRS 16: Leases

 

In January 2016, the IASB issued IFRS 16, which replaces IAS 17 — Leases. The Company adopted IFRS 16 on January 1, 2019 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17.  Specifically, rent expense will be replaced by associated depreciation of the right-to-use assets and interest expense. Since the Company is not restating prior periods as part of adopting IFRS 16, current results will not be directly comparable to results for periods before January 1, 2019.

 

Under IAS 17, a lease of property and equipment was classified as an operating lease whenever the terms of the lease did not transfer substantially all of the risks and rewards of ownership to the lessee. Lease payments were recognized as rent expense on a straight-line basis over the lease term, except where another systematic basis was more representative of the time pattern in which the economic benefits were consumed.

 

Under IFRS 16, at inception of a contract, the Company assesses whether a contract conveys the right to control the use of an identified asset for a period in exchange for consideration, in which case it is classified as a lease. The Company recognizes a right-of-use asset (“lease asset”) and a lease liability at the lease commencement date. The asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore the underlying asset, less any lease incentives received. The lease asset is subsequently amortized using the straight-line method from the commencement date to the end of the useful life of the right-of-use asset, considered to be indicated by the lease term. The lease asset is periodically assessed and adjusted for certain remeasurements of the lease liability and impairment losses, if any. The lease liability is initially measured at the present value of outstanding lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. The lease liability is measured at amortized cost using the effective interest method and is remeasured when there is a change in future lease payments arising from a change in an index or rate or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. A corresponding adjustment is made to the carrying amount of the right-of-use asset with any excess over the carrying amount of the asset being recognized in the statement of profits or losses.

 

The Company has elected not to recognize lease assets and lease liabilities for short-term leases (leases with a term of 12 months or less) and leases of low-value assets such as small equipment. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

 

On transition to IFRS 16, the Company recognized a right-of-use asset of $41,853, a corresponding lease liability of $42,842 and derecognized $989 of deferred rent. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate ranging from 8.19% to 9.42%.

 

Amendment to IFRS 3: Definition of a Business

 

In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)” (the “IFRS 3 Amendment”). The IFRS 3 Amendment clarifies the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The IFRS 3 Amendment provides an assessment framework to determine when a series of integrated activities is not a business. The IFRS 3 Amendment is effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on

 

17

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

or after January 1, 2020, however early application is permitted. The Company has elected early application of the IFRS 3 Amendment and elects whether to apply, or not apply, the test to each transaction separately. The Company applies the IFRS 3 based on whether a single asset is a significant percentage of the total assets acquired.

 

IAS 1: Presentation of Financial Statements & IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors

 

In October 2018, the IASB issued “Definition of Material”, an amendment to IAS 1 — Presentation of Financial Statements and IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of material and to align the definition used in the Conceptual Framework and the standards themselves. Materiality is defined as “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” This amendment will be effective for the annual period beginning January 1, 2020. The extent of the impact of application of the interpretation has not yet been determined.

 

Note 3 — Reverse takeover transaction and private placement

 

On July 25, 2018, Curaleaf, Inc. entered into an agreement (“Transaction Agreement”) with LVI which resulted in a reverse takeover of LVI by the security holders of Curaleaf, Inc. and the listing for trading of the SVS of the issuer resulting from the reverse takeover, Curaleaf Holdings, Inc., on the CSE. Pursuant to the Transaction Agreement, the shareholders of LVI received, upon completion of the reverse takeover, SVS having an aggregate value of C$2,160.

 

On October 25, 2018, pursuant to the Transaction Agreement and an Agreement and Plan of Transaction among Curaleaf, Inc., the Company (then known as Lead Ventures, Inc.) and Curaleaf Mergers, Inc., completed the combination of their respective businesses (collectively, the “Business Combination”). The Business Combination was structured as a series of transactions, including a Canadian three-cornered amalgamation transaction and a series of U.S. merger and reorganization steps.

 

Immediately prior to the Business Combination, 1177687 B.C. Ltd. (“Curaleaf FinCo”), a special purpose corporation, completed a brokered and a non-brokered subscription receipt private placement financing at a price of C$11.45 per subscription receipt for aggregate gross proceeds of approximately C$520,000 (the “Private Placement”).

 

As part of the Business Combination, the Company, Curaleaf FinCo and 1177679 B.C. Ltd., a wholly-owned subsidiary of the Company, were parties to a three-cornered amalgamation (the “Amalgamation”) pursuant to which the shareholders of Curaleaf FinCo (being the investors in the Private Placement after automatic conversion of their subscription receipts into common shares of Curaleaf FinCo (the “Curaleaf FinCo Shares”) received SVS of the Company in exchange for their Curaleaf FinCo Shares. Concurrently with the Amalgamation, Curaleaf MergerCo Inc., a wholly-owned subsidiary of the Company, merged with and into Curaleaf, Inc., with Curaleaf, Inc. continuing as the surviving corporation and becoming a wholly-owned subsidiary of the Company.

 

In connection with the Business Combination, Gociter Holdings Ltd., a corporation of which Boris Jordan, the Executive Chairman of Curaleaf Holdings, Inc. is the beneficial owner, made a contribution of 3,734,965 common shares to the Company in exchange for 122,170,705 multiple voting shares (“MVS”) of Curaleaf Holdings, Inc., representing 100% of the issued and outstanding MVS as of closing of the Business Combination.

 

18

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 4 — Acquisitions

 

A summary of acquisitions completed during the years ended December 31, 2019 and 2018 is provided below:

 

 

 

Year ended

 

 

 

December 31, 2019

 

Purchase price allocation

 

Acres (2)

 

Glendale (1)

 

Phyto (1)

 

Emerald (1)

 

Eureka (1)

 

Blackjack (1)

 

HMS (1)

 

Elevate (1)

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

478

 

$

330

 

$

37

 

$

747

 

$

490

 

$

120

 

$

501

 

$

101

 

Accounts receivable

 

884

 

92

 

—

 

188

 

82

 

—

 

1,052

 

—

 

Prepaid expenses and other current assets

 

114

 

21

 

143

 

253

 

876

 

—

 

211

 

53

 

Inventory

 

3,812

 

422

 

103

 

724

 

587

 

333

 

414

 

93

 

Biological assets

 

567

 

—

 

—

 

—

 

 

 

—

 

—

 

—

 

Property, plant and equipment

 

5,994

 

1,407

 

—

 

103

 

357

 

—

 

—

 

68

 

Other assets

 

45

 

107

 

—

 

15

 

—

 

—

 

—

 

—

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

22,340

 

17,060

 

7,424

 

15,970

 

35,253

 

7,187

 

32,775

 

1,937

 

Trade name

 

370

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Non-compete agreements

 

700

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Goodwill

 

17,471

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Deferred tax liabilities

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Liabilities assumed

 

(5,178

)

(660

)

(38

)

—

 

(1,284

)

(915

)

(2,654

)

(151

)

Non-controlling interest

 

—

 

—

 

—

 

—

 

—

 

(2,156

)

—

 

—

 

Consideration transferred

 

$

47,597

 

$

18,779

 

$

7,669

 

$

18,000

 

$

36,361

 

$

4,569

 

$

32,299

 

$

2,101

 

 

(1)         Acquisition accounted for as an asset acquisition with the application of the IFRS 3 Amendment.

 

(2)         Acquisition accounted for as a business combination under IFRS 3.

 

 

 

Year ended

 

 

 

December 31, 2018

 

Purchase price allocation

 

CLMA

 

Swell

 

MTR

 

Assets acquired:

 

 

 

 

 

 

 

Cash

 

$

190

 

$

436

 

$

50

 

Accounts receivable

 

23

 

—

 

—

 

Prepaid expenses and other current assets

 

232

 

69

 

—

 

Inventory

 

1,188

 

844

 

107

 

Biological assets

 

527

 

125

 

—

 

Property, plant and equipment

 

1,087

 

1,724

 

247

 

Other assets

 

24

 

—

 

234

 

Intangible assets:

 

 

 

 

 

 

 

Licenses

 

5,950

 

21,340

 

6,294

 

Trade name

 

150

 

640

 

100

 

Non-compete agreements

 

—

 

100

 

—

 

Goodwill

 

4,516

 

11,708

 

3,781

 

Deferred tax liabilities

 

(1,769

)

(5,492

)

(1,597

)

Liabilities assumed

 

(1,401

)

(803

)

(305

)

Non-controlling interest

 

(7,169

)

—

 

—

 

Consideration transferred

 

$

3,548

 

$

30,691

 

$

8,911

 

 

19

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

During the year ended December 31, 2019, the Company completed the purchase price allocation for MTR which resulted in a corresponding reallocation from goodwill to intangibles (Note 9) as compared to December 31, 2018.

 

Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.

 

Goodwill arising from acquisitions consists largely of the synergies and economies of scale expected from combining the operations of the businesses. These synergies include the elimination of redundant facilities and functions and the use of the Company’s existing commercial infrastructure to expand sales.

 

2019 acquisitions

 

HMS Health LLC (“HMS”), HMS Processing LLC, MI Health LLC, and HMS Sales LLC, HMS Health LLC, all Maryland limited liability companies (the “HMS Companies”)

 

In January 2019, the Company completed the acquisition of the HMS Companies which concluded as a $30,000 convertible financing. Prior to funding, HMS spun off its cannabis processing license and cannabis dispensing license into separate entities, HMS Processing LLC and HMS Sales LLC, respectively. There was an additional adjustment of $447 upon closing as part of the agreement. The loans, together with accrued interest, are convertible into equity of each of the HMS Companies upon receipt of all required regulatory approvals. In addition, the owners of the HMS Companies will receive additional consideration of $2,000 in SVS at the then-current market price upon completed conversion of the loans. The Company recorded a liability of $1,852 for the additional consideration.

 

Revenue and net income from HMS included in the consolidated statement of profits and losses for the year ended December 31, 2019 was $6,071 and $1,640, respectively.

 

Town Center Wellness, LLC, dba Elevate Takoma, a Maryland limited liability company (“Elevate”)

 

In January 2019, the Company paid $2,101 cash for an option to acquire the license associated with Elevate, a dispensary located in Takoma Park, MD.

 

Revenue and net loss from Elevate included in the consolidated statement of profits and losses for the year ended December 31, 2019 was $654 and $677, respectively.

 

Naturex II, LLC, dba Blackjack Collective, a Nevada limited liability company (“Blackjack”)

 

In October 2017, the Company entered into an agreement to acquire 51.2% of Blackjack by purchasing a 64% interest in VSLV Management, a related party, which owned 80% of Blackjack. The purchase price was in the form of 4,105,988 SVS valued at $3,001. The Company issued these shares of Curaleaf Holdings, Inc. into escrow for release to the members of VSLV Management upon regulatory approval of the transaction. In January 2019, the Company entered into an agreement to acquire an additional 18% of Blackjack from minority owners for cash consideration of $1,260. Furthermore, in October 2019, the Company entered into an agreement to acquire the remaining interests in VSLV Management for the issue of 286,246 additional SVS upon closing of the transaction.

 

The Company’s total controlling ownership in Blackjack as of April 1, 2019,the date it took control of Blackjack, was 69.2%. The Company recognized the residual 30.8% of unowned membership interest as a $2,156 non-controlling interest in equity. As a result of its agreement to acquire the remaining interest in VSLV Management, the Company’s controlling ownership interest was increased to 98% as of October 11, 2019. There was an additional $308 of payables due to the Company that were effectively forgiven as part of the purchase price.

 

20

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Revenue and net loss from Blackjack included in the consolidated statement of profits and losses for the year ended December 31, 2019 was $3,685 and $1,221, respectively.

 

EC Investment Partners, LLC, a Nevada limited liability company (“Eureka”)

 

In April 2019, the Company acquired all of the membership interests of Eureka.  Total consideration of $36,361 consisted of $5,608 in cash, settlement of $5,000 of debt owed to the Company, and $14,239 which was settled through the issuance of 1,663,511 SVS.  In addition, the sellers may be entitled to additional consideration in the form of additional SVS based upon the excess of Eureka’s EBITDA for the twelve-month period starting July 1, 2019 above $5,000. The Company recorded contingent consideration of $11,514 associated with the contingent consideration.

 

Revenue and net loss from Eureka included in the consolidated statement of profits and losses for the year ended December 31, 2019 was $985 and $4,872, respectively.

 

Absolute Healthcare, Inc. dba Emerald Dispensary, an Arizona non-profit corporation (“Emerald”)

 

In May 2019, the Company acquired exclusive rights to operate the Emerald dispensary in Gilbert, AZ, whose license is held by Absolute Healthcare, Inc. Total consideration for the transaction was $18,000, of which $10,000 in cash was paid upfront, $5,000 in cash is payable six months after the closing, and $3,000 in cash is payable 12 months after the closing. The notes payable associated with the remaining amounts have an interest rate of 7% (see Note 10).

 

Revenue and net loss from Emerald included in the consolidated statement of profits and losses for the year ended December 31, 2019 was $7,750 and $168, respectively.

 

Phytotherapeutics Management Services, LLC, an Arizona non-profit corporation (“Phyto”)

 

In July 2019, the Company completed the acquisition of Phyto, which operates under the license of Phytotherapeutics of Tucson, LLC. The close of the transaction resulted in the license being applied to a newly developed dispensary located in Phoenix, AZ.

 

Aggregate agreed consideration for Phyto was $7,669, consisting of cash of $5,669, 65,511 SVS valued at $500 and a Company promissory note in the amount of $1,500 with a maturity date of 12 months from the close of the transaction with an interest rate of 7.5% (Note 10). The transaction completed in July 2019.

 

Revenue and net loss from Phyto included in the consolidated statement of profits and losses for the year ended December 31, 2019 was $1,155 and $473, respectively.

 

Glendale Greenhouse, an Arizona non-profit corporation (“Glendale”)

 

In August 2019, the Company completed the acquisition of Glendale, which operates under the license of PP Wellness as a vertically integrated cannabis cultivation, processing, and dispensary company.

 

Consideration for Glendale included 173,050 SVS valued at $1,500 and cash of $8,279. The Company also issued two promissory notes with a combined amount of $5,000 with a maturity date of 12 months from the close of the transaction date and an interest rate of 7%. The Company also issued a promissory note in the amount of $2,500 with a maturity date of 6 months from the close of the transaction date and an interest rate of 7% (Note 10). Additionally, the Company will issue SVS with a value of $1,500 12 months after the close of the transaction. Revenue and net loss from Glendale included in the consolidated statement of profits and losses for the year ended December 31, 2019 was $3,095 and $1,002, respectively.

 

21

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Acres Cannabis, a Nevada limited liability company (“Acres”)

 

In October 2019, the Company completed the acquisition of Acres, which included a cultivation facility in the Amargosa Valley, Nevada and a large dispensary located in Las Vegas, Nevada, with a second dispensary under construction. Total consideration for the transaction was $47,597, of which $15,000 in cash was paid upon signing, $9,500 was paid upon receiving regulatory approval of the license transfer for the dispensary in January 2020, as well as a $500 holdback. Total consideration also included $12,856 which was settled through the issuance of 3,108,183 SVS, $8,569 which was settled through the issuance of 2,039,062 SVS upon receiving regulatory approval of the license transfer for the dispensary in January 2020, and $1,172 of contingent consideration which is payable if certain financial targets are met.

 

Revenue and net loss from Acres in the consolidated statement of profits and losses for the year ended December 31, 2019 was $3,060 and $1,174, respectively.

 

2018 Acquisitions

 

Curaleaf Massachusetts, Inc., a Massachusetts corporation (“CLMA”)

 

In March 2018, the Company acquired a 50% stake, plus one share, in CLMA. Total consideration consisted of $36 in cash and settlement of $3,512 of debt, in accordance with a plan of conversion of CLMA’s predecessor, Massachusetts Organic Therapy, Inc. (“MOT”) to a for-profit entity. At that time, the Company obtained control over CLMA.  PT Mass Holdings, LLC, of which Joseph F. Lusardi, the Company’s President and Chief Executive Officer, is a member, acquired the remaining shares of CLMA at the time for consideration of $36.

 

In August 2018, the Company entered into an agreement with the minority owner to acquire all of PT Mass Holdings, LLC’s stake in CLMA for $46,200, of which $28,200 was satisfied by the issuance of 3,212,337 SVS and $18,000 has been recorded as contingent consideration and is expected to be paid in cash upon the achievement of certain milestones. This transaction closed immediately following completion of the Business Combination discussed in Note 3.

 

The results of CLMA have been included in the consolidated financial statements since the date of the acquisition in March 2018. Revenue and net income of CLMA included in the consolidated financial statements from the acquisition date through December 31, 2018 were $5,963 and $4,305, respectively.

 

Swell Management LLC, an Arizona limited liability company (“Swell”)

 

In April 2018, the Company acquired all of the outstanding membership interests of Swell. Total consideration consisted of cash of $23,055, which included a settlement of Swell’s third party debt of $3,776 and the issuance of a convertible promissory note in the amount of $7,636 (the “Swell Note”). The convertible promissory note contained a variable rate to convert into shares of the Company which the Company considered a hybrid instrument. The Company elected to classify the entire convertible promissory note as a financial liability at fair value through profit or loss. In connection with the Business Combination, discussed in Note 3, the Swell Note was converted into 3,715,038 SVS. As a result the Company determined that the fair value of the Swell Note increased to $32,716 and recorded a loss on the change in the fair value of the convertible note of $25,100.

 

The results of Swell have been included in the consolidated financial statements since the date of the acquisition. Revenue and net loss of Swell included in the consolidated financial statements from the acquisition date through December 31, 2018 were $10,209 and $1,952, respectively.

 

For the year ended December 31, 2018, the Company recorded $735 of transaction expenses related to third-party legal, accounting and shareholder representative services incurred in connection with the acquisition. These costs are included in general and administrative expenses in the Company’s consolidated statement of profits and losses.

 

22

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Catalina Hills Botanica Center, LLC, d/b/a Midtown Roots, an Arizona limited liability company (“MTR”)

 

In November 2018, the Company acquired Thunderbird III Partners, LLC, a cannabis dispensary operating pursuant to a management services agreement with MTR, a non-profit entity holding a vertical medical marijuana license issued by the Arizona Department of Health Services. Total consideration consisted of $7,000 in cash and $1,911 which was settled through the issuance 341,737 SVS.

 

The results of MTR have been included in the consolidated financial statements since the date of the acquisition. Revenue and net income of MTR included in the consolidated financial statements from the acquisition date through December 31, 2018 were $406 and $16, respectively.

 

For the year ended December 31, 2018, the Company recorded $87 of transaction expenses related to third-party legal, accounting and shareholder representative services incurred in connection with the acquisition. These costs are included in general and administrative expenses in the Company’s consolidated statement of profits and losses.

 

Pending acquisitions

 

The following acquisitions have been signed but have not been completed. The results of the following entities are not included in the consolidated results of the Company:

 

Alternative Therapies Group, Inc, a Massachusetts corporation (“ATG”)

 

In August 2018, the Company entered into an agreement to acquire ATG, a registered marijuana dispensary licensed by the Massachusetts Department of Health, operating a 53,600 square foot cultivation and processing facility in Amesbury, Massachusetts and intends to enter supply agreements with ATG’s three dispensaries in Massachusetts.  Consideration for ATG is $50,000, $42,500 of which was prepaid in cash in December 2018 in order to solidify the Company’s intent to complete the purchase of ATG and was recorded as a non-current asset. The remaining $7,500 is due at the close of the transaction.  The closing of the transaction is subject to certain milestones being met and regulatory approval.

 

Cura Partners, Inc., an Oregon corporation (“Cura” or “Select”)

 

On May 1, 2019, Curaleaf announced the signature of a definitive agreement to acquire Cura Partners, Inc. (“Cura”), owners of the Select brand (“Select”). The acquisition includes Select’s manufacturing, processing, distribution, marketing and retailing operations and all adult-use and medical cannabis products marketed under the Select brand name, including all intellectual property (the “Cura Transaction”).

 

Refer to the Company’s material change report dated May 10, 2019 with respect to the Cura Transaction for additional details regarding the terms of the Cura Transaction under the original merger agreement (the “Original Material Change Report”).

 

Due to changes in market conditions, Curaleaf and Select mutually agreed on October 30, 2019 to reduce the base consideration payable upon closing of the Cura Transaction. Under the amended and restated merger agreement (the “Amended Merger Agreement”), the number of SVS payable at closing of the Cura Transaction was reduced to 55,000,000 SVS from 95,555,556 originally. The remaining 40,555,556 SVS will be payable to Select equity holders contingent upon Curaleaf achieving certain calendar year 2020 revenue targets based on Select-branded retail extract sales beginning at a target of $130,000 with maximum achievement at $250,000. In addition, Select equity holders will also be eligible to receive an earn-out of up to $200,000 from the issuance of additional SVS, contingent upon Curaleaf exceeding $300,000 in calendar year 2020 revenue for Select-branded retail extract sales.

 

The Select transaction closed on February 1, 2020.

 

23

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Ohio Grown Therapies, LLC, an Ohio limited liability company (“OGT”)

 

In May 2019, the Company entered into an agreement granting it an option to acquire OGT for $20,000. The Company paid $5,000 cash in May 2019 and the remaining consideration will be paid upon completion of milestones, culminating with regulatory approval of the transfer of the final licenses and OGT facility to Curaleaf.  The closing of this transaction is currently pending regulatory approval.

 

GR Companies, Inc., a Delaware company (“Grassroots”)

 

In July 2019, the Company entered into an agreement to acquire Grassroots, a large, private, vertically-integrated multi-state operator, for consideration composed of $75,000 in cash, and approximately 102,808,038 SVS. Consideration is subject to adjustments for working capital and cash at closing. Consideration also includes additional SVS equal to the quotient obtained by dividing $40,000 by the higher of (i) the 10-day volume-weighted average price per SVS, determined as of the close of business on the last business day prior to the closing date, on the CSE and (ii) eighty-five percent (85%) of the 1-day volume-weighted average price per SVS determined two trading days prior to the closing date of such SVS on the CSE. In February 2020, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired with respect to the acquisition of Grassroots. The closing of this transaction is currently pending completion of certain closing conditions, including regulatory approval.

 

Arrow Alternative Care, Inc., Arrow Alternative Care #2, Inc., Arrow Alternative Care #3, Inc., each a Delaware corporation (collectively, the “Arrow Companies”)

 

In March 2020, the Company signed definitive agreements to acquire the Arrow Companies, which operate licensed medical cannabis dispensaries in Stamford, Hartford, and Milford, Connecticut.  The aggregated consideration to be paid for the Arrow Companies is $38,000, consisting of $16,400 cash and $21,600 to be paid in SVS. The closing of this transaction is currently pending completion of certain closing conditions, including regulatory approval.

 

Virginia’s Kitchen, LLC, a Colorado company d/b/a Blue Kudu (“Blue Kudu”)

 

In February 2020, the Company signed a definitive agreement to acquire 100% of Blue Kudu, a Colorado-licensed processor and producer cannabis edibles, operating an 8,400 sq.ft. facility in Denver, Colorado.    The consideration to be paid for Blue Kudu consists of 322,580 SVS, $1,250 cash at closing of the transaction and a 5% note for $500 due ten and a half months from closing. The closing of this transaction is currently pending completion of certain closing conditions, including regulatory approval.

 

24

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 5 — Inventory

 

Inventory consist of the following:

 

 

 

December 31, 

 

December 31, 

 

 

 

2019

 

2018

 

Raw materials

 

 

 

 

 

Harvested cannabis

 

$

19,232

 

$

15,979

 

Harvested trim

 

2,890

 

807

 

Total raw materials

 

22,122

 

16,786

 

Work-in-process

 

 

 

 

 

Processing

 

16,277

 

3,653

 

Finished goods

 

 

 

 

 

Consumables

 

7,452

 

4,420

 

Flower

 

2,696

 

332

 

Extracts

 

14,663

 

2,785

 

Total finished goods

 

24,811

 

7,537

 

 

 

$

63,210

 

$

27,976

 

 

Note 6 — Biological assets

 

The following table is a reconciliation of carrying amount of the biological assets:

 

Balance at December 31, 2017

 

$

1,439

 

Assets obtained in the acquisition of CLMA

 

527

 

Assets obtained in the acquisition of Swell

 

125

 

Unrealized fair value gain on growth of biological assets

 

16,471

 

Increase in biological assets due to capitalized costs

 

11,297

 

Transferred to inventory upon harvest

 

(25,368

)

Balance at December 31, 2018

 

$

4,491

 

 

 

 

 

Balance at December 31, 2018

 

$

4,491

 

Assets obtained in the acquisition of HMS

 

469

 

Assets obtained in the acquisition of Eureka

 

577

 

Assets obtained in the acquisition of Acres

 

567

 

Unrealized fair value gain on growth of biological assets

 

97,738

 

Increase in biological assets due to capitalized costs

 

20,661

 

Transferred to inventory upon harvest

 

(105,306

)

Balance at December 31, 2019

 

$

19,197

 

 

Biological assets consisted of actively growing cannabis plants to be harvested as agricultural produce.

 

The average grow cycle of plants up to the point of harvest is approximately twelve weeks. Plants not in production are valued at the fair market value less costs to sell. Plants in production are plants that are in the flowering stage and are valued at fair value less cost to complete and cost to sell, where fair value represents the Company’s selling price per gram of dried cannabis. As of December 31, 2019 and 2018, it was expected that the Company’s biological assets would yield 7,031,057 and 1,526,418 grams of cannabis when harvested, respectively. See Note 19 for the inputs and sensitivity analysis for the fair value of the biological assets.

 

25

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 7 — Notes receivable

 

Notes receivable consist of the following:

 

 

 

December 31, 

 

December 31, 

 

 

 

2019

 

2018

 

Notes receivable Curaleaf NJ, Inc.

 

$

56,437

 

$

32,536

 

Notes receivable Evio

 

—

 

533

 

Notes receivable Remedy Compassion Center, Inc.

 

729

 

722

 

Notes receivable from other third parties

 

—

 

20

 

Total notes receivable

 

$

57,166

 

$

33,811

 

 

In September 2017, the Company entered into a $1,000 note receivable with Evio in connection with the PhytaTech disposal. The note receivable has an interest rate of 8% per annum with all outstanding interest payable on July 6, 2018. The notes receivable contain certain financial and non-financial covenants. During the years ended December 31, 2019 and 2018, the Company recorded $47 and $61 of interest income, respectively. The note receivable was paid off in February 2019.

 

In October 2016, the Company entered into a $500 note receivable with Remedy Compassion Center, Inc (“RMC”). The note receivable has an interest rate of 12% and interest payments are payable monthly. The principal balance of the loan is payable upon the maturity date of December 31, 2019. The notes receivable carries certain financial and non-financial covenants. During the years ended December 31, 2019 and 2018, the Company recorded $82 and $73 of interest income, respectively.

 

In February 2011, the Company entered into a management services agreement which included a $2,500 credit facility, structured as a ten year term loan, with Curaleaf NJ, Inc., an unrelated party. The term loan has an interest rate of 18% and interest payments are payable quarterly or added to the principal balance of the loan if payment is not made. In January 2019, the Company entered into an amended and restated conditionally convertible promissory note (“Convertible Note”) to increase the term loan up to $70,000 with the same interest rate of 18% and maturity date of December 31, 2021. During the years ended December 31, 2019 and 2018, the Company recorded $8,017 and $4,070 of interest income, respectively.  Additionally, the Company provides Curaleaf NJ, Inc. with management services for fees which are added to the note receivable. Revenue from Curaleaf NJ, Inc. accounted for approximately 17% and 18% of total revenue for the years ended December 31, 2019 and 2018, respectively.

 

Under the terms of the Convertible Note, the outstanding balance of the principal and interest is convertible upon conversion of Curaleaf, NJ, Inc. from a non-for-profit corporation to a for-profit corporation in accordance with New Jersey law. In January 2020, Curaleaf NJ, Inc. submitted a request for authorization to sell and transfer its alternative treatment center (“ATC”) permit and substantially all of its assets to the Company in exchange for forgiveness of the outstanding balance of the principal and interest of the Convertible Note.  Upon receiving approval from the State of New Jersey and other regulatory bodies, it is expected that the Company will acquire Curaleaf NJ, Inc. with consideration consisting of the balance of the principal and interest of the Convertible Note.

 

The notes receivable are secured by assets or ownership interests in the customers’ business. The Company had $729 of notes receivable past due at December 31, 2019. As of December 31, 2018 the Company had $533 of notes receivable past due, however the full balance was repaid in February 2019.

 

26

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 8 — Property, plant and equipment

 

Property, plant and equipment and related accumulated depreciation consist of the following:

 

 

 

December 31, 

 

December 31, 

 

 

 

2019

 

2018

 

Land

 

$

487

 

$

210

 

Building and improvements

 

87,563

 

48,060

 

Furniture and fixtures

 

37,526

 

13,486

 

Information technology

 

1,858

 

582

 

Construction in progress

 

20,387

 

10,119

 

Total property and equipment

 

147,821

 

72,457

 

Less: Accumulated depreciation

 

(18,009

)

(5,488

)

Property, plant and equipment, net

 

$

129,812

 

$

66,969

 

 

In August 2019, the Company entered into a Purchase and Sale Agreement (“PSA”) with Freehold Properties, Inc. (“Freehold”) in which Freehold agreed to purchase 7 of the Company’s buildings that are used in the cultivation, manufacture and sale of cannabis. As part of the PSA, the Company agreed to lease the buildings from Freehold over a ten-year period. The Company received $25,245 cash and 311,991 shares of Freehold stock valued at $2,836. The Company recognized a gain of $693 as a result of the sale.

 

A reconciliation of the beginning and ending balances of property and equipment and accumulated depreciation is as follows:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

Building and

 

Furniture and

 

Information

 

in

 

 

 

 

 

Land

 

Improvements

 

Fixtures

 

Technology

 

Progress

 

Total

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

$

210

 

$

17,725

 

$

5,053

 

$

243

 

$

1,513

 

$

24,744

 

Additions

 

—

 

15,558

 

5,788

 

415

 

23,958

 

45,719

 

Business acquisitions

 

—

 

2,442

 

397

 

4

 

215

 

3,058

 

Disposals

 

—

 

(863

)

(111

)

(86

)

(4

)

(1,064

)

Transfers

 

—

 

13,198

 

2,359

 

6

 

(15,563

)

—

 

As of December 31, 2018

 

$

210

 

$

48,060

 

$

13,486

 

$

582

 

$

10,119

 

$

72,457

 

Additions

 

277

 

39,280

 

25,307

 

1,677

 

35,439

 

101,980

 

Business acquisitions

 

—

 

5,365

 

2,050

 

2

 

512

 

7,929

 

Disposals

 

—

 

(26,348

)

(2,525

)

(840

)

(4,832

)

(34,545

)

Transfers

 

—

 

21,206

 

(792

)

437

 

(20,851

)

—

 

Balance as of December 31, 2019

 

$

487

 

$

87,563

 

$

37,526

 

$

1,858

 

$

20,387

 

$

147,821

 

 

27

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

Building and

 

Furniture and

 

Information

 

in

 

 

 

 

 

Land

 

Improvements

 

Fixtures

 

Technology

 

Progress

 

Total

 

Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

$

—

 

$

681

 

$

462

 

$

82

 

$

—

 

$

1,225

 

Depreciation

 

—

 

2,841

 

1,405

 

94

 

—

 

4,340

 

Disposals

 

—

 

(1

)

(7

)

(69

)

—

 

(77

)

Transfers

 

—

 

—

 

—

 

—

 

—

 

—

 

As of December 31, 2018

 

$

—

 

$

3,521

 

$

1,860

 

$

107

 

$

—

 

$

5,488

 

Depreciation

 

—

 

7,680

 

6,041

 

403

 

—

 

14,124

 

Disposals

 

—

 

(635

)

(24

)

—

 

(944

)

(1,603

)

Transfers

 

—

 

—

 

—

 

—

 

—

 

—

 

Balance as of December 31, 2019

 

$

—

 

$

10,566

 

$

7,877

 

$

510

 

$

(944

)

$

18,009

 

 

Total depreciation expense of $14,124 and $4,340 for the years ended December 31, 2019 and 2018, respectively, which includes $5,505 and $1,226 recognized as cost of goods sold and $8,619 and $3,114 recognized as a part of operating expenses in the consolidated statements of profits and losses.

 

There were no impairments recorded against property, plant and equipment during the years ended December 31, 2019 and 2018.

 

Note 9 — Goodwill and intangible assets

 

Identifiable intangible assets consist of the following:

 

 

 

2018

 

2019

 

 

 

Balance at

 

Prior

 

 

 

Year-to-date

 

Balance at 

 

 

 

December 31,

 

Acquisitions (1)

 

Acquisitions

 

amortization

 

December 31, 

 

Licenses

 

$

50,842

 

$

4,485

 

$

139,946

 

$

(12,304

)

$

182,969

 

Trade names

 

1,981

 

—

 

370

 

(430

)

1,921

 

Non-compete agreements

 

102

 

100

 

700

 

(157

)

745

 

Total intangible assets, net

 

$

52,925

 

$

4,585

 

$

141,016

 

$

(12,891

)

$

185,635

 

 

(1)         During the year ended December 31, 2019, the Company completed the purchase price allocation for MTR which resulted in a corresponding reallocation from goodwill to intangibles.

 

Amortization of intangible assets was $12,891 and $4,313 for the years ended December 31, 2019 and 2018, respectively.

 

The Company has determined that the goodwill associated with all acquisitions belong to the cannabis operations segment. There was no goodwill associated with the non-cannabis operations segment for the years ended December 31, 2019 and 2018. The changes in the carrying amount of goodwill for the cannabis operations segment were as follows:

 

 

 

Balance at

 

Prior

 

2019

 

Balance at 

 

 

 

December 31, 2018

 

Acquisitions (1)

 

Acquisitions

 

December 31, 2019

 

2017 Acquisitions

 

$

31,561

 

$

289

 

$

—

 

$

31,850

 

Acquisition of CLMA

 

2,747

 

1,769

 

—

 

4,516

 

Acquisition of Swell

 

6,216

 

5,492

 

—

 

11,708

 

Acquisition of MTR

 

6,743

 

(2,962

)

—

 

3,781

 

Acquisition of Acres

 

—

 

—

 

17,471

 

17,471

 

Total Goodwill

 

$

47,267

 

$

4,588

 

$

17,471

 

$

69,326

 

 

28

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

(1)         During the year ended December 31, 2019, the Company completed the purchase price allocation for MTR and recorded several deferred tax liabilities for prior acquisitions.

 

There was no goodwill impairment at any CGUs as of December 31, 2019 or 2018.

 

Note 10 — Notes payable

 

Notes payable consist of the following:

 

 

 

December 31, 

 

December 31, 

 

 

 

2019

 

2018

 

Senior Unsecured Notes — 2019

 

 

 

 

 

Principal amount

 

$

—

 

$

2,570

 

Unamortized debt discount

 

—

 

(167

)

Net carrying amount

 

—

 

2,403

 

 

 

 

 

 

 

Financing Agreement — 2021

 

 

 

 

 

Principal amount and interest accrued

 

90,795

 

86,335

 

Unamortized debt discount

 

(5,773

)

(8,023

)

Net carrying amount

 

85,022

 

78,312

 

 

 

 

 

 

 

Secured Promissory Notes - 2029

 

2,505

 

2,654

 

Seller note payable

 

17,000

 

—

 

Other notes payable

 

426

 

935

 

Total notes payable

 

$

104,953

 

$

84,304

 

 

 

 

 

 

 

Current portion of notes payable

 

17,000

 

—

 

Current portion of notes payable - related parties

 

—

 

2,403

 

Long term notes payable

 

87,953

 

81,901

 

Total notes payable

 

$

104,953

 

$

84,304

 

 

Senior Unsecured Notes — 2019

 

In 2016, the Company entered into promissory notes (the “Senior Unsecured Notes — 2019”) with various related parties (see Note 18) for an aggregate principal amount of $2,570. The Senior Unsecured Notes — 2019 was repaid in full in December 2019.

 

The Senior Unsecured Notes — 2019 require interest-only payments at a rate of 14% per annum, payable quarterly, prior to maturity on December 30, 2019. Upon maturity, the Company shall pay all principal and accrued but unpaid interest. At its option, the Company may prepay the notes in full at any time before maturity.

 

In connection with the Senior Unsecured Notes — 2019, the Company issued warrants to purchase 4,609,288 shares of common stock at an exercise price of $0.11 per share. The liability component of the notes was recorded at fair value of $2,201 and the equity component at the residual amount of $369. A debt discount is reflected as a reduction of the carrying

 

29

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

value of the long-term debt on the Company’s consolidated statement of financial position and is being amortized to interest expense over the term of the notes using the effective interest method.

 

The Company recognized interest expense under the Senior Unsecured Notes — 2019 of $364 and $447 for the years ended December 31, 2019 and 2018, respectively, including interest expense related to the amortization of the debt discount of $0 and $82.

 

Financing Agreement — 2021

 

In August 2018, the Company issued $85,000 of senior secured debt (the “Financing Agreement — 2021”). In connection with this agreement, the Company paid a fee of $1,700 upon the initial funding.

 

The Financing Agreement — 2021 accrues interest at a rate of 15% per annum, of which 10% is payable in cash quarterly and 5% is payable in kind. Principal and interest are due in full on August 23, 2021.  The Financing Agreement — 2021 is secured by a guarantee of each wholly-owned direct and indirect subsidiary of the Company, as well as a pledge of the Company’s assets and each such guarantor and contains certain negative covenants, including restrictions on its ability to pay dividends, invest in non-wholly owned entities and to incur non-subordinated debt.

 

The Financing Agreement — 2021 may be pre-paid in tranches of up to $25,000 or $50,000 upon 90 or 180 days written notice. Any amount prepaid once the outstanding principal falls below $25,000 is subject to a prepayment premium.

 

In connection with the Financing Agreement — 2021, the Company issued warrants to purchase 3,598,492 shares of common stock for a nominal value. The liability component of the notes was recorded at fair value of $77,556 and the equity component at the residual amount of $7,444. A debt discount is reflected as a reduction of the carrying value of the long-term debt on the Company’s consolidated statements of financial position and is being amortized to interest expense over the term of the notes using the effective interest method.

 

The Company recognized interest expense under the Financing Agreement — 2021 of $15,682 and $5,215 for the years ended December 31, 2019 and 2018, respectively, including interest expense related to the amortization of the debt discount of $2,250 and $1,211, respectively.

 

The Company satisfied in full its obligations under the Financing Agreement — 2021 in connection with and out of the proceeds from with the new senior secured debt facility that occurred in January 2020 (see Note 20).

 

Secured Promissory Notes — 2029

 

In January 2017, the Company entered into secured promissory notes (the “Secured Promissory Notes — 2029”) with certain individuals for an aggregate principal amount of $2,505.

 

The Secured Promissory Notes — 2029 accrue interest at a rate of 12% per annum on the first $224 and 14% per annum on the remaining balance. Principal and interest are due in full on May 1, 2029.

 

The Company recognized interest expense under the Secured Promissory Notes — 2029 of $300 and $239 for the years ended December 31, 2019 and 2018, respectively.

 

Seller note

 

The Company issued certain notes payable in conjunction with the Emerald acquisition in the amount of $8,000, the Glendale acquisition in the amount of $7,500, and the Phyto acquisition in the amount of $1,500. The Company recognized $692 of interest expense on the Seller Note for the year ended December 31, 2019 (see Note 4).

 

30

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Future maturities

 

As of December 31, 2019, future principal payments due under Notes payable were as follows:

 

Year ending December 31,

 

Amount

 

2020

 

$

17,000

 

2021

 

90,795

 

2022

 

—

 

2023

 

—

 

2024 and thereafter

 

2,931

 

 

 

$

110,726

 

 

Note 11 — Shareholders’ equity

 

The authorized and issued share capital of the Company is as follows:

 

Authorized

 

As of December 31, 2019 the authorized share capital consists of an unlimited number of MVS without par value and an unlimited number of SVS without par value.

 

Issued

 

In connection with the reverse takeover transaction discussed in Note 3, each issued and outstanding share of the Company was converted into the right to receive 32.71 of SVS.  Prior period share amounts have been adjusted to reflect the conversion.  Also, in connection with the reverse takeover transaction, the Company issued 188,646 SVS for the purchase of LVI with an issuance date fair value of $940.

 

Multiple voting shares —  Holders of the MVS are entitled to 15 votes per share and are entitled to notice of and to attend at any meeting of the shareholders, except a meeting of which only holders of another particular class or series of shares will have the right to vote. As of December 31, 2019 and 2018, the MVS represent approximately 22.1% and 26.7%, respectively, of the total issued and outstanding shares and 81% and 84.5%, respectively, of the voting power attached to such outstanding shares. The MVS are convertible into SVS on a one-for-one basis at any time at the option of the holder or upon termination of the MVS structure. The MVS structure will terminate automatically on October 25, 2021. It will also terminate automatically upon the occurrence of the following events: (i) transfer or disposition of the MVS by the Company’s Executive Chairman, Boris Jordan, to one or more third parties which are not certain permitted holders as described in the Company’s Articles, and (ii) Mr. Jordan or his permitted holders no longer beneficially owning, directly or indirectly and in the aggregate, at least 50% of the issued and outstanding SVS and MVS. In 2019, the holder of 18,200,000 MVS voluntarily converted 18,200,000 MVS into SVS. As of December 31, 2019, the Company had 103,970,705 MVS issued and outstanding.

 

Subordinate voting shares — Holders of the SVS are entitled to one vote per share. As of December 31, 2019 the Company had 366,114,366 SVS issued and outstanding.

 

The Company had reserved 52,237,230 and 50,848,420 SVS, as of December 31, 2019 and 2018, respectively, for the issuance of stock options under the Company’s 2018 Long Term Incentive Plan (see Note 12).

 

31

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Treasury shares

 

For the year ended December 31, 2019, the Company repurchased an aggregate of 147,900 shares for a purchase price of $5.97 per share, or a total of $883. For the year ended December 31, 2018, the Company purchased an aggregate of 4,340,586 shares for the purchase price of $0.77 per share, or a total of $3,359. The amount is reflected as treasury shares in the consolidated statement of financial position.

 

Warrants

 

In connection with the Senior Unsecured Notes — 2019, the Company issued to the noteholders warrants to purchase 4,609,288 shares of common stock at an exercise price of $0.1113 per share.

 

In connection with the Financing Agreement — 2021, the Company issued to the noteholders warrants to purchase 3,598,492 shares of common stock at nominal value.

 

In connection with the reverse takeover transaction and private placement described in Note 3 all outstanding warrants were exercised in full immediately prior to the effective time of the merger of the Company with and into LVI. As of December 31, 2019 and 2018 there were no outstanding warrants to purchase shares.

 

Note 12 — Share-based payment arrangements

 

Stock option programs

 

The 2011 and 2015 Equity Incentive Plans provide for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other share-based awards. In connection with the Business Combination, all unexercised stock options of Curaleaf, Inc. issued and outstanding under the 2011 and 2015 Equity Incentive Plans were converted to the option to receive an equivalent substitute option under the 2018 Long Term Incentive Plan (the “LTIP”).  The LTIP provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards, dividend equivalents, and other share-based awards.  The number of SVS reserved for issuance under the LTIP is calculated as 10% of the aggregate number of SVS and MVS outstanding on an “as-converted” basis.

 

Stock option valuation

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes valuation model, where appropriate. In instances where stock options have performance or market conditions, the Company utilizes the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option.

 

The weighted average inputs used in the measurement of the grant date fair values of the equity-settled share-based payment plans were as follows:

 

32

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

 

 

December 31, 

 

 

 

2019

 

2018

 

Fair value at grant date

 

$

5.97

 

$

2.85

 

Share price at grant date

 

$

7.67

 

$

4.96

 

Exercise price

 

$

7.76

 

$

2.99

 

Expected volatility

 

87.2

%

145.8

%

Expected life

 

6.9

years

6.8

years

Expected dividends

 

—

%

—

%

Risk-free interest rate (based on government bonds)

 

1.90

%

2.68

%

 

The expected volatility is estimated based on the historical volatility of a publicly traded set of peer companies. The expected life in years represents the period of time that options granted are expected to be outstanding. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 

During the years ended December 31, 2019 and 2018, the Company recorded share-based compensation in the amount of $16,607 and $2,229, respectively.

 

Reconciliation of outstanding share options

 

The number and weighted-average exercise prices of share options under the share option program were as follows:

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Number of

 

average

 

Number of

 

average

 

 

 

options

 

exercise price

 

options

 

exercise price

 

 

 

2019

 

2019

 

2018

 

2018

 

Outstanding at January 1

 

31,269,448

 

$

0.94

 

34,377,946

 

$

0.26

 

Forfeited during the year

 

(178,086

)

1.10

 

(2,371,475

)

0.48

 

Exercised during the year

 

(6,905,117

)

0.31

 

(5,544,345

)

0.10

 

Granted during the year

 

2,733,370

 

8.35

 

4,807,322

 

4.76

 

Outstanding at December 31

 

26,919,615

 

$

1.59

 

31,269,448

 

$

0.94

 

Options exercisable at December 31

 

17,453,214

 

$

0.24

 

17,429,398

 

$

0.23

 

 

Restricted stock units (“RSUs”)

 

The number of RSUs awarded under the 2018 LTIP Plan were as follows:

 

 

 

Number of RSUs

 

 

 

2019

 

2018

 

Outstanding at January 1

 

166,215

 

—

 

Released during the year

 

(166,215

)

—

 

Granted during the year

 

2,170,064

 

166,215

 

Outstanding at December 31

 

2,170,064

 

166,215

 

RSUs vested at December 31

 

—

 

—

 

 

33

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 13 — Selling, general, and administrative expense

 

Selling, general, and administrative expenses consist of the following:

 

 

 

Year ended

 

 

 

December 31, 

 

 

 

2019

 

2018

 

Selling, general and administrative expenses:

 

 

 

 

 

Salaries and benefits

 

$

52,737

 

$

27,773

 

Sales and marketing

 

12,188

 

4,264

 

Rent and occupancy

 

4,613

 

7,944

 

Travel

 

6,574

 

3,131

 

Professional fees

 

30,550

 

12,564

 

Office supplies and services

 

8,290

 

4,662

 

Other

 

6,070

 

4,974

 

Total selling, general and administrative expense

 

$

121,022

 

$

65,312

 

 

Note 14 — Income taxes

 

The tax provision amounts recognized in the consolidated statements of profits and losses were as follows:

 

 

 

Year ended December 31, 

 

 

 

2019

 

2018

 

Current year

 

$

14,977

 

$

3,448

 

Provision to return adjustment

 

2,123

 

(304

)

Current tax expense

 

17,100

 

3,144

 

Deferred tax expense

 

6,959

 

2,499

 

Provision for income taxes

 

$

24,059

 

$

5,643

 

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into U.S. law. The Tax Act includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from 34% to 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). Under the Tax Act, the Company’s deferred tax assets and liabilities were remeasured at the lower federal tax rate, resulting in an income tax benefit of $672 recorded in the year ended December 31, 2018.

 

The Company’s provision for income taxes differs from applying the U.S. federal income tax rate to income before taxes primarily due to state income taxes, certain stock compensation, warrants accretion, tax credits and miscellaneous permanent differences.

 

34

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

 

 

Year ended December 31, 

 

 

 

2019

 

2018

 

Loss before provision for income taxes

 

$

(45,789

)

 

 

$

(56,234

)

 

 

 

 

 

 

 

 

 

 

 

 

Tax using the Company’s domestic tax rate

 

$

(6,868

)

15.0

%

$

(8,435

)

15.0

%

Effect of tax rates in foreign jurisdictions

 

(2,747

)

6.0

%

(3,371

)

6.0

%

Reduction in tax rate

 

—

 

—

%

(8

)

0.0

%

Tax effect of:

 

 

 

 

 

 

 

 

 

State taxes, net of federal benefit

 

3,130

 

(6.8

)%

1,302

 

(2.3

)%

Share-based compensation

 

4,993

 

(10.9

)%

458

 

(0.8

)%

Warrant accretion

 

—

 

—

%

(136

)

0.2

%

Non-taxable partnership income

 

(137

)

0.3

%

5,271

 

(9.4

)%

Non-deductible expenses

 

18,341

 

(40.1

)%

10,348

 

(18.4

)%

Non-taxable gain

 

—

 

—

%

—

 

—

%

Tax credits

 

—

 

—

%

(56

)

0.1

%

Other

 

1,290

 

(2.8

)%

131

 

(0.2

)%

Unrecognized deferred tax asset on current year losses

 

6,057

 

(13.2

)%

139

 

(0.2

)%

 

 

$

24,059

 

(52.5

)%

$

5,643

 

(10.0

)%

 

As the Company operates in the legal cannabis industry, the Company is subject to Section 280E of the Internal Revenue Code (“IRC”) which prohibits businesses engaged in the trafficking of controlled substances (within the meaning of Schedule I and II of the CSA) from deducting normal business expenses associated with the sale of cannabis, such as payroll and rent, from gross income (revenue less cost of goods sold). Section 280E, therefore, has a significant impact on the retail side of cannabis, but a lesser impact on cultivation and manufacturing operations.  Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (“IRS”) has subsequently applied Section 280E to state-legal cannabis businesses. The effective tax rate on a cannabis business depends on how large its ratio of non-deductible expenses is to its total revenues.  In the states that the Company operates in that align their tax codes with Section 280E, it is also unable to deduct normal business expenses for state tax purposes. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable and a higher effective tax rate than most industries.  Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses for state tax purposes.  The non-deductible expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying Section 280E to the Company’s businesses that are involved in selling cannabis, along with other typical non-deductible expenses such as lobbying expenses.

 

The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. 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 and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses.  Further, there are several pieces of legislation being considered by the U.S. Congress that could change the interpretation of Section 280E by removing its applicability to the legalized cannabis industry. Given these facts, the

 

35

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the Company.

 

Changes in the Company’s deferred taxes were as follows:

 

 

 

 

 

 

 

Acquired in

 

 

 

Deferred

 

Deferred

 

 

 

Net balance

 

Recognized in

 

business

 

 

 

tax

 

tax

 

 

 

at January 1

 

profit or loss

 

combination

 

Net

 

asset

 

liability

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

(5,163

)

$

7,122

 

$

(9,368

)

$

(7,409

)

$

—

 

$

(7,409

)

Accrued & prepaid expenses

 

(455

)

(7,226

)

—

 

(7,681

)

—

 

(7,681

)

Share-based compensation

 

1,117

 

(1,117

)

—

 

—

 

—

 

—

 

Inventory

 

(890

)

(6,662

)

—

 

(7,552

)

—

 

(7,552

)

Tax loss carryforward

 

903

 

1,460

 

265

 

2,628

 

2,628

 

—

 

Tax credit carryforward

 

536

 

(536

)

—

 

—

 

—

 

—

 

Tax asset (liability) before set-off

 

$

(3,952

)

$

(6,959

)

$

(9,103

)

$

(20,014

)

$

2,628

 

$

(22,642

)

 

 

 

 

 

 

 

Acquired in

 

 

 

Deferred

 

Deferred

 

 

 

Net balance

 

Recognized in

 

business

 

 

 

tax

 

tax

 

 

 

at January 1

 

profit or loss

 

combination

 

Net

 

asset

 

liability

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

(1,369

)

$

(3,794

)

$

—

 

$

(5,163

)

$

—

 

$

(5,163

)

Accrued & prepaid expenses

 

(1,038

)

583

 

—

 

(455

)

—

 

(455

)

Share-based compensation

 

815

 

302

 

—

 

1,117

 

1,117

 

—

 

Inventory

 

(1,097

)

207

 

—

 

(890

)

—

 

(890

)

Tax loss carryforward

 

1,236

 

(333

)

—

 

903

 

903

 

—

 

Tax credit carryforward

 

—

 

536

 

—

 

536

 

536

 

—

 

Tax asset (liability) before set-off

 

$

(1,453

)

$

(2,499

)

$

—

 

$

(3,952

)

$

2,556

 

$

(6,508

)

 

Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As the Company generally files separate U.S. and state tax returns for each legal entity within the consolidated group, the Company must evaluate the realization of deferred tax assets separately. As of December 31, 2019, the Company performed an evaluation to determine whether the net deferred tax assets at each filing group could be recognized. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company determined that the U.S. parent company, along with its Kentucky, Maryland, Missouri, Ohio, and Oregon operations should not recognize their deferred tax assets due to those companies being in cumulative loss positions.

 

Under IRC 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. The Company has not completed a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” as defined in Section 382. Future changes in the Company’s stock ownership, which may be outside of the Company’s control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to the Company.

 

36

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Deferred tax assets have not been recognized with respect to the following items, because it is deemed not probable that future taxable profit will be available against which the Company can utilize them.

 

 

 

December 31, 2019

 

December 31, 2018

 

 

 

Gross amount

 

Tax amount

 

Gross amount

 

Tax amount

 

Deductible/(taxable) temporary differences

 

$

20,535

 

$

5,798

 

$

(443

)

$

(116

)

Tax losses

 

65,345

 

17,447

 

5,708

 

627

 

 

 

$

85,880

 

$

23,245

 

$

5,265

 

$

511

 

 

At December 31, 2019 and 2018, the Company had tax loss carryforwards of $84,913 and $3,934, respectively, which begin to expire between 2020 through 2038 and 2020 through 2037, respectively. At December 31, 2019, the Company had a tax loss carryforward of $70,753 which will never expire.

 

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which the Company operates and conducts business.

 

Note 15 — Earnings per share

 

Basic and diluted loss per share attributable to Curaleaf Holdings, Inc. was calculated as follows:

 

 

 

Year ended

 

 

 

December 31, 

 

 

 

2019

 

2018

 

Numerator:

 

 

 

 

 

Net loss and comprehensive loss

 

$

(69,848

)

$

(61,877

)

Less: Net loss attributable to redeemable non-controlling interest

 

(2,604

)

(5,410

)

Net loss attributable to Curaleaf Holdings, Inc. — basic and diluted

 

$

(67,244

)

$

(56,467

)

Denominator:

 

 

 

 

 

Weighted average common shares outstanding — basic and diluted

 

462,911,053

 

396,498,411

 

Loss per share — basic and diluted

 

$

(0.15

)

$

(0.14

)

 

The Company’s potentially dilutive securities, which include stock options and warrants to purchase shares of stock, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to shareholders is the same. The Company excluded the following potential shares, presented based on amounts outstanding at each period end, from the computation of diluted loss per share attributable to Curaleaf, Inc. for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Year ended

 

 

 

December 31, 

 

 

 

2019

 

2018

 

Options to purchase common stock

 

26,919,615

 

31,269,448

 

 

In addition to the potentially dilutive securities noted above, as of December 31, 2019, the Company has 688,349 shares held in escrow in connection with the Eureka acquisition. As of December 31, 2018, the Company had 4,105,988 shares of stock in an escrow account which transferred to members of Blackjack upon the closing of the transaction (See Note 4).

 

Note 16 — Segment Reporting

 

The Company operates in two segments: the production and sale of cannabis via retail and wholesale channels (“Cannabis Operations”); and providing professional services including cultivation, processing and retail know-how and back office

 

37

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

administration, intellectual property licensing, real estate leasing services and lending facilities to medical and adult-use cannabis licensees under management service agreements (“Non-Cannabis Operations”).

 

 

 

Cannabis

 

Non-Cannabis

 

Total

 

For the year ended December 31, 2019:

 

 

 

 

 

 

 

Revenues

 

$

173,857

 

$

47,161

 

$

221,018

 

Gross profit

 

94,452

 

47,161

 

141,613

 

Loss from operations

 

(6,348

)

(21,370

)

(27,717

)

Net loss

 

(19,649

)

(50,198

)

(69,848

)

 

 

 

Cannabis

 

Non-Cannabis

 

Total

 

For the year ended December 31, 2018:

 

 

 

 

 

 

 

Revenues

 

$

55,661

 

21,396

 

$

77,057

 

Gross profit

 

24,891

 

21,396

 

46,287

 

Income (loss) from operations

 

(25,156

)

(3,525

)

(28,681

)

Net loss

 

(29,820

)

(32,057

)

(61,877

)

 

 

 

Cannabis

 

Non-Cannabis

 

Total

 

As of December 31, 2019:

 

 

 

 

 

 

 

Total assets

 

$

465,169

 

$

271,757

 

$

736,926

 

Total liabilities

 

93,785

 

239,695

 

333,480

 

 

 

 

Cannabis

 

Non-Cannabis

 

Total

 

As of December 31, 2018:

 

 

 

 

 

 

 

Total assets

 

$

88,524

 

$

481,312

 

$

569,836

 

Total liabilities

 

12,307

 

121,887

 

134,194

 

 

Note 17 — Commitments and contingencies

 

Leases

 

The Company leases its facilities under operating leases that provide for the payment of real estate taxes and other operating costs in addition to normal rent.

 

38

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

At December 31, 2019, approximate future minimum payments due under non-cancelable operating leases were as follows:

 

Period

 

Scheduled payments

 

2020

 

17,381

 

2021

 

16,377

 

2022

 

17,250

 

2023

 

16,126

 

2024 and thereafter

 

62,320

 

Total undiscounted lease liability

 

129,454

 

Impact of discount

 

(36,300

)

Lease liability at December 31, 2019

 

93,154

 

Less current portion of lease liability

 

(11,835

)

Long-term portion of lease liability

 

$

81,319

 

 

The following table provides a reconciliation of commitments at December 31, 2018 to the Company’s lease liability as of January 1, 2019 and December 31, 2019:

 

Disclosed commitments as of December 31, 2018

 

$

58,666

 

Impact of discount

 

(15,824

)

Lease liability at January 1, 2019

 

42,842

 

Lease payments

 

(11,348

)

Amortization of discount

 

6,216

 

New leases acquired

 

55,444

 

Lease liability at December 31, 2019

 

$

93,154

 

 

Real estate leases typically extend for a period of 1—10 years. Some leases for office space include extension options exercisable up to one year before the end of the cancellable lease term. Typically, the option to renew the lease is for an additional period of 5 years after the end of the initial contract term and are at the option of the Company as the lessee. Lease payments are in substance fixed, and certain real estate leases include annual escalation clauses with reference to an index or contractual rate.

 

The Company leases machinery and equipment but does not purchase or guarantee the value of leased assets. The Company considers these assets to be of low-value or short-term in nature and therefore no right-of use assets and lease liabilities are recognized for these leases. Expenses recognized relating to short-term leases and leases of low value during the years ended December 31, 2019 and 2018 were immaterial.

 

The Company leases space for its offices, cultivation centers, and retail dispensaries. Key movements relating to the right-of-use lease asset balances are presented below:

 

 

 

Scheduled Payments

 

Carrying amount, January 1, 2019

 

$

41,853

 

Additions to leased assets

 

51,211

 

Depreciation charges

 

(10,270

)

Carrying amount, December 31, 2019

 

$

82,794

 

 

39

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

The total interest expense on lease liabilities for the year ended December 31, 2019 was $6,357.

 

The total cash outflow for lease liability payments for the year ended December 31, 2019 was $11,073.

 

Indemnification agreements

 

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and senior management team that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnification agreements. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its consolidated financial statements.

 

Legal

 

The Company is involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits are provided to the extent that losses are deemed both probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is management’s opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on the Company.

 

Among other legal disputes, the Company is currently involved in the following proceedings:

 

Connecticut Arbitration.  Pursuant to the Second Amended and Restated Operating Agreement of Doubling Road Holdings, LLC, the holders of a majority of the Series A-2 Units of Doubling Road Holdings had the right to require that PalliaTech or any Affiliate purchase all of the Series A-2 Units in exchange for shares of PalliaTech, Inc. (now Curaleaf, Inc.), the parent of PalliaTech, pursuant to a defined “Buy-Out Exchange Ratio.”  On October 25, 2018, the Holders, Curaleaf, and others entered into a Stipulation of Settlement in order to resolve a dispute with respect to the applicable Buy-Out Exchange Ratio for the Put Right.  The Stipulation of Settlement provided, among other things, that PalliaTech CT purchased the Holders’ interests in exchange for (1) a payment of $40,142; (2) 4,755,548 SVS; and (3) the potential for additional equity in Curaleaf depending on the results of a “Settlement Second Appraisal.”  Pursuant to the Settlement Second Appraisal, dated December 12, 2019, and the terms of the Stipulation of Settlement, the Holders received 2,016,859 additional SVS.  On January 23, 2020, the Holders filed new claims in arbitration including for fraudulent inducement and breach of contract, relating primarily to a lock-up agreement that the Holders signed in connection with the Stipulation of Settlement.

 

Florida Arbitration / Litigation.  On December 10, 2018, Jayson Weisz and SRC Medical Partners, LLC initiated an arbitration against PalliaTech Florida LLC.  On March 19, 2019, Weisz and SRC derivatively on behalf of PalliaTech Florida LLC filed a complaint against Defendants Curaleaf Florida LLC, PalliaTech Florida, Inc., Joseph Lusardi, and Boris Jordan in the Complex Business Litigation Section in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. Plaintiffs’ derivative Complaint seeks the judicial dissolution of Curaleaf Florida LLC and asserts various causes of action against Defendants, including for breach of contract, civil conspiracy, breach of fiduciary duty, fraudulent transfer, and a declaratory judgment appointing Robins to the Board of Managers.  On January 10, 2020, Weisz, JRF Group, and the Curaleaf entities entered into a Stipulation of Settlement pursuant to which the Company purchased JRF Group’s interest in PalliaTech Florida LLC for consideration of 1,772,062 SVS and $2,500 in cash.  During

 

40

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

February, 2020, SRC, PalliaTech Florida LLC, PalliaTech Florida, Inc., and Lusardi participated in a final arbitration hearing. The parties are currently exchanging post-hearing briefs.

 

Securities Class Action.  On August 5, 2019, a purported class action was filed against Curaleaf, Joseph Lusardi, Neil Davidson, and Jonathan Faucher in the United States District Court for the Eastern District of New York on behalf of persons or entities who purchased or otherwise acquired publicly traded securities of the Company from November 21, 2018 to July 22, 2019.  On January 6, 2020, an Amended Class Action Complaint was filed against Defendants.  The Amended Class Action Complaint alleges that Defendants made materially false and/or misleading statements regarding Curaleaf’s CBD products based on a July 22, 2019 letter received from the U.S. Food and Drug Administration (“FDA Letter”).  According to the Amended Class Action Complaint, the FDA Letter states that several of the CBD products sold on Curaleaf’s website were “misbranded drugs” in violation of the Federal Food, Drug, and Cosmetic Act.  The Amended Class Action Complaint asserts claims (1) against all Defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and (2) against Lusardi, Davidson, and Faucher for alleged violations of Section 20(a) of the Securities Exchange Act of 1934.  On March 6, 2020, the Defendants filed a motion to dismiss arguing that the Amended Class Action Complaint failed to allege (1) any false or misleading statement or omission, (2) scienter, (3) any domestic transactions, or (4) control person liability.

 

Taxes

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The U.S. parent company is currently under audit by the Internal Revenue Service (“IRS”) for the years ending December 31, 2016 through December 31, 2018.  The IRS has proposed adjustments relating the U.S. parent company’s treatment of expenses under Section 280E, however, as of December 31, 2019, there has been no resolution to any adjustments. Although the Company currently believes all its tax positions can be sustained, the ultimate resolution of tax matters could have a significant impact on the Company’s consolidated financial statements.   The Company’s tax years are still open under statute from December 31, 2016, to the present.

 

Note 18 — Related party transaction

 

The Company incurred the following transactions with related parties during the years ended December 31, 2019 and 2018.

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

2019

 

2018

 

2019

 

2018

 

Transaction

 

Related Party Transactions

 

Balance Receivable (Payable)

 

Senior Unsecured Note - 2019 (1)

 

$

237

 

$

237

 

$

—

 

$

(1,666

)

Consulting Fees (1)

 

319

 

201

 

—

 

—

 

Deal Fees (1)

 

—

 

1,800

 

—

 

—

 

Travel and Reimbursement (1)

 

816

 

1,052

 

—

 

—

 

Rent expense (1)

 

238

 

91

 

—

 

—

 

Contingent Liability (2)

 

—

 

—

 

(18,000

)

(18,000

)

 

 

$

1,610

 

$

3,381

 

$

(18,000

)

$

(19,666

)

 

(1) Interest, debt related, general and administrative fees due to a director in common.

(2) Contingent consideration liability for the purchase of CLMA.

 

41

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 19 — Fair value measurements

 

The Company’s financial instruments consist of cash, restricted cash and cash equivalents, notes receivable, accounts payable, accrued expenses, long-term debt and redeemable non-controlling contingency. The fair values of cash, restricted cash, notes receivable, accounts payable and accrued expenses approximate their carrying values due to the relatively short-term to maturity. The Company’s long-term notes payable carrying value at the effective interest rate approximates fair value.

 

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:

 

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2 — Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and

 

Level 3 — Inputs for the asset or liability that are not based on observable market data.

 

The Company’s assets measured at fair value on a nonrecurring basis include investments, long-lived assets, indefinite-lived intangible assets and goodwill. The Company reviews the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually as of December 31, for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to be Level 3 measurements.

 

There have been no transfers between fair value levels during the years ended December 31, 2019 and 2018.

 

 

 

Fair Value Measurements

 

 

 

as of December 31, 2019 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Biological assets

 

$

—

 

$

—

 

$

19,197

 

$

19,197

 

 

 

$

—

 

$

—

 

$

19,197

 

$

19,197

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Non-controlling interest redemption and contingent consideration liabilities

 

$

—

 

$

—

 

$

35,310

 

$

35,310

 

 

 

$

—

 

$

—

 

$

35,310

 

$

35,310

 

 

 

 

Fair Value Measurements

 

 

 

as of December 31, 2018 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Biological assets

 

$

—

 

$

—

 

$

4,491

 

$

4,491

 

 

 

$

—

 

$

—

 

$

4,491

 

$

4,491

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Non-controlling interest redemption and contingent consideration liabilities

 

$

—

 

$

—

 

$

20,957

 

$

20,957

 

 

 

$

—

 

$

—

 

$

20,957

 

$

20,957

 

 

42

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Biological assets

 

The fair value of biological assets is categorized within Level 3 on the fair value hierarchy. The Company measures its biological assets at fair value less costs to sell. This is determined using a model which estimates the expected harvest yield in grams for plants that are actively growing, and then adjusts that amount for the expected selling price per gram in the market in which the biological asset is growing. The estimates used in determining the fair value of biological assets are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods. The significant assumptions used in determining the fair value of biological assets include:

 

·                  Expected yield by plant — represents the expected number of grams of finished cannabis inventory which are expected to be obtained from each harvested cannabis plant;

 

·                  Wastage of plants — represents the weighted average percentage of biological assets which are expected to fail to mature into cannabis plants that can be harvested;

 

·                  Duration of the production cycle — represents the weighted average number of weeks out of the 12 week growing cycle that biological assets have reached as of the measurement date;

 

·                  Percentage of costs incurred as of this date compared to the total costs expected to be incurred — this is calculated as the cost per gram of harvested cannabis to complete the sale of cannabis plants post harvest, consisting of the cost of direct and indirect materials and labor related to further production, labeling, and packaging;

 

·                  Percentage of costs incurred for each stage of plant growth — represents the direct and indirect production costs incurred that are capitalized; and

 

·                  Market values — this is calculated as the current market price per gram in the market in which the biological asset is being produced. This is expected to approximate future selling price.

 

The Company accretes fair value on a straight line basis according to stage of growth. As a result, a cannabis plant that is 50% through its 12 week growing cycle would be ascribed approximately 50% of its harvest date expected fair value. All plants are to be harvested cannabis and as of December 31, 2019 and 2018, on average, were 49% and 59% complete, respectively. An increase or decrease in the estimated sale price would result in a significant change in the fair value of biological assets.

 

Non-controlling interest contingency and buyout

 

During 2018 the Company agreed to acquire the remaining non-controlling interest in Costa Nursery Farms, LLC, d/b/a Modern Health Concepts (“MHC”) and Double Road Holdings, LLC (“DRH”), therefore voiding the non-controlling interest put options and the non-controlling interest purchased call options from the original agreements. The MHC acquisition consideration was for $25,000 in cash as well as common stock and the DRH acquisition consideration was for $40,142 in cash as well as common stock. Upon each acquisition, the Company reversed the non-controlling interest contingency liabilities.

 

The non-controlling interest in MHC of $12,000 was calculated using the fair value method of the assets acquired and liabilities assumed. The value used in this determination was the purchase price for the controlling interest. The Company used the fair value method as it believes that the risks and rewards of the acquired entity are shared by the Company and the non-controlling interest. The MHC Agreement contained a put option under which the non-controlling interest could require the Company to redeem its equity interest in MHC. The redemption value was to be determined by mutual

 

43

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

agreement or by an independent valuation expert subject to certain parameters that include a “floor” amount of $12,000 and a “ceiling” amount equal to 75% of the excess of the fair market value over $40,000 times the percentage interest held by the non-controlling interest (30% at the acquisition date). The Company had a call option under which it may require the non-controlling interest to sell under the same terms. As a result of the transactions described above there was no direct non-controlling interest in MHC as of December 31, 2018.

 

PT Florida is owned 77.2% by the Company and 22.8% by third parties (the “Remaining Florida Minority Holders”). The Remaining Florida Minority Holders, through their 22.8% non-controlling interest in PT Florida, indirectly held a 15.9% non-controlling interest in MHC as of December 31, 2019. In January 2020, half of the Remaining Minority Holders agreed to sell their 11.4% equity in PT Florida for consideration of $4,159 cash and 1,772,062 SVS, valued at $10,000. In addition, in connection with this transaction, the Company paid the selling Remaining Minority Holders  $1,651 cash to retire principal and interest on the half of the Secured Promissory Notes — 2029 held by the selling Remaining Minority Holder. (See Note 10).

 

In October 2018, the Company agreed to acquire from the minority members of DRH (the “DRH Minority Members”) their remaining 49% membership interests in DRH (the “DRH Minority Membership Units”) in consideration for $40,142 in cash (the “Connecticut Minority Buy-Out”) and $41,747 which was settled through the issuance of 4,755,548 SVS. This transaction closed immediately following completion of the Business Combination discussed in Note 3. The number of SVS to be paid to the DRH Minority Members for the DRH Minority Membership Units may be adjusted based upon an independent valuation to be conducted following the completion of the Business Combination. The valuation will first establish the value of DRH as a percentage of the value of Curaleaf Inc. as at March 8, 2018 (the “Exchange Ratio”), and then convert the Exchange Ratio into a percentage of the fully diluted equity as of the date of the Business Combination, not taking into account shares to be issued in connection with the Private Placement (the “Diluted Share Count”). Upon completion of this valuation, the number of additional SVS to be issued to DRH Minority Members shall be determined based on a prescribed formula, provided that the aggregate number of SVS issued to the DRH Minority Holders shall not exceed an additional 1.96% of the Diluted Share Count representing 8,962,380 SVS. In February 2020, the Company issued 2,016,858 SVS to the former minority members of DRH as a result of the second independent valuation.

 

As of December 31, 2019 and 2018 the Company recognized a non-controlling interest buyout liability in the amount of $16,174 and $2,957, respectively, with the offset being recognized in redeemable non-controlling interest buyout as contra equity.  An increase or decrease in the weighted average cost of capital (“WACC”) would result in a significant change in the fair value of the non-controlling interest contingency.

 

Financial Risk Management

 

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below:

 

Credit Risk

 

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at December 31, 2019 and 2018 is the carrying amount of cash and cash equivalents, accounts receivable and notes receivable. The Company does not have significant credit risk with respect to its customers. All cash and cash equivalents are placed with major U.S. financial institutions.

 

The Company provides credit to its customers, mostly wholesale and MSA customers, in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk.

 

As of December 31, 2019, future loan receivable receipts were as follows:

 

44

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Year Ending December 31, 

 

Amount

 

2020

 

$

729

 

2021

 

56,437

 

2022

 

—

 

2023

 

—

 

2024 and thereafter

 

—

 

 

 

$

57,166

 

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.

 

Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cash and cash equivalents bear interest at market rates. The Company’s notes receivable and financial debts have fixed rates of interest and therefore expose the Company to interest rate fair value risk.

 

Capital Management

 

The Company’s objectives when managing capital are to ensure that there are adequate capital resources to safeguard the Company’s ability to continue as a going concern and maintain adequate levels of funding to support its ongoing operations and development such that it can continue to provide returns to shareholders and benefits for other stakeholders.

 

The capital structure of the Company consists of items included in shareholders’ equity and debt, net of cash and cash equivalents. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the Company’s underlying assets. The Company plans to use existing funds, as well as funds from the future sale of products to fund operations and expansion activities. As of December 31, 2019, the Company was not subject to externally imposed capital requirements.

 

Note 20 — Subsequent events

 

The Company has evaluated subsequent events through March 26, 2020, the date the consolidated financial statements were available to be issued.

 

In January 2020, the Company closed on a Senior Secured Term Loan Facility (“Facility”) from a syndicate of lenders totaling $300,000. The notes bear interest at a rate of 13.0% per annum, payable quarterly in arrears with a maturity on December 2023. The Company satisfied its obligations in full under the Financing Agreement — 2021 in connection with, and out of the proceeds of the Facility (see Note 10).

 

See Note 19 for information regarding acquisitions of certain minority interests that were signed after December 31, 2019.

 

See Note 17 for information regarding developments in certain legal proceedings that occurred after December 31, 2019.

 

45

 

Curaleaf Holdings, Inc.

Notes to Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

See Note 4 for information regarding acquisitions that were signed after December 31, 2019.

 

46



Exhibit 4.3

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018

 

(Amounts in thousands, except share and per share amounts)

 

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Curaleaf Holdings, Inc. (the “Company” or “Curaleaf”) is for the years ended December 31, 2019 and 2018 prepared as of March 26, 2020. It is supplemental to, and should be read in conjunction with, the Company’s audited consolidated financial statements and the accompanying notes for the years ended December 31, 2019 and 2018. For the purposes of this MD&A, the terms “Company” and “Curaleaf” mean Curaleaf Holdings, Inc. and, unless the context otherwise requires, includes its subsidiaries. Additional information regarding Curaleaf is available on the Company’s website at www.curaleaf.com or through the SEDAR website at www.sedar.com. The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”) in effect as of and for the year ended December 31, 2019.  Financial information presented in this MD&A is presented in United States (“U.S.”) dollars (“$” or “US$”), unless otherwise indicated.

 

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 — Continuous Disclosure Obligations of the Canadian Securities Administrators and Staff Notice 51-352 (Revised) — Issuers with US Marijuana Related Activities (“Staff Notice 51-352”).

 

This MD&A contains “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States securities laws (“forward-looking statements”). Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on management’s current beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions of the Company. In addition, the Company may make or approve certain statements in future filings with Canadian securities regulatory authorities, in press releases, or in oral or written presentations by representatives of the Company that are not statements of historical fact and may also constitute forward-looking statements. All statements, other than statements of historical fact, made by the Company that address activities, events or developments that the Company expects or anticipates will or may occur in the future are forward-looking statements, including, but not limited to, statements preceded by, followed by or that include words such as “may”, “will”, “would”, “could”, “should”, “believes”, “estimates”, “projects”, “potential”, “expects”, “plans”, “intends”, “anticipates”, “targeted”, “continues”, “forecasts”, “designed”, “goal”, or the negative of those words or other similar or comparable words and includes, among others, information regarding: expectations for the effects of any transactions; expectations for the effects and potential benefits of any transactions; expectations for the effects of COVID-19 on the business’ operations and financial condition; statements relating to the business and future activities of, and developments related to, the Company after the date of this MD&A, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Company’s business, operations and plans; expectations that planned acquisitions will be completed; expectations that licenses applied for will be obtained; potential future legalization of adult-use and/or medical cannabis under U.S. federal law; expectations of market size and growth in the U.S. and the states in which the Company operates; expectations for other economic, business, regulatory and/or competitive factors related to the Company or the cannabis industry generally; the ability for U.S. holders of securities of the Company to sell them on the Canadian Securities Exchange (“CSE”); and other events or conditions that may occur in the future. Forward-looking statements may relate to future financial conditions, results of operations, plans, objectives, performance or business developments. These statements speak only as of and at the date they are made and are based on information currently available and on the then current expectations. Holders of securities of the Company are cautioned that forward-looking statements are not based on historical facts but instead are based on reasonable assumptions and estimates of management of the Company at the time they were provided or made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, including, but not limited to, risks and uncertainties related to: business structure risks; legal and regulatory risks inherent in the cannabis industry; financing risks related to additional financing and restricted access to banking; general regulatory and legal risks including risk of civil asset forfeiture; risks relating to anti-money laundering laws and regulations; lack of access to U.S. bankruptcy protections, heightened scrutiny by regulatory authorities; risk of legal, regulatory or political change, general regulatory and licensing risks, limitations on ownership of licenses, regulatory action and approvals from the

 

1

 

Food and Drug Administration and risks of litigation; environmental risks including environmental regulation and unknown environmental risks; general business risks including risks related to COVID-19 pandemic, failure to complete acquisitions; risks related to the senior secured debt facility, unproven business strategy, service providers, enforceability of contracts, resale of the SVS on the CSE; reliance on the expertise and judgment of senior management of the Company, and ability to retain such senior management; the concentrated voting control of the Company’s Executive Chairman, Boris Jordan, risks inherent in an agricultural business; unfavorable publicity or consumer perception, product liability, product recalls, results of future clinical research, difficulty attracting and retaining personnel, dependence on suppliers, reliance on inputs, limited market data and difficulty to forecast, intellectual property risks, constraints on marketing products, fraudulent or illegal activity by employees, contractors and consultants, information technology systems and cyber-attacks, security breaches, reliance on management services agreements with subsidiaries and affiliates, website accessibility, high bonding and insurance coverage, risks of leverage, future acquisitions or dispositions; , management of growth, performance not indicative of future results and financial projections may prove materially inaccurate or incorrect, conflict of interest; tax risks as well as those risk factors discussed under “Risk Factors” in this MD&A and under “Risk Factors” in the Company’s Annual Information Form dated September 23, 2019.

 

The discussion of risk factors in this MD&A has been updated to include discussion of risks related to the current pandemic caused by the spread of the novel coronavirus (“COVID-19”).   The nature and scope of the pandemic and its impact are rapidly developing  and it is difficult for management to identify at the current time all risks, or quantify those identified, or to assess their impact on particular financial measures and operating results.  Nevertheless, discussion under “Risk Factors” identifies potential areas of negative potential impact that may be caused by the pandemic.

 

The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. In particular, but without limiting the foregoing, disclosure in this MD&A as well as statements regarding the Company’s objectives, plans and goals, including future operating results and economic performance may make reference to or involve forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Certain of the forward-looking statements and other information contained herein concerning the cannabis industry, its medical, adult-use and hemp-based CBD markets, and the general expectations of the Company concerning the industry and the Company’s business and operations are based on estimates prepared by the Company using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which the Company believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Company is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry involves risks and uncertainties that are subject to change based on various factors.

 

A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. You should not place undue reliance on forward-looking statements contained in this MD&A. Such forward-looking statements are made as of the date of this MD&A. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

 

This MD&A contains future-oriented financial information and financial outlook information (collectively, “FOFI”) about the Company’s prospective results of operations, production and production efficiency, commercialization, revenue and cash on hand, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth in the above paragraph. FOFI contained in this MD&A was approved by management as of the date of this MD&A and was provided for the purpose of providing further information about the Company’s future business operations. The Company disclaims any intention or obligation to update or revise any FOFI contained in this MD&A, whether as a result of new information, future events or otherwise, unless required pursuant to applicable law. Readers are cautioned that the FOFI contained in this MD&A should not be used for purposes other than for which it is disclosed herein.

 

2

 

OVERVIEW OF THE COMPANY

 

Curaleaf operates as a life science company developing full scale cannabis operations, with core competencies in cultivation, manufacturing, dispensing and medical cannabis research.  Curaleaf is a leading vertically integrated medical and wellness cannabis operator in the United States. Headquartered in Wakefield, Massachusetts, the Company has operations in fourteen states and, as of December 31, 2019, operates fifty-one dispensaries, fourteen cultivation sites and fifteen processing sites with a focus on highly populated, limited license states, including New York, New Jersey, Florida and Massachusetts. The Company leverages its extensive research and development capabilities to distribute cannabis products with the highest standard for safety, effectiveness, consistent quality and customer care. The Company is committed to leading the industry in education and advancement through research and advocacy. The Company markets to medical and adult-use customers through brand strategies intended to build trust and loyalty.

 

The Company was one of the first professionally managed companies to enter the U.S. legal cannabis industry, which is one of the fastest growing industries in the U.S. and still in its early stages of maturity. Formed in 2010, the Company began as a medical device company, and was the first to develop and patent a medical cannabis vaporizing unit capable of delivering single metered doses of cannabis medicine to patients.

 

Presently, the Company is a diversified holding company dedicated to delivering market-leading products and services while building trusted national brands within the legal cannabis industry. Through its team of physicians, pharmacists, medical experts and industry innovators, the Company has developed a portfolio of branded cannabis-based therapeutic offerings in multiple formats and a strategic network of branded retail dispensaries. Exemplifying its commitment to quality, Curaleaf’s Florida operations were the first in the cannabis industry to receive the Safe Quality Food certification under the Global Food Safety Initiative, setting a new standard of excellence.

 

Curaleaf Holdings, Inc., formerly known as Lead Ventures, Inc. (“LVI”), was incorporated under the laws of British Columbia, Canada on November 13, 2014. The Company changed its name to “Curaleaf Holdings, Inc.” as part of the business combination described below under the heading “Reverse Takeover Transaction and Private Placement”.

 

The Company’s Subordinated Voting Shares (“SVS”) are listed for trading on the CSE under the ticker symbol “CURA” and on the OTCQX under the ticker symbol “CURLF”.

 

In order to achieve its strategy, the Company has completed several acquisitions since its formation.  The Company expects to continue to actively pursue other acquisition, disposition and investment opportunities in the future.

 

The consolidated financial statements of the Company include the financial statements of the Company and its direct subsidiaries, indirect subsidiaries that are not wholly owned by the Company and other entities consolidated other than on the basis of ownership:

 

 

 

 

 

December 31, 

 

December 31, 

 

 

 

State of

 

2019

 

2018

 

Business name

 

operations

 

ownership %

 

ownership %

 

CLF AZ, Inc.

 

AZ

 

100

%

100

%

CLF NY, Inc.

 

NY

 

100

%

100

%

Curaleaf CA, Inc.

 

CA

 

100

%

100

%

Curaleaf KY, Inc.

 

KY

 

100

%

100

%

Curaleaf Massachusetts, Inc.

 

MA

 

100

%

100

%

Curaleaf MD, LLC

 

MD

 

100

%

100

%

Curaleaf OGT, Inc.

 

OH

 

100

%

100

%

Curaleaf PA, LLC

 

PA

 

100

%

100

%

Curaleaf, Inc.

 

MA

 

100

%

100

%

Focused Investment Partners, LLC

 

MA

 

100

%

100

%

PalliaTech Maine, Inc.

 

ME

 

100

%

100

%

PalliaTech RI, LLC

 

RI

 

100

%

100

%

PalliaTech CT, Inc.

 

CT

 

100

%

100

%

PalliaTech OR, LLC (formerly Groen)

 

OR

 

100

%

100

%

PalliaTech Florida, Inc.

 

FL

 

100

%

100

%

PalliaTech Florida, LLC

 

FL

 

77.2

%

75

%

Curaleaf Florida, LLC

 

FL

 

70

%

70

%

CLF MD Processing, LLC

 

MD

 

100

%

85

%

PT Nevada, Inc.

 

NV

 

100

%

—

 

HMS Health LLC

 

MD

 

—

 

—

 

HMS Processing LLC

 

MD

 

—

 

—

 

HMS Sales LLC

 

MD

 

—

 

—

 

MI Health LLC

 

MD

 

—

 

—

 

Town Center Wellness, LLC

 

MD

 

—

 

—

 

 

3

 

Reverse Takeover Transaction and Private Placement

 

On July 25, 2018, Curaleaf, Inc. entered into an agreement (“Transaction Agreement”) with LVI which resulted in a reverse takeover of LVI by the security holders of Curaleaf, Inc. and the listing for trading of the SVS of the issuer resulting from the reverse takeover, Curaleaf Holdings, Inc., on the CSE. Pursuant to the Transaction Agreement, the shareholders of LVI received, upon completion of the reverse takeover, SVS having an aggregate value of C$2,160.

 

On October 25, 2018, Curaleaf, Inc. and the Company completed the combination of their respective businesses (the “Business Combination”) pursuant to the Transaction Agreement and an Agreement and Plan of Transaction among Curaleaf, Inc., the Company (then known as Lead Ventures, Inc.) and Curaleaf Mergerco, Inc. The Business Combination was structured as a series of transactions, including a Canadian three-cornered amalgamation transaction and a series of U.S. merger and reorganization steps.

 

Immediately prior to the Business Combination, 1177687 B.C. Ltd. (“Curaleaf FinCo”), a special purpose corporation, completed a brokered and a non-brokered subscription receipt private placement financing at a price of C$11.45 per subscription receipt for aggregate gross proceeds of approximately C$520,000 (the “Private Placement”).

 

As part of the Business Combination, the Company, Curaleaf FinCo and 1177679 B.C. Ltd., a wholly-owned subsidiary of the Company, were parties to a three-cornered amalgamation (the “Amalgamation”) pursuant to which the shareholders of Curaleaf FinCo (being the investors in the Private Placement after automatic conversion of their subscription receipts into common shares of Curaleaf FinCo (the “Curaleaf FinCo Shares”) received SVS of the Company in exchange for their Curaleaf FinCo Shares. Concurrently with the Amalgamation, Curaleaf MergerCo Inc., a wholly-owned subsidiary of the Company, merged with and into Curaleaf, Inc., with Curaleaf, Inc. continuing as the surviving corporation and becoming a wholly-owned subsidiary of the Company.

 

In connection with the Business Combination, Gociter Holdings Ltd., a corporation of which Boris Jordan, the Executive Chairman of Curaleaf Holdings, Inc. is the beneficial owner, made a contribution of 3,734,965 common shares to the Company in exchange for 122,170,705 multiple voting shares (“MVS”) of Curaleaf Holdings, Inc., representing 100% of the issued and outstanding MVS as of closing of the Business Combination.

 

Company Performance and Objectives

 

The Company is currently active in numerous cannabis programs across the U.S. In the U.S., thirty-three states have legalized the use of medical cannabis for patients with certain qualifying conditions. In most of these medical states, a regulatory framework is in place whereby patients can receive a recommendation from a certified physician to purchase medical cannabis in approved dispensaries. In the U.S., eleven states have legalized cannabis for adult-use (“adult-use”). In many of these adult-use states, customers can purchase cannabis from approved dispensaries by providing identification proving the customer is 21 years of age or older.

 

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A key aspect of the Company’s business plan is achieving “vertical integration” in each cannabis program in which it operates. Vertical integration means controlling the entire supply chain: from cultivating cannabis, to processing the cannabis into oils and other formulated products and, ultimately, selling the end-product to customers and/or patients.

 

The Company plans to continue growth of its operations via expansion in three dimensions: acquiring licenses in limited-license markets, increasing presence in current markets, and increasing exposure in mass markets. While the Company’s goal is to have its own licensed operations in each of its markets, we may enter a market through production and/or marketing arrangements where such arrangements provide opportunity for accelerated roll-out.

 

Limited-License Markets. The majority of the markets in which the Company currently operates have formal regulations limiting the number of cannabis licenses that will be awarded, thus forming high barriers to entry, limited market participants, and protected market share in these limited-license states. Curaleaf intends to apply for new licenses or acquire businesses within limited-license markets in which the Company does not currently operate.

 

Increasing Presence in Current Markets. The Company plans to grow within its current markets by pursuing opportunities for vertical integration, acquiring additional dispensary licenses and/or entering into production and marketing relationships to further build its retail brand and expand its retail footprint, and intends to apply for new licenses as available and determined by each state.

 

Increasing Exposure in Mass Markets. The Company has established itself as a market leader and has become a dominant player due to its competitive pricing, experienced management, strong capitalization and strong brand goodwill. In mass markets exhibiting a free market dynamic typical of other industries, such as California, Nevada, and Oregon, the Company intends to leverage its extensive experience to grow cannabis and/or process more efficiently and reliably, while taking advantage of wholesale and retail opportunities and establishing a strong brand.

 

The Company expects acquisition related costs, marketing and selling expenses, and capital expenditures to increase as it expands its presence in current markets and expands into new markets.

 

Operating Segments

 

The Company currently operates in two segments:

 

Cannabis Operations

 

The Company engages in the production and sale of cannabis via retail and wholesale channels. The Company operates 51 retail dispensaries in nine states. The Company operates 14 cultivation sites in 11 states and 15 processing sites in 12 states which sell cannabis through wholesale channels.

 

Non-Cannabis Operations

 

The Company provides professional services including cultivation, processing and retail know-how and back office administration, intellectual property licensing, real estate leasing services and lending facilities to medical and adult-use cannabis licensees under management service agreements. The Company manages three integrated medical cannabis licenses; one license in New Jersey and two licenses in Maine under such management agreements. The financial results of these entities are not included into the consolidated financial statements of the Company because the Company does not have control over these operations in accordance with IFRS 10.

 

The States We Operate In, Their Legal Framework and How It Affects Our Business

 

Arizona Operations

 

Arizona’s medical cannabis program was introduced in November 2010 when voters approved the Proposition 203 “Arizona Medical Marijuana Initiative” ballot measure that legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

 

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The Arizona Department of Health Services has allocated 130 medical cannabis dispensary certificates. Each dispensary certificate permits the license holder to open one dispensary and gives the license holder the option to open one cultivation facility and/or one processing facility. Cultivation and processing sites can be located anywhere in the state and are not restricted based on where the license holder’s dispensary is located. Dispensaries are limited to their district for their first three years of operation. All dispensaries must be not-for-profit. Extracted oils, edibles, and flower products are permitted. Wholesale transactions are permitted. In June 2018, an Arizona appeals court ruled that extracted cannabis oils such as vaporizer cartridges were illegal. These products have been available in Arizona dispensaries since the launch of the program, and our dispensaries, as with most others in the state, have continued to sell extracted oils pending a final ruling by the Arizona Supreme Court. In January 2019, the Arizona Supreme Court agreed to review the legality of medical marijuana extracts such as vaporizer cartridges. In May 2019, the Arizona Supreme Court unanimously ruled that medical marijuana extracts are legal, meaning dispensaries can continue to sell oil-based formulations such as vaporizer cartridges.

 

In April 2018, the Company acquired Swell Farmacy, a holding company that operated four licensed dispensaries through Master Service Agreements (“MSAs”). The dispensaries are located in the Phoenix area, which boasts 122,000 of the state’s 189,000 patients. In May 2018, the Company entered into a 10-year lease to operate a 100,000 square foot indoor cultivation facility, 50,000 square feet of which is already constructed for cultivation on a 68-acre plot of land with the prospect of further expansion, including greenhouse and outdoor grows. In November 2018, the Company acquired Midtown Roots, a holding company operating the only dispensary located in downtown Phoenix. In May 2019, the Company acquired the exclusive rights to operate the Emerald dispensary, the only dispensary in the town of Gilbert, which is located in the Metro Phoenix area. In June 2019, the Company announced two separate acquisitions, Glendale Greenhouse, a vertically integrated cannabis business operating a cultivation and processing facility, as well as a dispensary, and Phytotherapeutics Management Services, LLC, which operates a dispensary that was subsequently moved to a newly developed, flagship dispensary located at 2175 N 83rd Avenue, which has close access to the I-10 Freeway. The Company may acquire additional dispensaries in this market, which is one of the biggest programs in the U.S.

 

California Operations

 

California’s medical cannabis program was introduced in 1996 when voters passed the Proposition 215 ballot initiative, that allowed patients with a valid doctor’s recommendation to possess and cultivate cannabis for personal medical use. In October 2015, Governor Brown signed the Medical Cannabis Regulation and Safety Act into law, which provided a regulatory framework around the longstanding, though unregulated, medical cannabis industry. In November 2016, voters approved Proposition 64, the Adult Use of Marijuana Act, with 57% of the vote, legalizing adult-use cannabis in the state. Dispensaries began selling to customers 21 years of age and older in January 2018.

 

The Medicinal and Recreational Cannabis Regulation and Safety Act creates the general framework for the regulation of commercial medicinal and adult-use cannabis in California. Three state agencies are responsible for licensing and regulating each aspect of the industry: the Bureau of Cannabis Control regulates retailers, distributors, testing labs, microbusinesses, and temporary cannabis events; the Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, regulates manufacturers of cannabis-infused edibles for both medical and nonmedical use; and the California Department of Food and Agriculture regulates cultivators of medicinal and adult-use cannabis.

 

Permitted products include oil-based formulations, edibles, and flower. Wholesaling and home delivery are permitted.

 

In December 2018, the Company received a manufacturing, distribution, and mobile dispensing license from the City of Davis, California. In January 2019, the Company received its California state licenses for manufacturing and distribution. In April 2019, the Company acquired Eureka, a Monterey County, California, based operator with a cultivation facility in the Salinas Valley. In February 2020, the Company closed the acquisition of Cura Partners, Inc., a leading wholesale brand in California, among other states, with a processing facility in Sacramento, CA.

 

Connecticut Operations

 

Connecticut’s medical cannabis program was introduced in May 2012 when the General Assembly passed legislation PA 12-55 ‘An Act Concerning the Palliative Use of Marijuana.’ The program is divided into two classes of licenses: producers

 

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and dispensaries. Producers cultivate and process medicinal cannabis and wholesale to dispensaries. Dispensaries sell cannabis directly to patients and must have a pharmacist on staff.

 

The program launched with six dispensary licensees and four producer licensees. The first dispensaries sold to patients in September 2014.

 

In January 2016, the Connecticut Department of Consumer Protection (“CTDCP”), the agency that oversees the program, approved three additional dispensary licenses. In December 2018, the CTDCP issued nine additional dispensary licenses, bringing the total to 18 licensed dispensaries in the state. As of February 2019, 17 of these dispensaries were operational.

 

Extracted oils and flower products are permitted. Edibles are permitted with the exception of confectionaries.

 

Curaleaf holds one of the four approved producer licenses in the state. The Company began wholesaling in October 2014 and now sells to all 14 of the state’s operational dispensaries. Curaleaf previously operated a 40,000 square foot facility but has recently moved to a new 55,000 square foot facility which includes cultivation space, extraction, purification facilities, and a commercial kitchen for the production of edibles.

 

The Company expects to acquire GR Companies, Inc., a cannabis multi-state operator in Connecticut, among other states, with one dispensary in Connecticut. The Company also expects to close its acquisition of three Connecticut dispensaries currently operated the Arrow Alternative Care name upon regulatory approval. See “Proposed Transactions” section of this MD&A.

 

Florida Operations

 

Florida’s medical cannabis program was introduced in June 2014 when the Florida Legislature passed the Compassionate Medical Cannabis Act of 2014 (“CMCA”). The CMCA permitted low-THC cannabis oils to be dispensed and purchased by patients suffering from cancer and epilepsy. Under this program, six organizations called Medical Marijuana Treatment Centers (“MMTCs”) were licensed to dispense low-THC cannabis to patients.

 

In November 2016, Florida voters approved the Amendment 2 “Expand Medical Marijuana” ballot measure with 71% of the vote. This constitutional amendment expanded the program by legalizing cannabis oils for individuals with specific debilitating diseases or conditions, including chronic pain, as determined by a licensed state physician. In June 2018, Governor Scott signed Senate Bill 8-A: “Medical Use of Marijuana,” which outlined how patients can qualify and receive medical cannabis under the state’s constitutional amendment. The bill also increased the number of available MMTC licenses to 17, with 14 of these licenses issued as of the end of 2018. In April 2019, as the result of a joint settlement, the state awarded additional licenses, and as of the date hereof a total of 22 licenses have been granted in the state.

 

A single MMTC license allows for the cultivation, processing, and dispensing of cannabis products. Originally, each MMTC was permitted to open up to 25 dispensaries statewide. With each additional 100,000 qualified patients, the dispensary cap increased by five for each MMTC. However, the limit on dispensaries will no longer apply after April 2020.

 

Permitted products originally included oil-based formulations. Rules permitting the sale of edible medical cannabis products are under development. In May 2018, a district court judge ruled that Florida’s medical cannabis constitutional amendment requires the Department of Health to permit sales of smokable medical cannabis flower. Smokable flower was introduced as a permitted form factor in March 2019, shortly after Governor DeSantis signed a bill that repealed the state’s ban on smokable medical cannabis flower.

 

Each MMTC is required to cultivate and process all medical cannabis products they dispense. Wholesale transactions are permitted on a case by case basis to alleviate shortages. Home delivery is permitted.

 

The Company holds one of the original six vertically-integrated medical cannabis licenses issued in the state. In October 2016, Curaleaf’s Florida business became the third license holder to begin sales to patients. As of December 31, 2019,

 

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Curaleaf operated a 24,000 square foot indoor growing facility, a 278,000 square foot greenhouse growing facility, and 28 dispensaries, with plans to open additional dispensaries in 2020.

 

Maine Operations

 

Maine’s medical cannabis program was introduced in November 1999 when voters approved Question 2, the ‘Maine Medical Marijuana for Specific Illnesses Initiative,’ with 61% of the vote. This program permitted qualified patients, or their designated caregiver, to grow and consume cannabis, but did not create a licensing structure whereby entities could apply to cultivate, process, and/or dispense cannabis.

 

In November 2009, Maine voters expanded the medical program by passing Question 5, the ‘Maine Medical Marijuana Initiative, with 59% of the vote, which established a licensing structure in which eight vertically-integrated, not-for-profit dispensaries could sell cannabis directly to registered patients. The first dispensary opened to patients in October 2010. Medical dispensaries are vertically-integrated and cultivate, process, and dispense products to patients. Wholesaling is only permitted in emergency situations. Extracted oils, edibles, and flower products are permitted.

 

In November 2016, Maine voters approved Question 1, the ‘Maine Marijuana Legalization Measure,’ which legalized adult-use cannabis sales in the state. In May 2018, the Maine legislature overrode a veto by Governor LePage to formally approve the cannabis legalization legislation that lays the groundwork for the adult-use market. The law passed in May 2018 establishes separate classes of licenses (dispensaries, cultivators, processors) with no caps in place on the number of licenses that can be issued. In February 2019, the Department of Administrative and Financial Services, which oversees both the medical and adult-use programs, selected a consultant to write the rules and regulations for the adult-use program. Draft rules were released in April 2019, finalized and signed by the Governor in June 2019. The Office of Marijuana Policy is now accepting and processing adult-use applications and have issued 31 conditional adult-use licenses to date with the expectation the first adult-use stores will open in June 2020.

 

Each licensee is permitted to open one dispensary. In July 2018, the Maine legislature overrode yet another veto by Governor LePage to formally approve a sweeping medical marijuana reform bill that regulates caregiver operations and approves the issuance of six new dispensary licenses. The bill also removes the requirement that medical cannabis license holders operate as not-for-profit entities, paving the way for the conversion of existing license holders to for-profit corporations. This bill went into effect in December 2018, though rules around the issuance of new medical licenses are still under development. As of December 31, 2019, there were still eight vertically-integrated, not-for-profit medical dispensaries in Maine.

 

The Company provides management services to two of the eight integrated medical cannabis licensees in the state: Maine Organic Therapy (“MEOT”) and Remedy Compassion Center (“RCC”). MEOT operates a 30,000 square foot indoor grow facility and a dispensary. RCC operates a small grow facility and a dispensary and obtains most of its product wholesale via MEOT. MEOT and RCC have both been serving patients since 2010.

 

Maryland Operations

 

Maryland’s medical cannabis program was introduced in May 2013 when then Governor O’Malley signed House Bill 1101 into law. The Maryland Medical Cannabis Commission issued preliminary licenses to 102 dispensaries, 15 cultivators, and 15 processors in 2016. The first dispensaries opened to patients in December 2018.

 

The market is divided into three classes of licenses: dispensaries, cultivators, and processors. Wholesaling occurs between cultivators and processors, cultivators and dispensaries, and processors and dispensaries. Originally, no one company could directly control multiple licenses of the same class, but this restriction was changed in May 2019 when Governor Hogan signed a bill that permitted a single company to own up to four dispensaries. Dispensary locations are tied to the Senate District in which they were awarded, with the exception of dispensary licenses that were awarded to applicants who also were awarded a cultivation license — these dispensaries can be located at the discretion of the license holder. Permitted products include oil-based formulations and flower. Edibles are prohibited.

 

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In April 2018, the Maryland House and Senate approved a bill, which was later signed by Governor Hogan, that expanded the license pool, adding seven additional cultivation licenses, for a total of 22, and 13 additional processing licenses, for a total of 28. As of December 31, 2019, there were approximately 89 operational dispensaries, 17 operational cultivators, and 18 operational processors.

 

Curaleaf received one of 102 preliminary medical cannabis dispensary licenses in December 2016. The Company launched its dispensary in the first quarter of 2018, shortly after the market launched in December 2017. The Company also acquired a company holding a cannabis processing license, which began operations in the first quarter of 2018.

 

In January 2019, the Company completed a convertible debt financing with the owners of the HMS/MI Businesses which consist of one cultivation, one processing, and two dispensaries. Concurrently with completion of the convertible debt financing, the Company entered into supply, offtake, branding and services agreements with the HMS/MI Businesses.  Conversion of the debt into the equity of the HMS/MI Businesses is expected, subject to regulatory approval, when the licenses become subject to transfer under current law, starting in August 2020. The Company also announced in January 2019 that it had entered into an option purchase agreement to purchase all of Town Center Wellness, LLC, subject to regulatory approval, which operates the Elevate Takoma dispensary located in Takoma Park, Maryland.

 

In May 2019, Maryland passed legislation allowing for the sale of edibles in the market, and the Company has constructed a processing and manufacturing facility at Curaleaf’s Frederick facility in anticipation of the implementation of these rules.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., a recently-launched wholesale brand in Maryland, among other states.

 

The Company expects to acquire GR Companies, Inc., a cannabis multi-state operator in Maryland, among other states, which owns a cultivation and processing facility and a dispensary and has the right to acquire any additional dispensary in Maryland. See “Proposed Transactions” section of this MD&A.

 

Massachusetts Operations

 

Massachusetts’ medical cannabis program was established by “An Act for the Humanitarian Medical Use of Marijuana” in November 2012 when voters passed Ballot Question 3 “Massachusetts Medical Marijuana Initiative” with 63% of the vote. The first dispensary opened in June 2015.

 

In November 2016, Massachusetts voters legalized adult-use cannabis by passing ballot Question 4 — Legalize Marijuana with 54% of the vote. In July 2018, Governor Baker signed legislation that laid the groundwork for the adult-use market. In March 2018, the Cannabis Control Commission (the “CCC”), the regulatory body, was set up to regulate the adult-use market and approve the rules that will govern the industry. While the CCC original aimed to officially launch adult-use sales on July 1, 2018, issues such as a lack of licensed testing labs and disagreements with city and town officials over agreements with cannabis businesses slowed the rollout, and the first adult-use sale did not take place until November 2018.

 

The Department of Health originally oversaw the medical cannabis program, but in December 2018 transferred oversight to the CCC, a change which was mandated by the aforementioned July 2018 legislation. Each medical licensee must be vertically-integrated and may have up to three medical dispensaries. Licensed medical dispensaries are given priority in adult-use licensing. As of December 31, 2019, there were 33 adult-use dispensaries open across the state.

 

The CCC oversees the adult-use cannabis program. Adult-use cultivators are grouped into 11 tiers of production—ranging from up to 5,000 square feet to no larger than 100,000 square feet — and regulators will bump a licensee down to a lower tier if that licensee has not shown an ability to sell at least 70 percent of what it produces. Medical dispensaries that wish to add the ability to sell cannabis products to non-patients will be required to reserve 35 percent of their inventory or the six-month average of their medical cannabis sales for medical cannabis patients. In order to achieve an adult-use license, a prospective licensee must first sign a “Host Community Agreement” with the town in which it wishes to locate. Roughly two-thirds of municipalities in the state have a ban or a moratorium in place that prohibits cannabis businesses from operating within their jurisdiction.

 

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In both the medical and adult-use markets, extracted oils, edibles, and flower products are permitted. Wholesaling is also permitted.

 

The Company holds an integrated medical cannabis license and operates a 54,000 square foot indoor grow and three dispensaries, one licensed for medical and adult-use sales in Oxford, one licensed for medical sales in Hanover, and one licensed for adult-use sales in Provincetown. In March 2020, a fourth dispensary opened in Ware for adult-use sales. In February 2019, Curaleaf exercised an option to purchase an adjacent unit in its cultivation facility, thereby expanding its cultivation facility to 104,000 square feet.

 

The Company expects to acquire Alternative Therapies Group (“ATG”), another licensed medical cannabis operator in Massachusetts, which operates a 53,000 square foot cultivation facility and processing facility. See “Proposed Transactions” section of this MD&A.

 

On August 9, 2019, the Company announced that it had been granted approval by the CCC for the Company’s Reverse Takeover transaction, which the CCC deemed a change of ownership and control.

 

Nevada Operations

 

Nevada’s medical cannabis program was introduced in June 2013 when the legislature passed SB374, legalizing the medicinal use of cannabis for certified patients. The first dispensaries opened to patients in August 2015.

 

In November 2016, Nevada voters approved Question 2 with 55% of the vote, legalizing adult-use cannabis in the state. Adult-use sales launched under an “early-start” program on July 1, 2018. This market is divided into five classes of licenses: dispensaries, cultivators, distribution, product manufacturing, and testing. Licenses are tied to the locality in which they were awarded. In December 2018, the Nevada Department of Taxation, the agency which oversees the cannabis program, issued 61 new dispensary licenses. As of December 31, 2019, there were approximately 66 operational dispensaries, 134 operational cultivators, and 96 operational processors.

 

Extracted oils, edibles, and flower products are permitted. Wholesaling is permitted.

 

In 2018, the Company agreed to acquire a 10,000 square foot licensed indoor cannabis cultivation and a licensed dispensary, operating in Las Vegas, Nevada. Both businesses are licensed for both medical and adult-use sales. Each of these transactions is subject to regulatory approval. In March 2019, the Company agreed to acquire Acres, a company with a 269,000 square foot operating cultivation facility and further expansion as needed on 37 acres of land in Amargosa Valley, Nevada, and a large dispensary located in the Las Vegas, Nevada. The transaction consisted of two stages, with the Company closing the acquisition of the cultivation and processing assets of Acres in October 2019. The Acres businesses financial results were consolidated as of November 2019 in conjunction with completion of the cultivation and processing component of the transaction.  The acquisition of the Acres dispensaries and processing facility closed in January 2020.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., a leading wholesale brand in Nevada, among other states.

 

New Jersey Operations

 

New Jersey’s medical cannabis program was introduced in January 2010 when then Governor Corzine signed the New Jersey Compassionate Use Medical Marijuana Act (“NJCUMMA”) into law. The NJCUMMA legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

 

In March 2018, under the direction of Governor Murphy, who campaigned on a platform that included cannabis legalization, the New Jersey Department of Health (“NJDOH”) issued the Executive Order 6 Report, which immediately expanded the medical cannabis program in numerous ways, including adding chronic pain and anxiety as qualifying conditions, doubling the monthly product limit, and permitting current licensees to open satellite dispensaries. In August 2018, the NJDOH began accepting applications for the licensing of six additional Alternative Treatment Centers (“ATCs”).

 

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These licenses were awarded in December 2018, and as of December 31, 2019, there were seven operational ATCs dispensing medical cannabis to patients. In December 2019, the New Jersey state legislature passed a bill to add an initiative to the November 2020 ballot that will allow voters to decide whether to legalize the sale of adult-use cannabis in the state.

 

A single ATC license allows for the cultivation, processing, and dispensing of medical cannabis products. Originally, each ATC was permitted to open one dispensary, located within the same facility in which the ATC cultivated and processed. With the Executive Order 6 Report, each ATC can now open two additional satellite dispensaries within their NJDOH- designated region for a total of three dispensaries each, as well as satellite production facilities. Wholesaling is permitted with approval from the NJDOH.

 

Extracted oils and flower products are permitted. The Executive Order 6 Report recommended adding edibles as a permitted product, with rulemaking for edibles the responsibility of the state legislature. As of March 31, 2019, the legislature has yet to develop rules for edibles, and a timeline for edibles rulemaking is yet to be determined.

 

Originally, ATCs were required to be non-profit entities. However, pursuant to the “Jake Honig Compassionate Use Medical Cannabis Act”, signed into law on July 2, 2019, ATCs are permitted to sell or transfer their license to a for-profit entity, pending NJDOH approval.

 

The Company manages Curaleaf NJ, Inc. (“Curaleaf NJ”), an unrelated not-for-profit entity, with an integrated medical cannabis license, under an MSA. Curaleaf NJ owns a property that includes 46,890 square feet of cultivation space. Curaleaf NJ also owns an adjacent 12,000 foot facility, of which 4,000 square feet is utilized for dispensary operations, with the remainder used for ancillary operations such as packaging and storage. Since the start of sales in October 2015, Curaleaf NJ has established itself as a market leader, dispensing 36% of all product sold in the state in 2018. In accordance with the recently adopted regulations described above, Curaleaf NJ plans to open two more dispensary locations in the state, as well as an additional cultivation facility, for which the Company has secured a 128,500 square foot facility in the township of Winslow, NJ.

 

New York Operations

 

New York’s medical cannabis program was introduced in July 2014 when Governor Cuomo signed the Compassionate Care Act, which legalized cannabis oils for patients with certain qualifying conditions. Under this program, five organizations, called Registered Organizations (each, a “RO”s) were licensed to dispense cannabis oil to patients, with the first sale to a patient completed in January 2016.

 

In December 2016, the New York State Department of Health (“NYSDOH”) added chronic pain as a qualifying condition. In the month-and-a-half following the addition of chronic pain, the number of registered patients increased by 18%. In August 2018, the NYSDOH granted licenses to five additional ROs. A single RO license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four dispensaries in NYSDOH- designated regions throughout the state. Each RO is permitted to open one cultivation/processing facility. Each RO is required to cultivate and process all medical cannabis products they dispense; however, wholesale transactions are permitted with approval from the state.

 

In November 2018, Governor Cuomo signed a bill to add post-traumatic stress disorder as a qualifying condition. In July 2018, the NYSDOH added opioid replacement as a qualifying condition, meaning any condition for which an opioid could be prescribed is now a qualifying condition for medical cannabis. In August 2018, Governor Cuomo, prompted by a NYSDOH study which concluded the “positive effects” of cannabis legalization “outweigh the potential negative impacts,” appointed a group to draft a bill for regulating legal adult-use cannabis sales in New York. During the 2019 state legislative session, Governor Cuomo proposed adult-use legalization in his budget proposal, though the legislature failed to include legalization in the final budget, and also failed to pass a legalization bill during the session. In January 2020, Governor Cuomo again included cannabis legalization in his budget proposal, a proposal which, as of February 2020, is still being considered by the legislature.

 

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Permitted products include oil-based formulations (vaporizer cartridges, tinctures, capsules), and ground-flower sold in tamper-proof vessels. Home delivery is also permitted.

 

The Company was awarded a vertically-integrated license in May 2018 with the right to open four dispensaries. The Company is only one of ten license holders in the state. Curaleaf currently operates four dispensaries located in Newburgh, Plattsburgh, Queens, and Nassau County, as well as a 72,000 square foot cultivation and manufacturing facility in Ravena, New York.

 

Ohio Operations

 

Ohio’s medical cannabis program was introduced in June 2016 when House Bill 523 was signed into law. In November 2018, the state issued 12 ‘Level I’ cultivation licenses, which permit up to 25,000 square feet of canopy, and 12 ‘Level II’ cultivation licenses, which permit up to 3,000 square feet of canopy. In June 2018, the state issued 56 dispensary licenses. In August 2018, the state issued seven processing licenses, and over the next few months issued seven additional processing licenses. In January 2019, the state issued an additional 26 processing licenses for a total of 40 across the state. Due to controversies around the scoring of cultivation applications and ensuing appeals, there are currently 16 ‘Level I’ cultivation licenses and 13 ‘Level II’ cultivation licenses. The first dispensaries opened in January 2019.

 

The Ohio Department of Commerce is responsible for regulating cultivators and processors. The Ohio State Board of Pharmacy is responsible for regulating dispensaries and the patient and caregiver registry. The Ohio State Medical Board is responsible for certifying physicians and reviewing petitions to add qualifying medical conditions.

 

Extracted oils, edibles, and non-combustible flower products are permitted.

 

The Company was awarded a preliminary processing license in Amelia, Ohio in early 2019. The Company no longer plans to develop this license due to the dissolution of the Village of Amelia and the absorption of the licensed processor site into a town that does not permit cannabis activities. In May 2019, the Company entered into an agreement granting it an option to acquire OGT, a holder of one of the 16 Level 1 cultivation licenses and a processing license. OGT is currently building out a 32,000 square foot production facility in Johnstown, Ohio, which is expected to be completed in the first half of 2020.

 

The Company expects to acquire GR Companies, Inc., a cannabis multi-state operator in Ohio, among other states, with one cultivation facility, one processing facility and two dispensaries in Ohio. See “Proposed Transactions” section of this MD&A.

 

Oregon Operations

 

Oregon’s medical cannabis program was introduced in November 1998 when voters approved Measure 67, the Oregon Medical Marijuana Act.

 

In November 2014, voters approved Measure 91, the ‘Oregon Legalized Marijuana Initiative’, which legalized adult-use cannabis in the state. In October 2015, the first adult-use dispensaries opened.

 

The market is divided into six classes of licenses: dispensaries, cultivators, wholesalers, processors, laboratories and research. To date the market has had a more relaxed licensing structure which has led to an oversupply of product. In 2018, Oregon cultivators grew three times the amount of cannabis that could legally be consumed in the market. In response to a report highlighting the issues in Oregon, the U.S. Attorney for Oregon, Billy Williams, said, “The recent HIDTA Insight Report on marijuana production, distribution, and consumption in Oregon confirms what we already know—it is out of control.”

 

In June 2018, the Oregon Liquor Control Commission, which regulates the adult-use program, announced they would not process any new adult-use license applications in order to work through the backlog that has developed as the result of 3,432 applications being submitted as of May 2018. In July 2018, the Oregon Health Authority, which regulates the medical program, conceded in a report that it has not provided effective oversight of growers and others in the industry.

 

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Extracted oils, edibles, and flower products are permitted.

 

The Company holds a producer license and a processing license for adult-use and operates a 20,000 square foot outdoor cultivation center and an adjacent 17,000 square foot indoor facility for indoor growing and large-scale CO2 extraction and manufacturing. In July 2018, the Company acquired a dispensary, which launched operations in Portland, Oregon at the end of 2018.

 

In February 2020, the Company completed the acquisition of Cura Partners, Inc., owners of the leading Select wholesale brand in Oregon, among other states, with a processing facility in Portland, Oregon.

 

Pennsylvania Operations

 

Pennsylvania’s medical cannabis program was introduced in April 2016 when Governor Wolf signed into law SB 3 “Medical Marijuana Act”, which legalized medical cannabis oils for patients with certain qualifying conditions. The law also called for a class of licenses, called “clinical registrant” licenses, whereby accredited medical institutions in the state can partner with medical cannabis companies to conduct research. There are two primary classes of licenses: licenses to grow/process cannabis products, and licenses to dispense cannabis products to patients. Grower/processors wholesale products to dispensaries. In June 2018, the Pennsylvania Department of Health (“PADOH”) awarded licenses to 12 grower/processors as well as 27 dispensary licensees. Each dispensary license permits the licensee to open up to three dispensaries in the region in which the license was awarded. In February 2018, the first dispensaries opened to patients.

 

In May 2018, a Commonwealth Court judge halted the PADOH’s planned “clinical registrant” program whereby up to eight Pennsylvania medical schools would partner with licensed medical cannabis organizations to conduct research. In June 2018, Governor Wolf signed a bill to re-implement the clinical registrant program. Regulations for this program are in development. In June 2018, the PADOH awarded licenses to an additional 13 grower/processors. In December 2018, the PADOH awarded an additional 23 dispensary licenses.

 

Originally, only oil-based formulations were permitted. In April 2018, the PADOH approved flower as a permitted medical cannabis product offering, and dispensaries began to offer flower to patients in August 2018.

 

The Company has partnered with an accredited medical school to obtain a “Clinical Registrant” license in Pennsylvania. In February 2020, the Company was approved as a Clinical Registrant in Pennsylvania by the Commonwealth’s Department of Health, Office of Medical Marijuana. Under this designation, the Company is entitled to open a cultivation and processing facility and up to six dispensaries, under the Commonwealth’s medical marijuana research program. Pennsylvania’s medical cannabis program has created this class of license to promote cooperation between industry and academia in the research of medical benefits of cannabis. To support its presence in Pennsylvania, the Company has leased a 49,200 square foot production facility in King of Prussia, Pennsylvania.

 

The Company expects to acquire GR Companies, Inc., a cannabis multi-state operator in Illinois, Pennsylvania and Ohio among other states. See “Proposed Transactions” section of this MD&A.

 

Utah Operations

 

Utah’s medical cannabis program was introduced in November 2018, when 53% of voters approved “Proposition 2, Medical Marijuana Initiative”. In December 2018, the state legislature passed a bill that legalized medical cannabis, but implemented several changes to the Proposition 2 ballot erasure, including removing home cultivation rights for patients and adding a requirement that dispensaries employ pharmacists.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. In July 2019, the Utah Department of Agriculture and Food (“UDAF”) awarded eight cultivation licenses. In January 2020, the Utah Department of Health awarded 14 retail licenses. The UDAF has been issuing processing licenses on a rolling basis throughout early 2020. All medical cannabis form factors are permitted, as is wholesaling. The market is expected to begin sales in 2020.

 

13

 

In January 2020, the Company was awarded a medical cannabis retail license from the Utah Department of Health. The Company plans to open a dispensary in Lindon, Utah for medical patients by the end of 2020, pending final approvals from regulators. Also in January 2020, the Company announced that it received preliminary approval for a processing license by the UDAF. The notice grants Curaleaf permission to begin the build out of its processing facility, and the Company expects to complete the build out by the end of 2020.

 

Components of Our Results of Operations

 

Revenue

 

Retail and Wholesale Revenue

 

The Company derives its retail and wholesale revenue in states in which it is licensed to cultivate, process, distribute, and sell cannabis. The Company sells directly to customers at its retail stores and sells wholesale to other dispensaries or processors not owned by the Company. For the years ended December 31, 2019 and 2018, our wholesale revenue represented approximately 20% and 32% of total retail and wholesale revenue, respectively.

 

Management Fee Income

 

Management fee income represents revenue related to management services agreements pursuant to which the Company provides professional services, including cultivation, processing and retail know-how and back office administration, intellectual property licensing, real estate leasing services and lending facilities to medical and adult-use cannabis licensees. The Company recognizes revenue from these consulting services on a straight-line basis over the term of third-party consulting agreements as services are provided.

 

Cost of Goods Sold

 

Cost of goods sold are derived from costs related to the cultivation and production of cannabis and from wholesale purchases made from other licensed producers operating within state markets in which the Company operates. Cost of goods sold includes the costs directly attributable to the production of inventory and includes amounts incurred in the cultivation and manufacture of finished goods, such as flower, concentrates, and edibles.  Direct and indirect costs include but are not limited to material, labor, supplies, depreciation expense on production equipment, utilities, and facilities costs associated with cultivation.

 

Change in Fair Value of Biological Assets

 

Plants that are actively growing are considered biological assets. In accordance with IAS 41 — Agriculture, biological assets are recorded at fair value at the time of harvest, less costs to sell, which are transferred to inventory. The amount transferred becomes the carrying value of the inventory on a go-forward basis. When the inventory is sold, the fair value is relieved from inventory and the amount is expensed to the cost of goods sold. The cost of goods sold also includes the product cost and costs related to products acquired from other suppliers.

 

Gross Profit

 

Gross profit is revenue less cost of goods sold. During the years ended December 31, 2019 and 2018 the Company did not operate at full capacity and the Company expects gross profit to increase over the foreseeable future as it continues to invest in its current operations.

 

Operating Expenses

 

Salaries and benefits include non-cost-of-goods sold labor for each retail location and corporate labor expenses. The Company expects salaries and benefits to increase proportionally with store openings in the foreseeable future, but these expenses are expected to level off as operations are scaled in each market.

 

14

 

Sales and marketing expenses consist of selling costs to support the Company’s retail stores including branding and marketing expenses and product development expenses. The Company expects selling costs to increase proportionally with each retail store opening.

 

Professional fees consist of accounting, legal and acquisition related expenses. The Company expects these fees to increase as expansion continues and subsequent acquisitions occur.

 

Other general and administrative expenses consist of travel, general office supplies and monthly services, facilities and occupancy, insurance, director fees and new business development expenses.

 

Other Income (Expense)

 

Interest income

 

The Company has notes receivable with various parties that earn interest income at rates ranging from 8% to 18%.

 

Interest expense

 

Interest expense consists of interest on outstanding borrowings under various promissory note agreements as well as amortization of debt discounts.

 

Other income (expense)

 

Other expense consists of costs related to the restructuring of the Curaleaf Hemp brand and loss on the termination of the Agua Street purchase agreement, offset by the gains and losses on the disposal of assets.

 

Income taxes

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable.

 

As the Company operates in the legal cannabis industry, the Company is subject to Section 280E of the Internal Revenue Code (“IRC”) which prohibits businesses engaged in the trafficking of controlled substances (within the meaning of Schedule I and II of the CSA) from deducting normal business expenses associated with the sale of cannabis, such as payroll and rent, from gross income (revenue less cost of goods sold). Section 280E, therefore, has a significant impact on the retail side of cannabis, but a lesser impact on cultivation and manufacturing operations.  Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (“IRS”) has subsequently applied Section 280E to state-legal cannabis businesses. The effective tax rate on a cannabis business depends on how large its ratio of non-deductible expenses is to its total revenues.  In the states that the Company operates in that align their tax codes with Section 280E, it is also unable to deduct normal business expenses for state tax purposes. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable and a higher effective tax rate than most industries.  Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses for state tax purposes.

 

SELECTED FINANCIAL INFORMATION

 

The Company reports results of operations of its affiliates from the date that control commences. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and is exposed to the variable returns from its activities. The following selected financial information includes only the results of operations after the Company established control of its affiliates. Accordingly, the information included below may not be representative of the results of operations if such affiliates had included their results of operations for the entire reporting period.

 

15

 

The following table sets forth selected financial information for the periods indicated that was derived from our audited consolidated financial statements and the respective accompanying notes prepared in accordance with IFRS. See “Results of Operations for the Years ended December 31, 2019 and 2018” for additional details. The selected consolidated financial information set out below may not be indicative of Curaleaf’s future performance:

 

 

 

Year Ended December 31,

 

 

 

2019

 

2018

 

2017

 

Revenue

 

$

221,018

 

$

77,057

 

$

19,313

 

Cost of goods sold

 

102,386

 

31,172

 

7,840

 

Gross profit before impact of biological assets

 

118,632

 

45,885

 

11,473

 

Net change in fair value of biological assets

 

22,981

 

402

 

4,124

 

Gross profit

 

141,613

 

46,287

 

15,597

 

Operating expenses

 

169,330

 

74,968

 

22,142

 

Other income, net

 

(18,072

)

(27,553

)

2,569

 

Net loss and comprehensive loss

 

(69,848

)

(61,877

)

(5,044

)

Loss per share attributable to Curaleaf Holdings, Inc. - basic and diluted

 

$

(0.15

)

$

(0.14

)

$

(0.01

)

 

 

 

December 31, 

 

December 31,

 

December 31, 

 

 

 

2019

 

2018

 

2017

 

Total assets

 

$

736,926

 

$

569,836

 

$

151,602

 

Long-term debt

 

87,953

 

81,901

 

10,194

 

 

RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2019 AND 2018

 

The following table summarizes our results of operations for the years ended December 31, 2019 and 2018:

 

 

 

Year ended December 31, 

 

 

 

2019

 

2018

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail and wholesale revenue

 

$

173,857

 

$

57,538

 

$

116,319

 

202

%

Management fee income

 

47,161

 

19,519

 

27,642

 

142

%

Total revenues

 

221,018

 

77,057

 

143,961

 

187

%

Cost of goods sold

 

102,386

 

31,172

 

71,214

 

228

%

Gross profit before impact of biological assets

 

118,632

 

45,885

 

72,747

 

159

%

Realized fair value amounts included in inventory sold

 

(74,757

)

(16,069

)

(58,688

)

365

%

Unrealized fair value gain on growth of biological assets

 

97,738

 

16,471

 

81,267

 

493

%

Gross profit

 

141,613

 

46,287

 

95,326

 

206

%

Operating expenses

 

169,330

 

74,968

 

94,362

 

126

%

Loss from operations

 

(27,717

)

(28,681

)

964

 

(3

)%

Other income (expense), net

 

(18,072

)

(27,553

)

9,481

 

(34

)%

Loss before provision for income taxes

 

(45,789

)

(56,234

)

10,445

 

(19

)%

Income tax benefit (expense)

 

(24,059

)

(5,643

)

(18,416

)

326

%

Net loss

 

(69,848

)

(61,877

)

(7,971

)

13

%

Less: Net loss attributable to redeemable non-controlling interest

 

(2,604

)

(5,410

)

2,806

 

(52

)%

Net loss attributable to Curaleaf, Holdings Inc.

 

$

(67,244

)

$

(56,467

)

$

(10,777

)

19

%

 

16

 

 

 

Year ended December 31, 

 

 

 

2019

 

2018

 

Retail and wholesale revenue

 

$

173,857

 

$

57,538

 

Management fee income

 

47,161

 

19,519

 

Total revenues

 

221,018

 

77,057

 

Cost of goods sold

 

102,386

 

31,172

 

Gross profit before impact of biological assets

 

118,632

 

45,885

 

Realized fair value amounts included in inventory sold

 

(74,757

)

(16,069

)

Unrealized fair value gain on growth of biological assets

 

97,738

 

16,471

 

Gross profit

 

$

141,613

 

$

46,287

 

Gross margin

 

64

%

60

%

Gross profit before impact of management fee income and biological assets

 

$

71,471

 

$

26,366

 

Gross margin before impact of management fee income and biological assets

 

41

%

46

%

Gross profit before impact of management fee income and after net gain on biological assets

 

$

94,452

 

$

26,768

 

Gross margin before impact of management fee income and after net gain on biological assets

 

54

%

47

%

 

Comparison of the Years Ended December 31, 2019 and 2018

 

As the 2017 financial results pre-date the completion of the Business Combination, they are not discussed below given the comparison with the 2018 and 2019 financial results would not be meaningful.

 

Revenue

 

Revenue for the year ended December 31, 2019 was $221,018, an increase of $143,961 or 187% compared to revenue of $77,057 for the year ended December 31, 2018. The increase in revenue was driven by an increase of $116,319 in retail and wholesale revenue and a $27,642 increase in management fee income.

 

Retail and wholesale revenue was $173,857 for the year ended December 31, 2019 compared to $57,538 for the year ended December 31, 2018, which represents an increase of $116,319 or 202%. The increase in retail and wholesale revenue was primarily due to organic growth and new store openings in in Florida, Massachusetts and New York, along with the acquisitions of three dispensaries in Arizona in 2019, and revenue from the HMS/MI Businesses and Elevate Takoma in Maryland. Additionally, wholesale revenue increased in Massachusetts as a result of the increased number of adult-use dispensaries.

 

The increase in management fee income of $27,642 is primarily due to the growth of Curaleaf NJ, the managed not-for-profit in New Jersey and management fees generated from ATG.

 

Cost of Goods Sold & Change in Fair Value of Biological Assets

 

Cost of goods sold, excluding any adjustments to the fair value of biological assets, for the year ended December 31, 2019 was $102,386, an increase of $71,214 or 228% compared to cost of goods sold for the year ended December 31, 2018. The increase was primarily due to cultivation and processing costs directly related to the increase in cannabis revenue for the year ended December 31, 2019, which were the result of opening new dispensaries and acquisitions made in 2018.

 

Biological asset transformation for the year ended December 31, 2019 was $22,981, an increase of $22,579 or 5,617% compared to $402 for the year ended December 31, 2018. The increase was primarily due to the increase number of cultivation facilities that generated initial harvests in 2019 and the corresponding increase in the unrealized fair value gain on the growth of biological assets offset by the amounts realized and included in cost of goods sold.

 

17

 

Gross Profit

 

Gross profit for the year ended December 31, 2019 was $141,613, or 64%, compared to $46,287, or 60%, for the year ended December 31, 2018.

 

Gross profit before management fee income and biological asset adjustments for the year ended December 31, 2019 was $71,471 compared to $26,366 for the year ended December 31, 2018. Gross margin for the year ended December 31, 2019 was 41% compared to 46% for the year ended December 31, 2018.  The relative increase in gross profit was due to the continued improvement in the operating capacity of the Company’s cultivation and processing facilities, while gross margin declined due to certain of the Company’s facilities, namely California and Kentucky bringing on new capacity during the year.

 

Gross profit before management fee income and after net gains on biological assets for the year ended December 31, 2019 was $94,452 or 54%, compared to $26,768, or 47%, for the year ended December 31, 2018. The increase was primarily due to higher operating capacity of the Company’s cultivation and processing facilities and the net gain on biological assets described above.

 

Total Operating Expenses

 

 

 

Year ended December 31, 

 

 

 

2019

 

2018

 

$Change

 

Salaries and benefits

 

$

52,737

 

$

27,773

 

$

24,964

 

Sales and marketing

 

12,188

 

4,264

 

7,924

 

Rent and occupancy

 

4,613

 

7,944

 

(3,331

)

Travel

 

6,574

 

3,131

 

3,443

 

Professional fees

 

30,550

 

12,564

 

17,986

 

Office supplies and services

 

8,290

 

4,662

 

3,628

 

Other

 

6,070

 

4,974

 

1,096

 

Total selling, general, and administrative

 

121,022

 

65,312

 

55,710

 

Depreciation and amortization

 

31,701

 

7,427

 

24,274

 

Share-based compensation

 

16,607

 

2,229

 

14,378

 

Total operating expenses

 

$

169,330

 

$

74,968

 

$

94,362

 

 

Total operating expenses for the year ended December 31, 2019 were $169,330, an increase of $94,362 or 126%, compared to $74,968 for the year ended December 31, 2018, which represents 77% and 97% of total revenue for the years ended December 31, 2019 and 2018, respectively. The increase in total operating expenses was primarily attributable to an increase in salaries and benefits, professional fees, as well as sales and marketing and other selling, general and administrative expenses as the Company expanded the number of retail dispensaries from 36 in 2018 to 51 in 2019, increased the level of support staff necessary to run the expanded operations as well as incurred $22,788 and $7,818 in one-time expenses during the years ended December 31, 2019 and 2018, respectively, largely associated with acquisitions and business development activities.

 

Salaries and benefits were $52,737 for the year ended December 31, 2019, compared to $27,773 for the year ended December 31, 2018, which represents an increase of $24,964. This was due to an increase in headcount at the corporate level as well as headcount from expanding operations in markets from both organic growth in Florida, Massachusetts, New York, and both organic and acquired growth in Arizona.

 

Sales and marketing expenses totaled $12,188 for the year ended December 31, 2019, compared to $4,264 for the year ended December 31, 2018, which represents an increase of $7,924. The increase was largely due to marketing cost associated with marketing CBD products nationally and other branding, lobbying, and public relations costs at the corporate level as well as Florida and Arizona.

 

18

 

Occupancy expenses totaled $4,613 for the year ended December 31, 2019, compared to rent and occupancy expenses of $7,944 for the year ended December 31, 2018. The decrease of $3,331 was primarily attributable to the adoption of IFRS 16 in 2019.

 

Travel expenses totaled $6,574 for the year ended December 31, 2019, compared to $3,131 for the year ended December 31, 2018, which represents an increase of $3,443. The increase was due to increased management travel associated with expanded operations.

 

Professional fees were $30,550 for the year ended December 31, 2019 compared to $12,564 for the year ended December 31, 2018, which represents an increase of $17,986. This increase was primarily due to increased legal and accounting fees associated with the expansion to new operating markets through organic growth and acquisitions, filing fees and cost associated with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”) and costs associated with the integration of acquisitions.

 

Other selling, general and administrative expenses were $14,360 for the year ended December 31, 2019 compared to $9,636 for the year ended December 31, 2018, which represents an increase of $4,724. This increase was primarily due to increased expenditures in office supplies and monthly services such as computer and software, telecommunication, and bank and license fees at the corporate level, Florida, New York, and Arizona as well as increases in development of new products and business development activities.

 

Depreciation and amortization was $31,701 for the year ended December 31, 2019, compared to $7,427 for the year ended December 31, 2018, which represents an increase of $24,274. The increase was primarily due to the Company’s expansion of capital projects in Connecticut, New York, Florida, Massachusetts and Oregon as well as acquisition and operation of new businesses in Arizona, Nevada and Maryland. Additionally, the adoption of IFRS 16 in 2019 resulted in $10,270 in depreciation expense for the year ended December 31, 2019.

 

Share-based compensation was $16,607 for the year ended December 31, 2019, compared to $2,229 for the year ended December 31, 2018 represented an increase of $14,378. The increase was primarily due to the share-based cost associated with options and restricted stock units granted in 2019.

 

 

 

Year ended

 

 

 

 

 

December 31, 

 

 

 

 

 

2019

 

2018

 

$ Change

 

Interest income

 

9,938

 

4,805

 

5,133

 

Interest expense

 

(18,396

)

(7,309

)

(11,087

)

Interest expense related to lease liabilities

 

(6,357

)

—

 

(6,357

)

Other income (expense)

 

(3,257

)

(25,049

)

21,792

 

Total other income (expense), net

 

$

(18,072

)

$

(27,553

)

$

9,481

 

 

Total other income, net for the year ended December 31, 2019 was a loss of $18,072 compared to loss of $27,553 for the year ended December 31, 2018. This is primarily due to the increase in interest expense related to the new debt borrowing entered into by the Company in August 2018, offset by the loss in change in fair value that was the result of the Business Combination, where the Swell Note converted into 3,715,038 SVS.  As a result, the Company determined that the fair value of the Swell Note increased to $32,716 and recorded a loss on the change in the fair value of the convertible note of $25,100. During the year ended December 31, 2019, the Company also recognized a loss of on the termination of the Agua Street purchase agreement of $1,319 and loss related to the Curaleaf Hemp brand of $2,323.

 

Interest income for the years ended December 31, 2019 and 2018 was $9,938 and $4,805, respectively. The increase of $5,133 was due to an increase in the notes receivable outstanding balances during 2019.

 

Interest expense for the years ended December 31, 2019 and 2018 was $18,396 and $7,309 respectively. The increase of $11,087 was due to new borrowings entered into by the Company towards the latter half of 2018.

 

19

 

Interest expense related to lease liabilities was $6,357 and was attributable to the adoption of IFRS 16 in 2019.

 

Provision for Income Taxes

 

The Company recorded total income tax expense of $24,059 for the year ended December 31, 2019 with $6,959 as the deferred tax component. The Company recorded total income tax expense of $5,643 for the year ended December 31, 2018 with $2,499 as the deferred tax component. The increase was the result of increased gross profit in certain of the Company’s subsidiaries that are subjected to Section 280E.

 

Net Loss

 

Net loss for the years ended December 31, 2019 and 2018 was $69,848 and $61,877, respectively, which represents a decrease of $7,971, or 13%. The decrease was primarily driven by the increase in gross profit, partially offset by the loss on change in fair value of convertible note in September 2018.

 

RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018

 

The following table summarizes our results of operations for the three months ended December 31, 2019 and 2018 and the three months ended September 30, 2019:

 

 

 

Three months ended

 

 

 

Q4 ‘19

 

Q3 ‘19

 

Q4’19 vs Q3’19

 

Q4’19 vs Q3’19

 

Q4 ‘18

 

Q4’19 vs Q4’18

 

Q4’19 vs Q4’18

 

 

 

December 31,

 

September 30,

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

2019

 

2019

 

$ Change

 

% Change

 

2018

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail and wholesale revenue

 

$

57,681

 

$

50,681

 

$

7,000

 

14

%

$

23,737

 

$

33,944

 

143

%

Management fee income

 

17,776

 

11,139

 

6,637

 

60

%

8,224

 

9,552

 

116

%

Total revenues

 

75,457

 

61,820

 

13,637

 

22

%

31,961

 

43,496

 

136

%

Cost of goods sold

 

35,695

 

27,079

 

8,616

 

32

%

11,980

 

23,715

 

198

%

Gross profit before impact of biological assets

 

39,762

 

34,741

 

5,021

 

14

%

19,981

 

19,781

 

99

%

Realized fair value amounts included in inventory sold

 

(33,920

)

(15,004

)

(18,916

)

126

%

(6,814

)

(27,106

)

398

%

Unrealized fair value gain on growth of biological assets

 

39,453

 

28,814

 

10,639

 

37

%

5,429

 

34,024

 

627

%

Gross profit

 

45,295

 

48,551

 

(3,256

)

(7

)%

18,596

 

26,699

 

144

%

Operating expenses

 

52,563

 

47,108

 

5,455

 

12

%

30,498

 

22,065

 

72

%

Loss from operations

 

(7,268

)

1,443

 

(8,711

)

(604

)%

(11,902

)

4,634

 

(39

)%

Other income (expense), net

 

(7,858

)

(3,598

)

(4,260

)

118

%

(2,643

)

(5,215

)

197

%

Loss before provision for income taxes

 

(15,126

)

(2,155

)

(12,971

)

602

%

(14,545

)

(581

)

4

%

Income tax benefit (expense)

 

(12,026

)

(5,279

)

(6,747

)

128

%

(1,926

)

(10,100

)

524

%

Net loss

 

(27,152

)

(7,434

)

(19,718

)

265

%

(16,471

)

(10,681

)

65

%

Less: Net loss attributable to redeemable non-controlling interest

 

(591

)

(599

)

8

 

(1

)%

(5,272

)

4,681

 

(89

)%

Net loss attributable to Curaleaf, Holdings Inc.

 

$

(26,561

)

$

(6,835

)

$

(19,726

)

289

%

$

(11,199

)

$

(15,362

)

137

%

 

20

 

 

 

Three months ended

 

 

 

Q4 ‘19

 

Q3 ‘19

 

Q4 ‘18

 

 

 

December 31, 

 

September 30,

 

December 31, 

 

 

 

2019

 

2019

 

2018

 

Retail and wholesale revenue

 

$

57,681

 

$

50,681

 

$

23,737

 

Management fee income

 

17,776

 

11,139

 

8,224

 

Total revenues

 

75,457

 

61,820

 

31,961

 

Cost of goods sold

 

35,695

 

27,079

 

11,980

 

Gross profit before impact of biological assets

 

39,762

 

34,741

 

19,981

 

Realized fair value amounts included in inventory sold

 

(33,920

)

(15,004

)

(6,814

)

Unrealized fair value gain on growth of biological assets

 

39,453

 

28,814

 

5,429

 

Gross profit

 

$

45,295

 

$

48,551

 

$

18,596

 

Gross margin

 

60

%

79

%

58

%

Gross profit before impact of management fee income and biological assets

 

$

21,986

 

$

23,602

 

$

11,757

 

Gross margin before impact of management fee income and biological assets

 

38

%

47

%

50

%

Gross profit before impact of management fee income and after net gain on biological assets

 

$

27,519

 

$

37,412

 

$

10,372

 

Gross margin before impact of management fee income and after net gain on biological assets

 

48

%

74

%

44

%

 

Comparison of the Three Months ended December 31, 2019 and 2018

 

Revenue

 

Revenue for the three months ended December 31, 2019 was $75,457, an increase of $43,496 or 136% compared to revenue of $31,961 for the three months ended December 31, 2018. The increase in revenue was driven by an increase of $33,944 in retail and wholesale revenue and a $9,552 increase in management fee income.

 

Retail and wholesale revenue was $57,681 for the three months ended December 31, 2019 compared to $23,737 for the three months ended December 31, 2018, which represents an increase of $33,944 or 143%. The increase in retail and wholesale revenue was primarily due to organic growth in Florida resulting from the opening of eight dispensaries, the acquisition of three dispensaries in Arizona. Additionally, wholesale revenue increased in Massachusetts as a result of the increased number of adult-use dispensaries.

 

The increase in management fee revenue was primarily due to increases in management fee income of $9,552. The increase is primarily due to the growth of Curaleaf NJ, the managed not-for-profit in New Jersey and management fees generated from ATG.

 

Cost of Goods Sold & Change in Fair Value of Biological Assets

 

Cost of goods sold, excluding any adjustments to the fair value of biological assets, for the three months ended December 31, 2019 was $35,695, an increase of $23,715 or 198% compared to cost of goods sold for the three months ended December 31, 2018. The increase was primarily due to cultivation and processing costs directly related to the increase in cannabis revenue for the three months ended December 31, 2019, which were the result of opening new dispensaries and acquisitions made in 2019.

 

Biological asset transformation for the three months ended December 31, 2019 was $5,533 compared to a negative $1,385 for the three months ended December 31, 2018. The increase was primarily due to the Company beginning cultivation in New York in late 2018, acquisitions in Maryland, Arizona, and California in 2019 and the corresponding increase in the unrealized fair value gain on the growth of biological assets offset by the amounts realized and included in cost of goods sold.

 

21

 

Gross Profit

 

Gross profit for the three months ended December 31, 2019 was $45,295, compared to $18,596 for three months ended December 31, 2018. Gross margin for the three months ended December 31, 2019 was 60% compared to 58% for the three months ended December 31, 2018.

 

Gross profit before management fee income and biological asset adjustments for the three months ended December 31, 2019 was $21,986 compared to $11,757 for the three months ended December 31, 2018. Gross margin for the year ended December 31, 2019 was 38% compared to 50% for the year ended December 31, 2018. The increase in absolute dollar amount was due to the reasons discussed above under retail and wholesale revenue. The decline in gross margin is due to certain of the Company’s facilities, namely California, bringing on new capacity during the year.

 

Gross profit before management fee income and after net gains on biological assets for the three months ended December 31, 2019 was $27,519, compared to $10,372 for the three months ended December 31, 2018. Gross margin for the year ended December 31, 2019 was 48% compared to 44% for the three months ended December 31, 2018. The increase is primarily due to higher operating capacity of the Company’s cultivation and processing facilities and the net gain on biological assets described above.

 

Comparison of the Three Months ended December 31, 2019 and September 30, 2019

 

Revenue

 

Revenue for the three months ended December 31, 2019 was $75,457, an increase of $13,637 or 22% compared to revenue of $61,820 for the three months ended September 30, 2019. The increase in revenue was driven by an increase of $7,000 in retail and wholesale revenue and a $6,637 increase in management fee income.

 

Retail and wholesale revenue was $57,681 for the three months ended December 31, 2019 compared to $50,681 for the three months ended September 30, 2019, which represents an increase of $7,000 or 14%. The increase in retail and wholesale revenue was primarily due to organic growth in Arizona and Florida and acquisitions in Nevada.

 

The increase in management fee revenue was primarily due to increases in management fee income of $6,637. The increase is primarily due to the growth of Curaleaf NJ, the managed not-for-profit in New Jersey and management fees generated from ATG.

 

Cost of Goods Sold & Change in Fair Value of Biological Assets

 

Cost of goods sold, excluding any adjustments to the fair value of biological assets, for the three months ended December 31, 2019 was $35,695, an increase of $8,616 or 32% compared to cost of goods sold for the three months ended September 30, 2019. The increase was primarily due to cultivation and processing costs directly related to the increase in cannabis revenue for the three months ended December 31, 2019, which were the result of opening new dispensaries and acquisitions made at the end of 2019.

 

Biological asset transformation for the three months ended December 31, 2019 was $5,533 compared to a $13,810 for the three months ended September 30, 2019. The increase was primarily due to the timing of harvest and increase cultivation at the end of 2019 and the corresponding increase in the unrealized fair value gain on the growth of biological assets offset by the amounts realized and included in cost of goods sold.

 

Gross Profit

 

Gross profit for the three months ended December 31, 2019 was $45,295, compared to $48,551 for three months ended September 30, 2019. Gross margin for the three months ended December 31, 2019 was 60% compared to 79% for the three months ended September 30, 2019.

 

22

 

Gross profit before management fee income and biological asset adjustments for the three months ended December 31, 2019 was $21,986 compared to $23,602 for the three months ended September 30, 2019. Gross margin for the three months ended December 31, 2019 was 38% compared to 47% for the three months ended September 30, 2019. The decrease was due to the reasons discussed above under retail and wholesale revenue.

 

Gross profit before management fee income and after net gains on biological assets for the three months ended December 31, 2019 was $27,519, compared to $37,412 for the three months ended December 31, 2018. Gross margin for the year ended December 31, 2019 was 48% compared to 74% for the three months ended December 31, 2018. The decrease is primarily due to higher operating capacity of the Company’s cultivation and processing facilities and the net gain on biological assets described above.

 

Total Operating Expenses

 

 

 

Three months ended

 

Q4 ‘19 vs

 

Q4 ‘19 vs

 

 

 

December 31, 

 

September 30,

 

December 31, 

 

Q3 ‘19

 

Q4 ‘18

 

 

 

2019

 

2019

 

2018

 

$ Change

 

$ Change

 

Salaries and benefits

 

$

 14,940

 

$

 14,296

 

$

 10,802

 

$

 644

 

$

 4,138

 

Sales and marketing

 

3,693

 

2,867

 

1,944

 

826

 

1,749

 

Rent and occupancy

 

1,214

 

1,384

 

3,655

 

(170

)

(2,441

)

Travel

 

1,823

 

2,048

 

861

 

(225

)

962

 

Professional fees

 

10,363

 

9,288

 

3,713

 

1,075

 

6,650

 

Office supplies and services

 

2,592

 

2,043

 

1,722

 

549

 

870

 

Other

 

1,602

 

1,571

 

3,093

 

31

 

(1,491

)

Total selling, general, and administrative

 

36,227

 

33,497

 

25,790

 

2,730

 

10,437

 

Depreciation and amortization

 

10,673

 

8,938

 

3,612

 

1,735

 

7,061

 

Share-based compensation

 

5,663

 

4,673

 

1,096

 

990

 

4,567

 

Total operating expenses

 

$

52,563

 

$

47,108

 

$

30,498

 

$

5,455

 

$

22,065

 

 

Comparison of the Three Months ended December 31, 2019 and 2018

 

Total operating expenses for the three months ended December 31, 2019 were $52,563, an increase of $22,065 or 72%, compared to $30,498 for the three months ended December 31, 2018, which represents 70% and 95% of total revenue for the three months ended December 31, 2019 and 2018, respectively. The increase in total operating expenses was primarily attributable to an increase in salaries and benefits, as well as sales and marketing and professional fees as the Company expanded the number of retail dispensaries from 36 in 2018 to 51 in 2019, and increased the level of support staff necessary to run the expanded operations as well as incurred $8,263 and $5,149 in one-time expenses during the three months ended December 31, 2019 and 2018, respectively, largely associated with acquisitions and business development activities.

 

Salaries and benefits were $14,940 for the three months ended December 31, 2019, compared to $10,802 for the three months ended December 31, 2018, which represents an increase of $4,138. This was due to an increase in headcount at the corporate level as well as headcount from operating markets from organic growth in Florida, Massachusetts, New York, and both organic and acquired growth in Arizona.

 

Sales and marketing expenses totaled $3,693 for the three months ended December 31, 2019, compared to $1,944 for the three months ended December 31, 2018, which represents an increase of $1,749. The increase was largely due to marketing cost associated with marketing CBD products nationally and other branding, lobbying, and public relations costs at the corporate level as well as Florida and Arizona.

 

23

 

Occupancy expenses totaled $1,214 for the three months ended December 31, 2019, compared to rent and occupancy of $3,655 for the three months ended December 31, 2018. The decrease of $2,441 was primarily due to the adoption of IFRS 16 in 2019.

 

Travel expenses totaled $1,823 for the three months ended December 31, 2019, compared to $861 for the three months ended December 31, 2018, which represents an increase of $962. The increase was due to increased management travel associated with expanded operations.

 

Professional fees were $10,363 for the three months ended December 31, 2019 compared to $3,713 for the three months ended December 31, 2018, which represents an increase of $6,650. This increase was primarily due to increased legal and accounting fees associated with the expansion to new operating markets through organic growth and acquisitions, filing fees and cost associated with the HSR compliance and costs associated with the integration of acquisitions.

 

Other general and administrative expenses were $4,194 for the three months ended December 31, 2019 compared to $4,815 for the three months ended December 31, 2018, which represents a decrease of $621. This decrease was primarily due to decreased expenditures in office supplies and monthly services at the corporate level.

 

Depreciation and amortization was $10,673 for the three months ended December 31, 2019, compared to $3,612 for the three months ended December 31, 2018, which represents an increase of $7,061. The increase was primarily due to the Company’s expansion of capital projects in Connecticut, New York, Florida, Massachusetts and Oregon as well as acquisition and operation of new businesses in Arizona, Nevada and Maryland. Additionally, the adoption of IFRS 16 in 2019 resulted in $3,474 in depreciation expense for the three months ended December 31, 2019.

 

Share-based compensation was $5,663 for the three months ended December 31, 2019, compared to $1,096 for the three months ended December 31, 2018 which represents an increase of $4,567. The increase was primarily due to the share-based cost associated with options and restricted stock units granted in 2019.

 

Comparison of the Three Months ended December 31, 2019 and September 30, 2019

 

Total operating expenses for the three months ended December 31, 2019 were $52,563, an increase of $5,455 or 12%, compared to $47,108 for the three months ended September 30, 2019, which represents 70% and 76% of total revenue for the three months ended December 31, 2019 and September 30, 2019, respectively. The increase in total operating expenses was primarily attributable to an increase in salaries and benefits, as well as sales and marketing and professional fees as the Company expanded the number of retail dispensaries from 49 as of September 30, 2019 to 51 at December 31, 2019, and increased the level of support staff necessary to run the expanded operations as well as incurred $8,263 and $7,772 in one-time expenses during the three months ended December 31 and September 30, 2019, respectively, largely associated with acquisitions and business development activities.

 

Salaries and benefits were $14,940 for the three months ended December 31, 2019, compared to $14,296 for the three months ended September 30, 2019, which represents an increase of $644. This was due to an increase in headcount at the corporate level as well as headcount from operating markets from organic  growth in Florida, Massachusetts, New York, and both organic and acquired growth in Arizona.

 

Sales and marketing expenses totaled $3,693 for the three months ended December 31, 2019, compared to $2,867 for the three months ended September 30, 2019, which represents an increase of $826. The increase was largely due to branding, lobbying, and public relations costs at the corporate level as well as Florida and Arizona.

 

Occupancy expenses totaled $1,214 for the three months ended December 31, 2019, compared to $1,384 for the three months ended September 30, 2019. The decrease of $170 was primarily due to additional leases subjected to IFRS 16 in Q4 2019.

 

Travel expenses totaled $1,823 for the three months ended December 31, 2019, compared to $2,048 for the three months ended September 30, 2019, which represents a decrease of $225. The increase was due to decreased management travel during the last quarter of 2019.

 

24

 

Professional fees were $10,363 for the three months ended December 31, 2019 compared to $9,288 for the three months ended September 30, 2019, which represents an increase of $1,075. This increase was primarily due to increased legal and accounting fees associated with the expansion to new operating markets through organic growth and acquisitions, filing fees and cost associated with the HSR compliance and costs associated with the integration of acquisitions.

 

Other general and administrative expenses were $4,194 for the three months ended December 31, 2019 compared to $3,614 for the three months ended September 30, 2019, which represents an increase of $580. This increase was primarily due to increased expenditures in office supplies and monthly services at the corporate level, Florida, New York, and Arizona as well as increases in development of new products and business development.

 

Depreciation and amortization was $10,673 for the three months ended December 31, 2019, compared to $8,938 for the three months ended September 30, 2019, which represents an increase of $1,735. The increase was primarily due to the Company’s expansion of capital projects in Florida, Connecticut and Oregon as well as acquisition and operation of new businesses in Arizona, Nevada, Maryland, and Massachusetts.

 

Share-based compensation was $5,663 for the three months ended December 31, 2019, compared to $4,673 for the three months ended September 30, 2019 which represents an increase of $990. The increase was primarily due to the share-based cost associated with options and restricted stock units granted in November and December 2019.

 

Total Other Income

 

 

 

Three Months Ended

 

Q4 ‘19 vs

 

Q4 ‘19 vs

 

 

 

December 31, 

 

September 30,

 

December 31, 

 

Q3 ‘19

 

Q4 ‘18

 

 

 

2019

 

2019

 

2018

 

$ Change

 

$ Change

 

Interest income

 

$

 2,450

 

$

 2,568

 

$

 1,731

 

$

 (118

)

$

 719

 

Interest expense

 

(5,397

)

(4,852

)

(4,405

)

(545

)

(992

)

Interest expense related to lease liabilities

 

(2,148

)

(1,894

)

—

 

(254

)

(2,148

)

Other income (expense)

 

(2,763

)

580

 

31

 

(3,343

)

(2,794

)

Total other income (expense), net

 

$

(7,858

)

$

(3,598

)

$

(2,643

)

$

(4,260

)

$

(5,215

)

 

Comparison of the Three Months ended December 31, 2019 and 2018

 

Total other income (expense), net for the three months ended December 31, 2019 was a net loss of $7,858 compared to net loss of $2,643 for the three months ended December 31, 2018. The increase in expense is primarily due to the additional debt incurred in August 2018 and the interest expense related to lease liabilities associated with the adoption of IFRS 16 in 2019. During the three months ended December 31, 2019, the Company recognized a loss related to the Curaleaf Hemp brand of $2,323.

 

Interest income for the three months ended December 31, 2019 and 2018 was $2,450 and $1,731, respectively. The increase of $719 was due to an increase in the notes receivable outstanding balances during 2019.

 

Interest expense, excluding interest related to lease liabilities for the three months ended December 31, 2019 and 2018 was $5,397 and $4,405 respectively. The increase of $992 was due to new borrowings entered into by the Company.

 

Interest expense related to lease liabilities was $2,148 and was attributable to the adoption of IFRS 16 in 2019.

 

Provision for Income Taxes

 

The Company recorded an income tax expense of $12,026 for the three months ended December 31, 2019, compared to an income tax expense of $1,926 for the three months ended December 31, 2018. The increase was the result of increased gross profit in certain of the Company’s subsidiaries that are subjected to Section 280E and increase in biological assets resulting in increased deferred tax expense.

 

25

 

Net Loss

 

Net loss for the three months ended December 31, 2019 was $27,152 compared to net loss of $16,471 for the three months ended December 31, 2018, which represents an increase of $10,681, or 65%. The increase was primarily driven by the increase in operating expenses described above, partially offset by the increase in gross profit.

 

Comparison of the Three Months ended December 31, 2019 and September 30, 2019

 

Total other income (expense), net for the three months ended December 31, 2019 was a net loss of $7,858 compared to net loss of $3,598 for the three months ended September 30, 2019. The increase in expense is primarily due to a loss related the Curaleaf Hemp brand of $2,323.

 

Interest income for the three months ended December 31, 2019 and September 30, 2019 was $2,450 and $2,568, respectively. The decrease of $118 was due to a reduction of bank deposit interest income related to the lower cash balance during the last quarter of 2019.

 

Interest expense, excluding interest related to lease liabilities for the three months ended December 31, 2019 and September 30, 2019 was $5,397 and $4,852 respectively. The increase of $545 was due to a catch up in it interest expense related to the Secured Promissory Notes.

 

Interest expense related to lease liabilities was attributable to the adoption of IFRS 16 in 2019. The interest expense related to lease liabilities for the three months ended December 31, and September 30, 2019 was $2,148 and $1,894, respectively.

 

Provision for Income Taxes

 

The Company recorded an income tax expense of $12,026 for the three months ended December 31, 2019, compared to an income tax expense of $5,279 for the three months ended September 30, 2019. The increase was the result of increased gross profit in certain of the Company’s subsidiaries that are subjected to Section 280E and increase in biological assets resulting in increased deferred tax expense.

 

Net Loss

 

Net loss for the three months ended December 31, 2019 was $27,152 compared to net loss of $7,434 for the three months ended September 30, 2019, which represents a decrease of $19,718, or 265%. The increase was primarily driven by the increase in operating expenses and the decrease in gross profit as described above.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity, and Capital Resources

 

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, acquisitions, debt service, and for general corporate purposes. To date our primary source of liquidity has been from  funds generated by financing activities, including Private Placement and the senior secured debt financing completed in January 2020. See the “Reverse Takeover Transaction and Private Placement” and “Recent Financing Transactions” sections of this MD&A. Our ability to fund our operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. See the “Financial Instruments and Financial Risk Management” and “Risk Factors” sections of this MD&A.

 

As of December 31, 2019, we had $43,478 of cash and working capital of $43,275 (current assets minus current liabilities), compared with $266,616 of cash and $288,632 of working capital as of December 31, 2018. The decrease of $245,104 in

 

26

 

our working capital was primarily due to a $223,138 decrease in cash largely resulting from cash paid for acquisitions, capital expenditures, advances on notes, and increases in inventory during the year ended December 31, 2019.

 

The Company is an early stage growth company. It is generating cash from sales and is investing its capital reserves in current operations and new acquisitions that are expected to generate additional earnings in the long term.

 

The Company expects that its cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet its capital requirements and operational needs for the next 12 months.

 

Recent Financing Transactions

 

In January 2020, the Company closed on a Senior Secured Term Loan Facility (“Facility”) from a syndicate of lenders totaling $300,000. The amounts owing under the Facility bear interest at a rate of 13.0% per annum, payable quarterly in arrears with a maturity on December 2023. A portion of the proceeds of the Facility were used to retire in full the existing 13% senior secured debt financing agreement of $85,000, which was closed on August 27, 2018.  In August 2019, the Company completed a sale leaseback transaction with Freehold Properties that provided $25,245 of cash. The proceeds from this transaction will be used for capital expenditures and acquisition purposes.

 

Cash Flows

 

The following table summarizes the sources and uses of cash or each of the periods presented:

 

 

 

Year ended

 

 

 

December 31, 

 

 

 

2019

 

2018

 

Net cash used in operating activities

 

$

 (38,321

)

$

 (33,101

)

Net cash used in investing activities

 

(204,045

)

(134,266

)

Net cash provided by financing activities

 

18,060

 

413,008

 

Net increase (decrease) in cash and cash equivalents

 

$

(224,306

)

$

245,641

 

 

Operating Activities

 

During the year ended December 31, 2019, operating activities used $38,321 of cash, primarily resulting from our net loss of $69,847 and net non-cash gains including unrealized changes in fair value of biological assets of $45,519, partially offset by net cash provided by changes in our operating assets and liabilities of $13,992. Cash provided by changes in operating assets and liabilities was primarily due to increases in accounts receivable, income tax payable, inventory and other assets of $6,943, $12,384, $28,746 and $1,216, respectively.

 

During the year ended December 31, 2018, operating activities used $33,101 of cash, primarily resulting from our net loss of $61,877 and net non-cash gains including unrealized changes in fair value of biological assets of $14,335, partially offset by net cash provided by changes in our operating assets and liabilities of $14,441. Cash provided by changes in operating assets and liabilities was primarily due to an increase of accounts payable and accrued expenses of $14,133, partially offset by increases in inventory, accounts receivable, prepaid expenses and other assets of $13,176, $8,142, and $3,615, respectively.

 

Investing Activities

 

During the year ended December 31, 2019, investing activities used $204,045 of cash, consisting primarily of payments totaling $82,075 in purchases of property and equipment, $80,560 in connection with acquisitions and $35,444 in connection with the amounts advanced under notes receivable.

 

27

 

During the year ended December 31, 2018, investing activities used $134,266 of cash, consisting primarily of payments totaling $44,904 in purchases of property and equipment, $73,164 in connection with acquisitions and $16,198 in connection with the amounts advanced under notes receivable.

 

Financing Activities

 

During the year ended December 31, 2019, financing activities provided $18,060 of cash, consisting primarily of $25,245 cash received from a sale leaseback transaction and option exercise of $2,337, offset by $5,132 of lease liability payments, principal payments on debt of $3,112 and repurchase of common stock of $883.

 

During the year ended December 31, 2018, financing activities provided $413,008 of cash, consisting primarily of $375,159 in proceeds from the Private Placement, $28,500 in proceeds from the issuance of common stock of Curaleaf, Inc. and $104,247 in proceeds from debt issuances, partially offset by $26,300 in repayments of debt and $66,642 in connection with minority buyouts.

 

Contractual Obligations and Commitments

 

The Company leases space for its offices, cultivation centers, and retail dispensaries. Key movements relating to the lease balances are present below:

 

Period

 

Scheduled payments

 

2020

 

17,381

 

2021

 

16,377

 

2022

 

17,250

 

2023

 

16,126

 

2024 and thereafter

 

62,320

 

Total undiscounted lease liability

 

129,454

 

Impact of discount

 

(36,300

)

Lease liability at December 31, 2019

 

93,154

 

Less current portion of lease liability

 

(11,835

)

Long-term portion of lease liability

 

$

81,319

 

 

Real estate leases typically extend for a period of 1—10 years. Some leases for office space include extension options exercisable up to one year before the end of the cancellable lease term. Typically, the option to renew the lease is for an additional period of 5 years after the end of the initial contract term and are at the option of the Company as the lessee. Lease payments are in substance fixed, and most real estate leases include annual escalation clauses with reference to an index or contractual rate.

 

The Company leases machinery and equipment but does not purchase or guarantee the value of leased assets. The Company considers these assets to be of low-value or short-term in nature and therefore no right-of use assets and lease liabilities are recognized for these leases. Expenses recognized relating to short-term leases and leases of low value during the year ended December 31, 2019 were immaterial.

 

Amounts in the table below reflect the contractually required principal and interest payments payable under promissory note agreements and other long-term debt. The various borrowings bear interest at rates between 7% and 15% per annum:

 

Year ending December 31, 

 

Amount

 

2020

 

$

17,000

 

2021

 

90,795

 

2022

 

—

 

2023

 

—

 

2024 and thereafter

 

2,931

 

 

 

$

110,726

 

 

28

 

SUMMARY OF QUARTERLY RESULTS

 

 

 

2019

 

2018

 

 

 

Q4

 

Q3

 

Q2

 

Q1

 

Q4

 

Q3

 

Q2

 

Q1

 

Revenue

 

$

75,457

 

$

61,820

 

$

48,489

 

$

35,251

 

$

31,961

 

$

21,370

 

$

14,644

 

$

9,085

 

Cost of goods sold

 

35,695

 

27,079

 

22,469

 

17,144

 

11,980

 

7,501

 

6,835

 

4,856

 

Net change in fair value of biological assets

 

5,533

 

13,810

 

1,392

 

2,246

 

(1,385

)

166

 

1,120

 

501

 

Gross profit

 

45,295

 

48,551

 

27,412

 

20,353

 

18,596

 

14,035

 

8,929

 

4,727

 

Operating expenses

 

52,563

 

47,108

 

39,713

 

29,945

 

30,498

 

20,852

 

14,612

 

(4,279

)

Other income, net

 

(7,858

)

(3,598

)

(3,942

)

(2,674

)

(2,643

)

(26,041

)

488

 

643

 

Net Loss

 

(27,152

)

(7,434

)

(24,435

)

(10,828

)

(16,471

)

(35,562

)

(6,430

)

(3,413

)

Less: Net loss attributable to redeemable non-controlling interest

 

(591

)

(599

)

106

 

(619

)

(5,272

)

(1,889

)

(1,497

)

(1,107

)

Net loss attributable to Curaleaf Holdings, Inc.

 

(26,561

)

(6,835

)

(24,541

)

(10,209

)

(11,199

)

(33,673

)

(4,933

)

(2,306

)

Loss per share - basic and diluted

 

$

(0.06

)

$

(0.01

)

$

(0.05

)

$

(0.02

)

$

(0.03

)

$

(0.09

)

$

(0.01

)

$

(0.01

)

Weighted average common shares outstanding - basic and diluted

 

468,445,941

 

464,073,130

 

461,313,741

 

453,559,765

 

436,048,233

 

385,754,657

 

382,618,764

 

381,086,113

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of the date of this filing, the Company does not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company, including, and without limitation, such considerations as liquidity and capital resources.

 

RELATED PARTY TRANSACTIONS

 

The Company incurred the following transactions with related parties during the years ended December 31, 2019 and 2018.

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

Transaction

 

Related Party Transactions

 

Balance Receivable (Payable)

 

Senior Unsecured Note - 2019 (1)

 

$

 237

 

$

 237

 

$

—

 

$

 (1,666

)

Consulting Fees (1)

 

319

 

201

 

—

 

—

 

Deal Fees (1)

 

—

 

1,800

 

—

 

—

 

Travel and Reimbursement (1)

 

816

 

1,052

 

—

 

—

 

Rent expense (1)

 

238

 

91

 

—

 

—

 

Contingent Liability (2)

 

—

 

—

 

(18,000

)

(18,000

)

 

 

$

1,610

 

$

3,381

 

$

(18,000

)

$

(19,666

)

 

(1) Interest, debt related, general and administrative fees due to a director in common.

(2) Contingent consideration liability for the purchase of CLMA.

 

 

 

Year Ended December 31,

 

Key Management Personnel Compensation

 

2019

 

2018

 

Short-term employee benefits

 

$

1,997

 

$

4,776

 

Post-employment benefits

 

—

 

—

 

Other long-term benefits

 

27

 

37

 

Termination benefits

 

—

 

—

 

Share-based payments

 

12,493

 

1,149

 

 

 

$

14,517

 

$

5,962

 

 

29

 

PROPOSED TRANSACTIONS

 

Alternative Therapies Group, Inc, a Massachusetts corporation (“ATG”)

 

In August 2018, the Company entered into an agreement to acquire ATG (“ATG Acquisition”), a registered marijuana dispensary licensed by the Massachusetts Department of Health, operating a 53,600 square foot cultivation and processing facility in Amesbury, Massachusetts and intends to enter into supply agreements with up to three ATG dispensaries in Massachusetts. The consideration payable by the Company for the acquisition of ATG is $50,000, $42,500 of which was prepaid in cash in December 2018 in order to solidify the Company’s intent to complete the purchase of ATG and was recorded as a non-current asset. The remaining $7,500 is due on the later of December 31, 2019 or the date on which certain milestones are met.  The closing of the transaction is subject to certain milestones being met and regulatory approval.

 

Cura Partners, Inc., an Oregon corporation (“Cura” or “Select”)

 

On May 1, 2019, Curaleaf announced the signature of a definitive agreement to acquire Cura Partners, Inc. (“Cura”), owners of the Select brand (“Select”). The acquisition includes Select’s manufacturing, processing, distribution, marketing and retailing operations and all adult-use and medical cannabis products marketed under the Select brand name, including all intellectual property (the “Cura Transaction”).

 

Refer to the Company’s material change reports dated May 10, 2019 and November 8, 2019, both of which have been filed on SEDAR, with respect to the Cura Transaction for additional details regarding the terms of the Cura Transaction under the original merger agreement.

 

Due to changes in market conditions, Curaleaf and Select mutually agreed on October 30, 2019 to reduce the base consideration payable upon closing of the Cura Transaction. Under the amended and restated merger agreement (the “Amended Merger Agreement”), the number of SVS payable at closing of the Cura Transaction was reduced to 55,000,000 SVS from 95,555,556 SVS originally. The remaining 40,555,556 SVS will be payable to Select equity holders contingent upon Curaleaf achieving certain calendar year 2020 revenue targets based on Select-branded retail extract sales beginning at a target of $130,000 with maximum achievement at $250,000. In addition, Select equity holders will also be eligible to receive an earn-out of up to $200,000 from the issuance of additional SVS, contingent upon Curaleaf exceeding $300,000 in calendar year 2020 revenue for Select-branded retail extract sales.

 

The Select transaction closed on February 1, 2020.

 

Ohio Grown Therapies, LLC, an Ohio limited liability company (“OGT”)

 

In May 2019, the Company entered into an agreement granting it an option to acquire OGT for $20,000. The Company paid $5,000 cash in May 2019 and the remaining consideration will be paid upon completion of milestones, culminating with regulatory approval of the transfer of the final licenses and OGT facility to Curaleaf.  The closing of this transaction is currently pending regulatory approval.

 

GR Companies, Inc., a Delaware company (“Grassroots”)

 

In July 2019, the Company entered into an agreement to acquire Grassroots (“Grassroots Acquisition”), a large, private, vertically integrated multi-state operator, for consideration composed of $75,000 in cash, and approximately 102,808,038 SVS. Consideration is subject to adjustments for working capital and cash at closing. Consideration also includes additional SVS equal to the quotient obtained by dividing $40,000 by the higher of (i) the 10-day volume-weighted average price per SVS, determined as of the close of business on the last business day prior to the closing date, on the CSE and (ii) eighty-five percent (85%) of the 1-day volume-weighted average price per SVS determined two trading days prior to the closing date of such SVS on the CSE. In February 2020, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired with respect to the acquisition of Grassroots. The closing of this transaction is currently pending completion of certain closing conditions, including regulatory approval.

 

30

 

Arrow Alternative Care, Inc., Arrow Alternative Care #2, Inc., Arrow Alternative Care #3, Inc., each a Delaware corporation (collectively, the “Arrow Companies”)

 

In March 2020, the Company signed definitive agreements to acquire the Arrow Companies, which operate licensed medical cannabis dispensaries in Stamford, Hartford, and Milford, Connecticut.  The aggregated consideration to be paid for the Arrow Companies is $38,000, consisting of $16,400 cash and $21,600 to be paid in SVS. The closing of this transaction is currently pending completion of certain closing conditions, including regulatory approval.

 

Virginia’s Kitchen, LLC, a Colorado company d/b/a Blue Kudu (“Blue Kudu”)

 

In February 2020, the Company signed a definitive agreement to acquire Blue Kudu, a Colorado-licensed processor and producer cannabis edibles, operating an 8,400 sq.ft. facility in Denver, Colorado.    The consideration to be paid for Blue Kudu consists of 322,580 SVS, $1,250 cash at closing of the transaction and a 5% note for $500 due ten and a half months from closing.   The closing of this transaction is currently pending completion of certain closing conditions, including regulatory approval (other than the HSR approval).

 

CHANGES IN OR ADOPTION OF ACCOUNTING PRACTICES

 

The following IFRS standards have been recently issued by the IASB. The Company is assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein.

 

IFRS 16: Leases

 

In January 2016, the IASB issued IFRS 16, which replaces IAS 17 — Leases. The Company adopted IFRS 16 on January 1, 2019 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17.  Specifically, rent expense will be replaced by associated depreciation of the right-to-use assets and interest expense. Since the Company is not restating prior periods as part of adopting IFRS 16, current results will not be directly comparable to results for periods before January 1, 2019.

 

Under IAS 17, a lease of property and equipment was classified as an operating lease whenever the terms of the lease did not transfer substantially all of the risks and rewards of ownership to the lessee. Lease payments were recognized as rent expense on a straight-line basis over the lease term, except where another systematic basis was more representative of the time pattern in which the economic benefits were consumed.

 

Under IFRS 16, at inception of a contract, the Company assesses whether a contract conveys the right to control the use of an identified asset for a period in exchange for consideration, in which case it is classified as a lease. The Company recognizes a right-of-use asset (“lease asset”) and a lease liability at the lease commencement date. The asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore the underlying asset, less any lease incentives received. The lease asset is subsequently amortized using the straight-line method from the commencement date to the end of the useful life of the right-of-use asset, considered to be indicated by the lease term. The lease asset is periodically assessed and adjusted for certain remeasurements of the lease liability and impairment losses, if any. The lease liability is initially measured at the present value of outstanding lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. The lease liability is measured at amortized cost using the effective interest method and is remeasured when there is a change in future lease payments arising from a change in an index or rate or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. A corresponding adjustment is made to the carrying amount of the right-of-use asset with any excess over the carrying amount of the asset being recognized in the statement of profits or losses.

 

31

 

The Company has elected not to recognize lease assets and lease liabilities for short-term leases (leases with a term of 12 months or less) and leases of low-value assets such as small equipment. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

 

On transition to IFRS 16, the Company recognized a right-of-use asset of $41,853, a corresponding lease liability of $42,842 and derecognized $989 of deferred rent. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate ranging from 8.19% to 9.42%.

 

Amendment to IFRS 3: Definition of a Business

 

In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020, however early application is permitted. The Company has elected early application of the amendment and elects whether to apply, or not apply, the test to each transaction separately.

 

IAS 1: Presentation of Financial Statements & IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors

 

In October 2018, the IASB issued “Definition of Material”, an amendment to IAS 1 — Presentation of Financial Statements and IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of material and to align the definition used in the Conceptual Framework and the standards themselves. Materiality is defined as “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” This amendment will be effective for the annual period beginning January 1, 2020. The extent of the impact of application of the interpretation has not yet been determined.

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of the Company’s annual audited consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.

 

Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the audited consolidated financial statements are described below.

 

Discount rate for leases

 

IFRS 16 - Leases requires lessees to discount lease payments using the rate implicit in the lease, if that rate is readily available. If that rate cannot be readily determined, the lessee is required to use its incremental borrowing rate. The Company generally uses the incremental borrowing rate when initially recording real estate leases as the implicit rates are not readily available as information from the lessor regarding the fair value of underlying assets and initial direct costs incurred by the lessor related to the leased assets is not available. The Company determines the incremental borrowing rate as the interest rate the Company would pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

 

32

 

Estimated Useful Lives and Depreciation of Property and Equipment

 

Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

 

Estimated Useful Lives and Amortization of Intangible Assets

 

Amortization of intangible assets is dependent upon estimates of useful lives which are determined through exercise of judgment and do not exceed the contractual period, if any. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired.

 

Biological Assets

 

Biological assets are dependent upon estimates of future economic benefits as a result of past events to determine the fair value through an exercise of significant judgment by the Company. In estimating the fair value of an asset or a liability, the Company uses market observable data to the extent it is available. The Company uses the average selling price per gram in the market in which the biological assets are produced to determine fair value. The Company reevaluates market prices on a quarterly basis in order to ensure biological assets are measured at the most relevant fair value.

 

Business Combinations

 

In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 — Financial Instruments with the corresponding gain or loss being recognized in the consolidated statement of profits and losses. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied.

 

Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.

 

Compound financial instruments

 

The identification of components in compound financial instruments is based on interpretations of the substance of the contractual arrangement and requires judgment from management. The separation of the components affects the initial recognition at issuance and the subsequent recognition of interest on the liability component. The determination of the fair value of the liability is also based on a number of assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.

 

Share-based Payment Arrangements

 

The Company uses the Black-Scholes valuation model to determine the fair value of share-based payment arrangements granted to employees and directors. In instances where stock options have performance or market conditions, the Company utilizes the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option.  In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility

 

33

 

of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

 

Goodwill Impairment

 

Goodwill is tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill has been impaired. In order to determine if the value of goodwill has been impaired, the CGU to which goodwill has been allocated must be valued using present value techniques. When applying this valuation technique, the Company relies on a number of factors including historical results, business plans, forecasts and market data. Changes in the conditions for these judgments and estimates can significantly affect the assessed value of goodwill.

 

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

 

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, notes receivable, accounts payable, accrued expenses, long-term debt, and redeemable non-controlling contingency. The fair values of cash, restricted cash, notes receivable, accounts payable and accrued expenses approximate their carrying values due to the relatively short-term to maturity. The Company’s long-term notes payable carrying value at the effective interest rate approximate fair value. Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:

 

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2 — Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and

 

Level 3 — Inputs for the asset or liability that are not based on observable market data.

 

The Company’s assets measured at fair value on a nonrecurring basis include investments, long-lived assets and indefinite-lived intangible assets and goodwill. The Company reviews the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually as at December 31, for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to be Level 3 measurements.

 

Financial Risk Management

 

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below:

 

Credit Risk

 

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at December 31, 2019 and 2018 is the carrying amount of cash and cash equivalents, accounts receivable and notes receivable. The Company does not have significant credit risk with respect to its customers. All cash and cash equivalents are placed with major U.S. financial institutions.

 

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk, but has limited risk as the majority of its sales are transacted with cash.

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its cash flows necessary to fund operations

 

34

 

and development and its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.

 

The Company continues to have robust access to equity and debt financing from public and private markets in Canada. If such financing were no longer available in the public markets in Canada due to changes in applicable law, then the Company expects that it would have to raise financing privately.

 

Market Risk

 

Currency Risk

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions have been and may be denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks.

 

At December 31, 2019 and 2018, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.

 

Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cash and cash equivalents bear interest at market rates. The Company’s financial debts have fixed rates of interest and therefore expose the Company to a limited interest rate fair value risk.

 

REGULATORY ENVIRONMENT: ISSUERS WITH UNITED STATES CANNABIS-RELATED ASSETS

 

In accordance with Staff Notice 51-352, below is a discussion of the current federal and state-level U.S. regulatory regimes in those jurisdictions where the Company is currently directly and indirectly involved, through its subsidiaries and investments, in the cannabis industry.

 

In accordance with Staff Notice 51-352, the Company will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented, amended and communicated to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation.  Any non-compliance, citations or notices of violation which may have an impact on the Company’s license, business activities or operations will be promptly disclosed by the Company.

 

The Company derives its revenues from the cannabis industry in certain states of the U.S., and the industry is illegal under U.S. federal law.

 

The Company is involved (through its licensed subsidiaries) in the cannabis industry in the U.S. where local state laws permit such activities. Currently, its subsidiaries and managed entities are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and/or medicinal cannabis marketplace in the states of Arizona, California, Connecticut, Florida, Maine, Maryland, Massachusetts, Nevada, New Jersey, New York, Ohio, Utah and Oregon; and have partnered with an accredited medical school and obtained a “clinical registrant” license in Pennsylvania.

 

The Company’s Statement of Financial Position and Operating Statement Exposure to U.S. marijuana Related Activities

 

As of the date of this MD&A, all of the Company’s business was directly derived from U.S. cannabis-related activities. As such, the Company’s statement of financial position and statement of profits and losses exposure to U.S. cannabis-related activities is 100%.

 

35

 

Readers are cautioned that the foregoing financial information, though extracted from the Company’s financial systems that supports its annual consolidated financial statements, has not been audited in its presentation format and accordingly is not in compliance with IFRS based on consolidation principles.

 

U.S. Federal Overview

 

The U.S. federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, in one of five different schedules. Cannabis is classified as a Schedule I drug. As a Schedule I drug, the Federal Drug Enforcement Agency (“DEA”) considers cannabis to have a high potential for abuse; no  currently accepted medical use in treatment in the U.S., and a lack of accepted safety for use of the drug under medical supervision. The classification of cannabis as a Schedule I drug is inconsistent with what the Company believes to be many valuable medical uses for marijuana accepted by physicians, researchers, patients, and others. As evidence of this, the federal Food and Drug Administration (“FDA”) on June 25, 2018 approved Epidiolex (cannabidiol) (“CBD”) oral solution with an active ingredient derived from the cannabis plant for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. This is the first FDA-approved drug that contains a purified drug substance derived from the cannabis plant. In this case, the substance is CBD, a chemical component of marijuana that does not contain the intoxication properties of tetrahydrocannabinol (“THC”), the primary psychoactive component of marijuana. The Company believes the CSA categorization as a Schedule I drug is not reflective of the medicinal properties of marijuana or the public perception thereof, and numerous studies show cannabis is not able to be abused in the same way as other Schedule I drugs, has medicinal properties, and can be safely administered.

 

The federal position is also not necessarily consistent with democratic approval of marijuana at the state government level in the United States. Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of marijuana under the Cannabis Act (Canada), cannabis is largely regulated at the state level in the United States. State laws regulating cannabis conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use cannabis production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts. Although the Company’s activities are compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law nor provide a defense to federal criminal charges that may be brought against the Company. The Supremacy Clause of the United States Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and State law, federal law shall apply.

 

Nonetheless, 33 states and the District of Columbia in the United States have legalized some form cannabis for medical use, while 11 states and the District of Columbia have legalized the adult use of cannabis for recreational purposes. As more and more states legalized medical and/or adult-use marijuana, the federal government attempted to provide clarity on the incongruity between federal prohibition under the CSA and these state-legal regulatory frameworks. Notwithstanding the foregoing, marijuana remains illegal under U.S. federal law, with marijuana listed as a Schedule I drug under the CSA. Until 2018, the federal government provided guidance to federal law enforcement agencies and banking institutions through a series of United States Department of Justice (“DOJ”) memoranda. The most recent such memorandum was drafted by former Deputy Attorney General James Cole on August 29, 2013 (the “Cole Memorandum”).

 

The Cole Memorandum offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states, and instructed federal law enforcement agencies not to prosecute violations of federal drug laws related to cannabis where the activity is permitted and regulated under cannabis laws of the relevant state.

 

The Cole Memorandum put forth eight prosecution priorities:

 

1.              Preventing the distribution of marijuana to minors;

 

2.              Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

 

3.              Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;

 

36

 

4.              Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

 

5.              Preventing the violence and the use of firearms in the cultivation and distribution of marijuana;

 

6.              Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

 

7.              Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

 

8.              Preventing marijuana possession or use on federal property.

 

The Cole Memorandum was seen by many state-legal marijuana companies as a safe harbor for their licensed operations that were conducted in full compliance with all applicable state and local regulations.

 

On January 4, 2018, former United States Attorney General Jeff Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United States Attorneys (the “Sessions Memorandum”). Rather than establish national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana activity was legal under state law, the Sessions Memorandum instructs that “in deciding which marijuana activities to prosecute... with the DOJ’s finite resources, prosecutors should follow the well established principles that govern all federal prosecutions.” Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.

 

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

 

Former United States Attorney General Sessions resigned on November 7, 2018. He was replaced by William Barr on February 14, 2019. It is unclear what specific impact this development will have on U.S. federal government enforcement policy. However, in a written response to questions from U.S. Senator Cory Booker made as a nominee, Attorney General Barr stated, “I do not intend to go after parties who have complied with state law in reliance on the Cole Memorandum.” Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the U.S. Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law.

 

The Company believes it is too soon to determine if any prosecutorial effects will be undertaken by the rescission of the Cole Memorandum, or if Attorney General Barr will reinstitute the Cole Memorandum or a similar guidance document for United States attorneys. The sheer size of the cannabis industry, in addition to participation by State and local governments and investors, suggests that a largescale enforcement operation would possibly create unwanted political backlash for the Department of Justice and the Trump administration.

 

As an industry best practice, despite the recent rescission of the Cole Memorandum, the Company abides by the following standard operating policies and procedures to ensure compliance with the guidance provided by the Cole Memorandum:

 

1.              Ensure that its operations are compliant with all licensing requirements as established by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions;

 

2.              Ensure that its cannabis related activities adhere to the scope of the licensing obtained (for example: in the states where cannabis is permitted only for adult-use, the products are only sold to individuals who meet the requisite age requirements);

 

3.              Implement policies and procedures to ensure that cannabis products are not distributed to minors;

 

37

 

4.              Implement policies and procedures to ensure that funds are not distributed to criminal enterprises, gangs or cartels;

 

5.              Implement an inventory tracking system and necessary procedures to ensure that such compliance system is effective in tracking inventory and preventing diversion of cannabis or cannabis products into those states where cannabis is not permitted by state law, or across any state lines in general;

 

6.              Ensure that its state-authorized cannabis business activity is not used as a cover or pretense for trafficking of other illegal drugs, is engaged in any other illegal activity or any activities that are contrary to any applicable anti-money laundering statutes; and

 

7.              Ensure that its products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving.

 

In addition, the Company conducts background checks to ensure that the principals and management of its operating subsidiaries are of good character, have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in cultivation, manufacturing or distribution of cannabis. The Company will also conduct ongoing reviews of the activities of its cannabis businesses, the premises on which they operate and the policies and procedures that are related to possession of cannabis or cannabis products outside of the licensed premises, including the cases where such possession is permitted by regulation. See “Compliance and Monitoring”.

 

Although the Cole Memorandum has been rescinded, one legislative safeguard for the medical marijuana industry remains in place: Congress has passed a so-called “rider” provision in the FY 2015, 2016, 2017, 2018, 2019 and 2020. Consolidated Appropriations Acts to prevent the federal government from using congressionally appropriated funds to enforce federal marijuana laws against regulated medical marijuana actors operating in compliance with state and local law. The rider is known as the “Rohrbacher- Farr” Amendment after its original lead sponsors (it is also sometimes referred to as the “Rohrbacher- Blumenauer” or “Joyce-Leahy” Amendment, but it is referred to in this MD&A as “Rohrbacher-Farr”). Most recently, the Rohrbacher-Farr Amendment was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019. In signing the Act, President Trump issued a signing statement noting that the Act “provides that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various States and territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” While the signing statement can fairly be read to mean that the executive branch intends to enforce the CSA and other federal laws prohibiting the sale and possession of medical marijuana, the president did issue a similar signing statement in 2017 and no major federal enforcement actions followed. On September 27, 2019 the Rohrbacher-Farr Amendment was temporarily renewed through a stopgap spending bill and was similarly renewed again on November 21, 2019.  The FY 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrbacher-Farr Amendment effective through September 30, 2020.  In signing the spending bill, President Trump again released a statement similar to the ones he made May 2017 and February 2019 regarding the Rohrbacher-Farr Amendment.

 

There is a growing consensus among marijuana businesses and numerous congressmen and congresswomen that guidance is not law and temporary legislative riders, such as the Rohrbacher-Farr Amendment, are an inappropriate way to protect lawful medical marijuana businesses. Numerous bills have been introduced in Congress in recent years to decriminalize aspects of state-legal marijuana trades. For FY 2019, the strategy amongst the bipartisan Congressional Marijuana Working Group in Congress, has been to introduce numerous marijuana-related appropriations amendments in the Appropriations Committee in both the House and Senate, similar to the strategy employed in FY 2018. The amendments included protections for marijuana-related businesses in states with medical and adult-use marijuana laws, as well as protections for financial institutions that provide banking services to state-legal marijuana businesses. The Company also has observed that each year more congressmen and congresswomen sign on and cosponsor marijuana legalization bills. These include the CARERS Act, REFER Act and others. While there are different perspectives on the most effective route to end federal marijuana prohibition, Congressman Blumenauer and Senator Wyden have introduced the three-bill package, Path to Marijuana Reform, which would fix the so-called Internal Revenue Service 280E provision that provides tax burdens for marijuana businesses, eliminate civil asset forfeiture and federal criminal penalties for marijuana businesses complying with state law, reduce barriers to banking, de schedule marijuana from the federal list of controlled substances, and tax and regulate marijuana.

 

Senator Booker has also introduced the Marijuana Justice Act, which would de-schedule marijuana, and in 2018 Congresswoman Barbara Lee introduced the House companion. Colorado Republican Senator Cory Gardner has

 

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reportedly secured a probable assurance from President Trump that he would sign a bill to allow states to legalize and regulate marijuana without federal intervention.

 

In light of all of this, it was anticipated that the federal government will eventually repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit regulated cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco. Given current political trends, however, the Company considers these developments unlikely in the near-term. For the time being, marijuana remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor its rescission nor the continued passage of the Rohrbacher-Farr Amendment has altered that fact. The federal government of the United States has always reserved the right to enforce federal law regarding the sale and disbursement of medical or adult-use marijuana, even if state law sanctions such sale and disbursement. If the United States begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects could be materially adversely affected.

 

Additionally, under United States federal law, it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of any Schedule I controlled substance. Due to the CSA categorization of marijuana as a Schedule I drug, federal law makes it illegal for financial institutions that depend on the Federal Reserve’s money transfer system to take any proceeds from marijuana sales as deposits. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses under the United States Currency and Foreign Transactions Reporting Act of 1970 (the “Bank Secrecy Act”). Therefore, under the Bank Secrecy Act, 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 charged with money laundering or conspiracy.

 

On September 26, 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (commonly known as the “SAFE Banking Act”), which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

While there has been no change in U.S. federal banking laws to accommodate businesses in the large and increasing number of U.S. states that have legalized medical and/or adult-use marijuana, in 2014, the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) issued guidance to prosecutors of money laundering and other financial crimes (the “FinCEN Guidance”) and notified banks that it would not seek enforcement of money laundering laws against banks that service cannabis companies operating under state law, provided that strict due diligence and reporting standards are met. The FinCEN Guidance advised prosecutors not to focus their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses so long as that business is legal in their state and none of the federal enforcement priorities referenced in the Cole Memorandum are being violated (such as keeping marijuana away from children and out of the hands of organized crime). The FinCEN Guidance also clarifies how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, including thorough customer due diligence, but makes it clear that they are doing so at their own risk. The customer due diligence steps include:

 

1.              Verifying with the appropriate state authorities whether the business is duly licensed and registered;

 

2.              Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;

 

3.              Requesting from state licensing and enforcement authorities available information about the business and related parties;

 

4.              Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus adult use customers);

 

5.              Ongoing monitoring of publicly available sources for adverse information about the business and related parties;

 

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6.              Ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and

 

7.              Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

 

With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

 

Because most banks and other financial institutions are unwilling to provide any banking or financial services to marijuana businesses, these businesses can be forced into becoming “cash-only” businesses. While the FinCEN Guidance decreased some risk for banks and financial institutions considering serving the industry, in practice it has not increased banks’ willingness to provide services to marijuana businesses, and most banks continue to decline to operate under the strict requirements provided under the FinCEN guidance. This is because, as described above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions to undertake time-consuming and costly due diligence on each marijuana business they accept as a customer.

 

The few state-chartered banks and/or credit unions that have agreed to work with marijuana businesses are limiting those accounts to small percentages of their total deposits to avoid creating a liquidity risk. Since, theoretically, the federal government could change the banking laws as it relates to marijuana businesses at any time and without notice, these credit unions must keep sufficient cash on hand to be able to return the full value of all deposits from marijuana businesses in a single day, while also keeping sufficient liquid capital on hand to serve their other customers. Those state-chartered banks and credit unions that do have customers in the marijuana industry charge marijuana businesses high fees to pass on the added cost of ensuring compliance with the FinCEN Guidance. Unlike the Cole Memorandum, however, the FinCEN Guidance from 2014 has not been rescinded.

 

The Secretary of the U.S. Department of the Treasury, Stephen Mnuchin, has publicly stated that the Department was not informed of any plans to rescind the Cole Memorandum. Secretary Mnuchin stated that he does not have a desire to rescind the FinCEN Guidance. As an industry best practice and consistent with its standard operating procedures, the Company adheres to all customer due diligence steps in the FinCEN Guidance.

 

In the United States, a bill has been tabled in Congress to grant banks and other financial institutions immunity from federal criminal prosecution for servicing marijuana-related businesses if the underlying marijuana business follows state law. This bill has not been passed and there can be no assurance with that it will be passed in its current form or at all. In both Canada and the United States, transactions involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Legislative changes could help to reduce or eliminate these challenges for companies in the cannabis space and would improve the efficiency of both significant and minor financial transactions.

 

An additional challenge to marijuana-related businesses is that the provisions of Internal Revenue Code Section 280E are being applied by the IRS to businesses operating in the medical and adult-use marijuana industry. Section 280E prohibits marijuana businesses from deducting 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 marijuana 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.

 

CBD is a product that often is derived from hemp, which contains only trace amounts of THC, the psychoactive substance found in marijuana. On December 20, 2018, President Trump signed the Agriculture Improvement Act of 2018 (popularly known as the “2018 Farm Bill”) into law.  Until the 2018 Farm Bill became law, hemp and products derived from it, such as CBD, fell within the definition of “marijuana” under the CSA and the DEA classified hemp as a Schedule I controlled substance because hemp is part of the cannabis plant.

 

The 2018 Farm Bill defines hemp as the plant Cannabis sativa L. and any part of the plant with a delta-9 THC concentration of not more than 0.3% by dry weight and removes hemp from the CSA. The 2018 Farm Bill also allows states to create regulatory programs allowing for the licensed cultivation of hemp and production of hemp derived products. Hemp and products derived from it, such as CBD, may then be sold into commerce and transported across state lines provided that

 

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the hemp from which any product is derived was cultivated under a license issued by an authorized state program approved by the U.S. Department of Agriculture and otherwise meets the definition of hemp removed from the CSA. The introduction of hemp and products derived from it, such as CBD, in foods, beverages, and dietary supplements has not — been approved by the FDA. The FDA expects to engage in rulemaking on this subject.

 

Service Providers

 

As a result of any adverse change to the approach in enforcement of U.S. cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse change in public perception in respect of the consumption of marijuana or otherwise, third party service providers to the Company could suspend or withdraw their services, which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.

 

Ability to Access Capital

 

Given the current laws regarding cannabis at the federal law level in the United States, traditional bank financing is typically not available to United States cannabis companies. Specifically, the federal illegality of marijuana in the United States means that financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under money laundering statutes, the unlicensed money transmitter statute and the Bank Secrecy Act. As a result, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. Banks who do accept deposits from cannabis-related businesses in the United states must do so in compliance with the Cole Memorandum and the FinCEN guidance, both discussed above.

 

The Company requires equity and/or debt financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There can be no assurance that additional financing will be available to the Company when needed or on terms which are acceptable. The Company’s inability to raise financing through traditional banking to fund on-going operations, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

 

If additional funds are raised through further issuances of equity or convertible debt securities, existing Company Shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to existing holders of SVS.

 

Restricted Access to Banking

 

As discussed above, the FinCEN Memorandum remains effective to this day, in spite of the fact that the 2014 Cole Memorandum was rescinded and replaced by the Sessions Memorandum. The FinCen Memorandum does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the Department of Justice, FinCEN or other federal regulators, though. Thus, most banks and other financial institutions in the U.S. do not appear to be comfortable providing banking services to cannabis-related businesses, or relying on this guidance, which can be amended or revoked at any time by the Trump administration. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company may have limited or no access to banking or other financial services in the U.S. The inability or limitation in the Company’s ability to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

On September 26, 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (commonly known as the “SAFE Banking Act”), which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank

 

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accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

Anti-Money Laundering Laws and Regulations

 

The Company is subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Sections 1956 and 1957 of U.S.C. Title 18 (the Money Laundering Control Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada. Further, 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, aiding and abetting, or conspiracy.

 

In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the U.S. were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while there are no current intentions to declare or pay dividends on the SVS in the foreseeable future, in the event that a determination was made that the Company’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

 

Heightened Scrutiny by Regulatory Authorities

 

For the reasons set forth above, the Company’s existing operations in the U.S., and any future operations or investments of the Company, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to operate or invest in any other jurisdictions, in addition to those described herein.

 

Change to government policy or public opinion may also result in a significant influence on the regulation of the cannabis industry in Canada, the United States, or elsewhere. A negative shift in the public’s perception of medical or adult-use cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation, or enforcement. Such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adult-use cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s business strategy in the states in which the Company currently operates or in the Company’s ability to expand its business into new states, may have a material adverse effect on the Company’s business, financial condition, and results of operations. See “Risk Factors” section of this MD&A.

 

Further, violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions, or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. Any enforcement action against the Company or any of its licensed operating facilities could have a material adverse effect on (1) the Company’s reputation, (2) the Company’s ability to conduct business, (3) the Company’s holdings (directly or indirectly) of medical or adult-use cannabis licenses in the United States, (4) the listing or quoting of the Company’s securities on various stock exchanges, (5) the Company’s financial position, (6) the Company’s operating results, profitability, or liquidity, or (7) the market price of the Company’s publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution because the time and resources that may be necessary depend on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial. See “Risk Factors”

 

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section of this MD&A. The Company’s business activities, and the business activities of its subsidiaries, while believed to be compliant with applicable U.S. state and local laws, currently are illegal under U.S. federal law.

 

Further to the indication by CDS Clearing and Depository Services Inc. (“CDS”), Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets that it would refuse to settle trades for cannabis issuers that have investments in the U.S., the TMX Group, the owner and operator of CDS, subsequently issued a statement in August 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S., despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.

 

In February 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“MOU”) with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the U.S. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented at a time when the SVS are listed on a stock exchange, it would have a material adverse effect on the ability of holders of SVS to make and settle trades. In particular, the SVS would become highly illiquid as until an alternative was implemented, investors would have no ability to affect a trade of securities through the facilities of the applicable stock exchange. Curaleaf has obtained eligibility with DTC for its SVS quotation on the OTCQX and such eligibility provides another possible avenue to clear the SVS in the event of a CDS ban. Revocation of DTC eligibility or implementation by DTC of a ban on the clearing of securities of issuers with cannabis-related activities in the United States would similarly have a material adverse effect on the ability of holders of the SVS to make and settle trades.

 

Compliance and Monitoring

 

As of the date of this MD&A, the Company believes that each of its licensed operating entities (a) holds all applicable licenses to cultivate, manufacture, possess, and/or distribute cannabis in its respective state, and (b) is in good standing and in compliance with its respective state’s cannabis regulatory program. The Company is in compliance with its obligations under state law related to its cannabis cultivation, processing and dispensary licenses, other than minor violations that would not result in a material fine, suspension or revocation of any relevant license.

 

The Company uses reasonable commercial efforts to ensure that its business is in compliance with laws and applicable licensing requirements and engages in the regulatory and legislative process nationally and in every state we operate through our compliance department, government relations department, outside government relations consultants, cannabis industry groups and legal counsel.

 

The compliance department consists of our SVP of Compliance, James Shorris and Vice President, Keisha Brice and local compliance officers in our subsidiaries. Compliance officers in each operating subsidiary are charged with knowing the local regulatory process and monitoring developments and ongoing developments with their governing bodies. Each compliance officer regularly reports regulatory developments to the Company’s SVP and VP of Compliance through written and oral communications and are charged with the creation and implementation of plans regarding all regulatory developments. The Company’s SVP and VP of Compliance work with external legal advisors in the states in which the Company operates to ensure that the Company is in on-going compliance with applicable state laws.

 

The government relations department, consisting of Senior Vice President, Ed Conklin, and Vice President, Matt Harrell, work closely with Curaleaf management to develop relationships with local and state regulators, industry groups, and elected officials in order to effectively monitor and engage in the regulatory and legislative processes. The Company’s Government Relations Department develops strategies, engages legislative consultant’s, directly lobbies and works with third party groups to protect the Company’s right to operate and to advocate for legislation, regulations and oversight under which it can be successful.

 

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Although the Company believes that its business activities are compliant with applicable and state and local laws of the United States, strict compliance with State and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law nor provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may result in a material adverse effect on the Company. The Company derives 100% of its revenues from the cannabis industry in certain States, which industry is illegal under United States federal law. Even where the Company’s cannabis-related activities are compliant with applicable State and local law, such activities remain illegal under United States federal law. The enforcement of relevant federal laws is a significant risk.

 

United States Customs and Border Protection (“CBP”) enforces the laws of the United States. Crossing the border while in violation of the CSA and other related United States federal laws may result in denied admission, seizures, fines, and apprehension. CBP officers administer the United States Immigration and Nationality Act to determine the admissibility of travelers who are non-U.S. citizens into the United States. An investment in the Company, if it became known to CBP, could have an impact on a non-U.S. citizen’s admissibility into the United States and could lead to a lifetime ban on admission. Medical cannabis has been protected against enforcement by enacted legislation from the United States Congress in the form of the Rohrabacher-Farr Amendment, which prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to the United States Congress restoring such funding. This amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. Subsequent to the issuance of Sessions Memorandum, the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the fourth consecutive year contained the Rohrabacher-Farr Amendment language (referred to in 2018 as the Leahy Amendment) and continued the protections for the medical cannabis marketplace and its lawful participants from interference by the Department of Justice. The Rohrabacher-Farr Amendment again was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019 and was similarly renewed again on November 21, 2019.  The FY 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrbacher-Farr Amendment effective through September 30, 2020. Notably, such Amendments have always applied only to medical cannabis programs and have no effect on pursuit of recreational cannabis activities.

 

In addition to the above disclosure, please see “Risk Factors” for further risk factors associated with the operations of the Company and the Company.

 

RISK FACTORS

 

The following are certain factors relating to the business of the Company. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or currently deemed immaterial by the Company, may also impair the operations of the Company. If any such risks actually occur, shareholders of the Company could lose all or part of their investment and the business, financial condition, liquidity, results of operations and prospects of the Company could be materially adversely affected and the ability of the Company to implement its growth plans could be adversely affected.

 

The acquisition of any of the securities of the Company is speculative, involving a high degree of risk and should be undertaken only by persons whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the securities of the Company should not constitute a major portion of an individual’s investment portfolio and should only be made by persons who can afford a total loss of their investment. Company Shareholders should evaluate carefully the following risk factors associated with the Company’s securities, along with the risk factors described elsewhere in this MD&A.

 

Business Structure Risks

 

The Company is a holding company as all of its assets are the capital stock of its subsidiaries in each of the markets the Company operates in and/or holds licenses in the adult-use and/or medicinal cannabis marketplace in Arizona, California, Connecticut, Florida, Maine, Maryland, Massachusetts, Nevada, New Jersey, New York, Ohio, Utah, Oregon and (awarded in February 2020) Pennsylvania; and has  no material assets other than: (i) cash on hand; and (ii) ownership of

 

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its subsidiaries, stakes in joint ventures and minority interests in certain operating companies. As a result, investors in the Company are subject to the risks attributable to its subsidiaries. As a holding company, the Company conducts substantially all of its business through its subsidiaries, which generate substantially all of its revenues. Consequently, the Company’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings to the Company. To the extent that the Company requires funds, and its subsidiaries and such other entities are restricted from making such distributions by applicable law, regulation or contract, or are otherwise unable to provide such funds, it could materially adversely affect the Company’s liquidity and financial condition, as well as its ability to make distributions to its shareholders. In the event of a bankruptcy, liquidation or reorganization of any of the Company’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before the Company.

 

The Company has no earnings or dividend record, and the ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. Dividends paid by the Company would be subject to tax and, potentially, withholdings. The Company does not anticipate paying any dividends on the Subordinate Voting Shares in the foreseeable future. Please see “Risk Factors — Anti-Money Laundering Laws and Regulations”.

 

Risks Related to Legality of Cannabis

 

Cannabis is a Controlled Substance under the United States Federal Controlled Substances Act

 

The Company is engaged directly and indirectly in the medical and adult-use cannabis industry in the U.S. where only state law permits such activities. Investors are cautioned that in the U.S., cannabis is largely regulated at the state level. To the Company’s knowledge, some form of cannabis has been legalized in 40 states and Washington, D.C., Puerto Rico and Guam as of March 2020. Additional states have pending legislation regarding the same. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a controlled substance under the Controlled Substance Act and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the U.S.

 

The Department of Justice, under the current administration, could allege that the Company has “aided and abetted” in violations of federal law by providing financing and services to its portfolio cannabis companies. Under these circumstances, the federal prosecutor could seek to seize the assets of the Company, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing financing or services. In these circumstances, the Company’s operations would cease, shareholders may lose their entire investment and directors, officers and/or shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, be sent to federal prison.

 

Notwithstanding the foregoing, as part of the Congressional omnibus-spending bill, Congress renewed, through September 30, 2020, the Rohrabacher-Farr Amendment, which prohibits the Department of Justice from expending any funds for the prosecution of medical cannabis businesses operating in compliance with state and local laws. At such time, it may or may not be included in the omnibus appropriations package or a continuing budget resolution once the current continuing resolution expires.  Should the Rohrabacher-Farr Amendment not be renewed upon expiration in subsequent spending bills, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favor of the Company.

 

Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical and adult-use cannabis licenses in the U.S., the listing of its securities on the

 

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CSE, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

 

Enforcement of Cannabis Laws Could Change

 

As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the U.S. are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the Cole Memorandum acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the U.S., several states have enacted laws relating to cannabis for medical purposes.

 

The Cole Memorandum outlined certain enforcement 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 did not provide specific guidelines for what regulatory and enforcement systems it deemed 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 cannabis had been legalized were not characterized as a high priority. In March 2017, then newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit. However, he disagreed that it had been implemented effectively and, on January 4, 2018, Mr. Sessions issued a new memorandum that rescinded and superseded the Cole Memorandum effective immediately (the “Sessions Memorandum”). The Sessions Memorandum stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by U.S. Congress and to follow well-established principles when pursuing prosecutions related to cannabis activities. U.S. Attorney General Jeff Sessions resigned on November 7, 2018. As of his resignation, Matthew Whitaker was the acting U.S. Attorney General until William Barr was appointed as the U.S. Attorney General on February 14, 2019.  In an April 10, 2019 Senate Appropriations Subcommittee meeting to discuss the Justice Department’s budget 2020, in response to a question about his position on the proposed Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, Attorney General Barr stated: “Personally, I would still favor one uniform federal rule against marijuana,” “But if there is not sufficient consensus to obtain that then I think the way to go is to permit a more federal approach so states can, you know, make their own decisions within the framework of the federal law. So we’re not just ignoring the enforcement of federal law.” The STATES Act, if it were to pass, would allow states to determine their own approaches to marijuana.  Attorney General Barr said the legislation is still being reviewed by his office but that he would “much rather... the approach taken by the STATES Act than where we currently are.” It is unclear what impact this development will have on U.S. federal government enforcement policy. The inconsistency between federal and state laws and regulations is a major risk factor.

 

As a result of the Sessions Memorandum, federal prosecutors may use their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws permitting such activity. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memorandum did not discuss the treatment of medical cannabis by federal prosecutors. Under the Rohrabacher-Farr Amendment, federal prosecutors are prohibited from expending federal funds against medical cannabis activities that are in compliance with state law. Dozens of U.S. Attorneys across the country have affirmed that their view of federal enforcement priorities has not changed. In Washington, Annette Hayes, U.S. Attorney for the Western District of Washington, released a statement affirming that her office will continue to investigate and prosecute “cases involving organized crime, violent and gun threats, and financial crimes related to marijuana” and that “enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve.” However, in California, at least one U.S. Attorney has made comments indicating a desire to enforce the Controlled

 

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Substances Act: Adam Braverman, Interim U.S. Attorney for the Southern District of California, has been viewed as a potential “enforcement hawk” after stating that the rescission of the 2013 Cole Memo “returns trust and local control to federal prosecutors” to enforce the Controlled Substances Act. Additionally, Greg Scott, the Interim U.S. Attorney for the Eastern District of California, has a history of prosecuting medical cannabis activity: his office published a statement that cannabis remains illegal under federal law, and that his office would “evaluate violations of those laws in accordance with our district’s federal law enforcement priorities and resources”. 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.

 

Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have an adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation and prospects, even if such proceedings were concluded successfully in favor of the Company. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Company or the seizure of its corporate assets.

 

Renewal of Rohrabacher-Farr Amendment Would Protect the Medical Cannabis Industry

 

The Rohrabacher-Farr Amendment, as discussed above, prohibits the Department of Justice from spending funds appropriated by Congress to enforce the tenets of the Controlled Substances Act against the medical cannabis industry in states which have legalized such activity. This amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. The Rohrabacher-Farr Amendment will remain in effect until September 30, 2020. At such time, it may or may not be included in the omnibus appropriations package or a continuing budget resolution, and its inclusion or non-inclusion, as applicable, is subject to political changes.

 

Market for Cannabis Could Decline due to Regulatory Changes

 

There can be no assurance that the number of states that allow the use of medicinal cannabis will increase. Furthermore, there can be no assurance that the existing states, districts and territories that permit the use of medicinal cannabis will not reverse their position.  If either of these things happens at any future time, then growth of the Company’s business may be materially impacted. The Company may not be able to achieve targeted revenue levels and may experience declining revenue as the potential market for its products and services diminishes.

 

Financing Risks

 

Risks Related to Additional Financing

 

The Company will require equity and/or debt financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There can be no assurance that additional financing will be available to the Company when needed or on terms which are acceptable. The Company’s inability to raise financing through traditional banking to fund on-going operations, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

 

If additional funds are raised through further issuances of equity or convertible debt securities, existing Company Shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to existing holders of Subordinate Voting Shares.

 

Restricted Access to Banking

 

In February 2014, the FinCEN bureau of the U.S. Treasury Department issued guidance (which is not law) with respect to financial institutions providing banking services to cannabis businesses, including burdensome due diligence expectations and reporting requirements. This guidance does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the Department of Justice, FinCEN or other federal regulators. Thus, most banks and other financial institutions in the U.S. do not appear to be comfortable providing banking services to cannabis-

 

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related businesses, or relying on this guidance, which can be amended or revoked at any time by the Trump administration. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company may have limited or no access to banking or other financial services in the U.S. The inability or limitation in the Company’s ability to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

General Regulatory and Legal Risks

 

Risk of Civil Asset Forfeiture

 

Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or were purchased using the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.

 

Anti-Money Laundering Laws and Regulations

 

The Company is subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Sections 1956 and 1957 of U.S.C. Title 18 (the Money Laundering Control Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada.

 

In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the U.S. were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while there are no current intentions to declare or pay dividends on the Subordinate Voting Shares in the foreseeable future, in the event that a determination was made that the Company’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

 

Lack of Access to U.S. Bankruptcy Protections

 

Because the use of cannabis is illegal under federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Company were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to the Company’s U.S. operations, which would have a material adverse effect on the Company, its lenders and other stakeholders.

 

Heightened Scrutiny by Regulatory Authorities

 

For the reasons set forth above, the Company’s existing operations in the U.S., and any future operations or investments of the Company, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to operate or invest in any other jurisdictions, in addition to those described herein.

 

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Further to the indication by CDS Clearing and Depository Services Inc. (“CDS”), Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets that it would refuse to settle trades for cannabis issuers that have investments in the U.S., the TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S., despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.

 

On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“MOU”) with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the U.S. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented at a time when the Subordinate Voting Shares are listed on a stock exchange, it would have a material adverse effect on the ability of holders of Subordinate Voting Shares to make and settle trades. In particular, the Subordinate Voting Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to affect a trade of securities through the facilities of the applicable stock exchange.

 

Risk of Legal, Regulatory or Political Change

 

The success of the business strategy of the Company depends on the legality of the marijuana industry. The political environment surrounding the marijuana industry in general can be volatile and the regulatory framework remains in flux. To the Company’s knowledge, some form of cannabis has been legalized in 40 states and Washington, D.C., Puerto Rico and Guam as of March 2020; however, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting the Company’s business, results of operations, financial condition or prospects.

 

Delays in enactment of new state or federal regulations could restrict the ability of the Company to reach strategic growth targets. The growth strategy of the Company is contingent upon certain federal and state regulations being enacted to facilitate the legalization of medical and adult-use marijuana. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, the growth targets of the Company, and thus, the effect on the return of investor capital, could be detrimental. The Company is unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.

 

Further, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects would be materially adversely affected. It is also important to note that local and city ordinances may strictly limit and/or restrict disbursement of marijuana in a manner that will make it extremely difficult or impossible to transact business in that jurisdiction, which may adversely affect the Company’s continued operations. Federal actions against individuals or entities engaged in the marijuana industry or a repeal of applicable marijuana legislation could adversely affect the Company and its business, results of operations, financial condition and prospects.

 

The Company is also aware that multiple states are considering special taxes or fees on businesses in the marijuana industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. Should such special taxes or fees be adopted, this could have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

 

The commercial medical and adult-use marijuana industry is in its infancy and the Company anticipates that such regulations will be subject to change as the jurisdictions in which the Company does business matures. The Company has

 

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in place a detailed compliance program headed by its VP of Compliance who oversees, maintains, and implements the compliance program and personnel. Compliance officers in each operating subsidiary are charged with knowing the local regulatory process and monitoring developments with their governing bodies. Each compliance officer regularly reports regulatory developments to the VP of Compliance or enforcement by regulators in certain States against such services arrangements through written and oral communications and is charged with the creation and implementation of plans regarding any regulatory developments. In addition to the Company’s robust legal and compliance departments, the Company also has local legal/regulatory counsel engaged in every jurisdiction in which it operates. Company’s compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Additionally, the Company has created comprehensive standard operating procedures that include detailed descriptions and instructions for monitoring inventory at all stages of development and distribution. The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program, standard operating procedures, and any changes to regulation in the marijuana industry.

 

Overall, the medical and adult-use marijuana industry is subject to significant regulatory change at both the state and federal level. The inability of the Company to respond to the changing regulatory landscape may cause it to not be successful in capturing significant market share and could otherwise harm its business, results of operations, financial condition or prospects.

 

General Regulatory and Licensing Risks

 

The Company’s business is subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of marijuana, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the Company’s business objectives are contingent, in part, upon compliance with applicable regulatory requirements and obtaining all requisite regulatory approvals. Changes to such laws, regulations and guidelines due to matters beyond the control of the Company may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

The Company is required to obtain or renew further government permits and licenses for its current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time-consuming process potentially involving numerous regulatory agencies, involving public hearings and costly undertakings on the Company’s part. The duration and success of the Company’s efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within its control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority. The Company may not be able to obtain, amend or renew permits or licenses that are necessary to its operations or to achieve the growth of its business. Any unexpected delays or costs associated with the permitting and licensing process could impede the ongoing or proposed operations of the Company. To the extent necessary permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Company may be curtailed or prohibited from proceeding with its ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Several of the Company’s licenses are subject to renewal on an annual or periodic basis; however, they are generally renewed, as a matter of course, if the license holder continues to operate in compliance with applicable legislation and regulations and without any material change to its operations.

 

While the Company’s compliance controls have been developed to mitigate the risk of any material violations of any license it holds arising, there is no assurance that the Company’s licenses will be renewed by each applicable regulatory authority in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process for any of the licenses held by the Company could impede the ongoing or planned operations of the Company and have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Company to pay substantial amounts of money, harming its financial condition. There can be no assurance that

 

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any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition, results of operations or prospects.

 

Limitations on Ownership of Licenses

 

In certain states, the cannabis laws and regulation limit, not only the number of cannabis licenses issued, but also the number of cannabis licenses that one person may own. For example, in Massachusetts, no person may have an ownership interest, or control over, more than three license holders in any category -cultivation, processing or dispensing. In Maryland, the Department of Health has taken the position that the law prevents having a material ownership interest in more than one cultivation or processing license holder and more than four dispensing license holders.  In New Jersey, there are restrictions on overlapping ownership of license holders. In Florida, there are also limitations on owning more than one of the vertically integrated medical cannabis licenses offered in that state. The Company believes that, where such restrictions apply, it may still capture significant share of revenue in the market through wholesale sales, exclusive marketing relations, provision of management or support services, franchising and similar arrangement with other operators. Nevertheless, such limitations on the acquisition of ownership of additional licenses within certain states or enforcement by regulators in certain States against such services arrangements may limit the Company’s ability to grow organically or to increase its market share in such states.

 

Regulatory Action and Approvals from the Food and Drug Administration

 

The Company’s cannabis-based products are supplied to patients diagnosed with certain medical conditions. However, the Company’s cannabis-based products are not approved by the FDA as “drugs” or for the diagnosis, cure, mitigation, treatment, or prevention of any disease. Accordingly, the FDA may regard any promotion of the cannabis-based products as the promotion of an unapproved drug in violation of the Food, Drug and Cosmetic Act (“FDCA”).

 

Cannabidiol, a compound referred to as CBD is one of the non-psychotropic cannabinoids in industrial hemp from the plant species Cannabis sativa L. There has been growing interest in CBD in recent years. CBD is increasingly used as an ingredient in food and beverages, as an ingredient in dietary supplements and as an ingredient in cosmetics, thereby generating new investments and creating employment in the cultivation and processing of hemp and hemp-derived products. Pharmaceutical products with CBD as an active ingredient have also been developed, including one product approved by the FDA (Epidiolex®).  Foods and beverages, dietary supplements, pharmaceuticals, and cosmetics containing CBD are all subject to regulation under the FDCA.   The FDA has asserted that CBD is not a lawful ingredient in foods and beverages, supplements and pharmaceuticals (unless FDA-approved), although FDA has generally refrained from taking enforcement action against those products.  CBD-containing products may also be subject to the jurisdiction of state and local health authorities.

 

In recent years, the FDA has issued letters to a number of companies selling products that contain CBD oil derived from hemp warning them that the marketing of their products violates the FDCA. FDA enforcement action against the Company could result in a number of negative consequences, including fines, disgorgement of profits, recalls or seizures of products, or a partial or total suspension of the Company’s production or distribution of its products.  Any such event could have a material adverse effect on the Company’s business, prospects, financial condition, and operating results.

 

On December 20, 2018, the Agricultural Improvement Act, H.R. 25 (“2018 Farm Bill”), which included the language of the Hemp Farming Act of 2018, removed industrial hemp and hemp-derived products with a THC concentration of not more than 0.3 percent (dry weight basis) from Schedule I of the Controlled Substances Act.  This has the effect of legalizing the cultivation of industrial hemp for commercial purposes, including the production of CBD and other cannabinoids, except for THC, subject to regulations to be developed by the U.S. Department of Agriculture.

 

The Company sells and distributes certain products containing CBD.  There is a risk that the FDA or state or local Departments of Health will seek to stop the Company from selling its CBD products or seek to have the claims made for those products revised.

 

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Litigation

 

The Company may become threatened by a party, or otherwise become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for the SVS. Even if the Company is involved in litigation and is successful, such litigation could redirect significant company resources.

 

Among other legal disputes, the Company is currently involved in the following proceedings:

 

Connecticut Arbitration.  Pursuant to the Second Amended and Restated Operating Agreement of Doubling Road Holdings, LLC, the holders of a majority of the Series A-2 Units of Doubling Road Holdings, LLC (collectively, the “Holders”) had the right to require that PalliaTech, Inc. or any of its affiliates purchase (the “Put Right”) all of the Series A-2 Units in exchange for shares of PalliaTech, Inc. (now Curaleaf, Inc.), the parent of PalliaTech, Inc., pursuant to a defined “Buy-Out Exchange Ratio”.  On October 25, 2018, the Holders, Curaleaf, and others entered into a Stipulation of Settlement in order to resolve a dispute with respect to the applicable Buy-Out Exchange Ratio for the Put Right.  The Stipulation of Settlement provided, among other things, that PalliaTech CT would purchase the Holders’ interests in exchange for (1) a payment of $40,142; (2) 4,755,548 SVS; and (3) the potential for additional equity in Curaleaf depending on the results of a “Settlement Second Appraisal.”  Pursuant to the Settlement Second Appraisal, dated December 12, 2019, and the terms of the Stipulation of Settlement, the Holders received 2,016,859 additional SVS.  On January 23, 2020, the Holders filed new claims in arbitration including for fraudulent inducement and breach of contract, relating primarily to a lock-up agreement that the Holders signed in connection with the Stipulation of Settlement.

 

Florida Arbitration / Litigation.  On December 10, 2018, Jayson Weisz (“Weisz”) and SRC Medical Partners, LLC (“SRC”) initiated an arbitration against PalliaTech Florida LLC.  On March 19, 2019, Weisz and SRC derivatively, on behalf of PalliaTech Florida LLC, filed a complaint against defendants Curaleaf Florida LLC, PalliaTech Florida, Inc., Joseph Lusardi, and Boris Jordan in the Complex Business Litigation Section in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. Plaintiffs’ derivative Complaint seeks the judicial dissolution of Curaleaf Florida LLC and asserts various causes of action against the defendants, including breach of contract, civil conspiracy, breach of fiduciary duty, fraudulent transfer, and a declaratory judgment appointing Robins to the Board of Managers.  On January 10, 2020, Weisz, JRF Group, and the Curaleaf entities entered into a Stipulation of Settlement pursuant to which the Company purchased JRF Group’s interest in PalliaTech Florida LLC for consideration of 1,772,062 SVS and $2,500 payable in cash.  During February, 2020, SRC, PalliaTech Florida LLC, PalliaTech Florida, Inc., and Lusardi participated in a final arbitration hearing.  The parties are currently exchanging post-hearing briefs.

 

Securities Class Action.  On August 5, 2019, a purported class action was filed against Curaleaf, Joseph Lusardi, Neil Davidson, and Jonathan Faucher in the United States District Court for the Eastern District of New York on behalf of persons or entities who purchased or otherwise acquired publicly traded securities of the Company from November 21, 2018 to July 22, 2019.  On January 6, 2020, an Amended Class Action Complaint was filed against the defendants.  The Amended Class Action Complaint alleges that the defendants made materially false and/or misleading statements regarding Curaleaf’s CBD products based on a July 22, 2019 letter received from the U.S. Food and Drug Administration (“FDA Letter”).  According to the Amended Class Action Complaint, the FDA Letter states that several of the CBD products sold on Curaleaf’s website were “misbranded drugs” in violation of the Federal Food, Drug, and Cosmetic Act.  The Amended Class Action Complaint asserts claims against (1) all Defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and (2) Lusardi, Davidson, and Faucher for alleged violations of Section 20(a) of the Securities Exchange Act of 1934.  On March 6, 2020, the defendants filed a motion to dismiss arguing that the Amended Class Action Complaint failed to allege (1) any false or misleading statement or omission, (2) scienter, (3) any domestic transactions, or (4) control person liability.

 

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Environmental Risks

 

Environmental Regulation

 

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

 

Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical marijuana or from proceeding with the development of its operations as currently proposed.

 

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. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

 

Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

 

Unknown Environmental Risks

 

There can be no assurance that the Company will not encounter hazardous conditions at the facilities where it operates its businesses, including, without limitation, its medical cannabis cultivation and dispensary facilities, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Company may be suspended. The presence of other hazardous conditions may require significant expenditure of the Company’s resources to correct the condition. Such conditions could have a material impact on the investment returns of the Company.

 

General Business Risks

 

COVID-19 pandemic

 

The novel coronavirus commonly referred to as “COVID-19” was identified in December 2019 in Wuhan, China.  On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization.   On March 13, 2013, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions.  While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

 

The rapid development of the COVID-19 pandemic and the measures being taken by governments and private parties to respond to it are extremely fluid.  While the Company has continuously sought to assess the potential impact of the pandemic on its financial and operating results, any assessment is subject to extreme uncertainty as to probably, severity and duration.  The Company has attempted to assess the impact of the pandemic by identifying risks in the following principle areas:

 

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·                  Mandatory Closure.   In response to the pandemic, many states and localities have implemented mandatory shut-downs of business to prevent spread of COVID-19.  While in most of the states of the Company’s operation, the Company’s  business has been deemed an “essential service”, permitting us to stay open despite the mandatory closure of non-essential businesses.   While the Company is working closely with state and local regulators to seek temporary measures that allow us to remain operational, there is no guarantee further measures may nevertheless require us to shut operations in some or all states. The Company’s ability to generate revenue would be materially impacted by any shut down of its operations.

 

·                  Customer Impact.   While the Company has not yet noticed an overall downturn in demand for its products in connection with the pandemic, if its customers become ill with COVID-19, are forced to quarantine, decide to self-quarantine or not to visit its stores or distribution points to observe “social distancing”, it may have material negative impact on demand for its products while the pandemic continues.  While the Company is seeking to implement measures, where permitted, such as “curb side” sales and delivery, to reduce infection risk to our customers, regulators may not permit such measures, or such measures may not prevent a reduction in demand.

 

·                  Supply Chain Disruption.    The Company relies on third party suppliers for equipment and services to produce its products and keep its operations going.   If its suppliers are unable to continue operating due to mandatory closures or other effects of the pandemic, it may negatively impact its own ability to continue operating.  At this time, the Company has not experienced any failure to secure critical supplies or services.  In particular, while the Company procures certain equipment, including components of its vaping and other products, from China where the pandemic has caused extensive business closures, the Company currently believes that it will be able to continue to source such products at a cost within historical ranges.   However, disruptions in our supply chain may affect our ability to continue certain aspects of the Company’s operations or may significantly increase the cost of operating its business and significantly reduce its margins.

 

·                  Staffing Disruption.     The Company is, for the time being, implementing among its staff where feasible “social distancing” measures recommended by such bodies as the Center of Disease Control, the Presidential Administration, as well as state and local governments.   The Company has cancelled non-essential travel by employees, implemented remote meetings where possible, and permitted all staff who can work remotely to do so.  For those whose duties require them to work on-site, measures have been implemented to reduce infection risk, such as reducing contact with customers, mandating additional cleaning of workspaces and hand disinfection, providing masks and gloves to certain personnel.  Nevertheless, despite such measures, the Company may find it difficult to ensure that its operations remain staffed due to employees falling ill with COVID-19, becoming subject to quarantine, or deciding not to come to come to work on their own volition to avoid infection.  At certain locations, the Company has experienced increased absenteeism due to the pandemic.   If such absenteeism increases, the Company may not be able, including through replacement and temporary staff, to continue to operate in some or all locations.

 

·                  Regulatory Backlog.  Regulatory authorities, including those that oversee the cannabis industry on the state level, are heavily occupied with their response to the pandemic.  These regulators as well as other executive and legislative bodies in the states in which we operate may not be able to provide the level of support and attention to day-to-day regulatory functions as well as to needed regulatory development and reform that they would otherwise have provided.  Such regulatory backlog may materially hinder the development of the Company’s business by delay such activities as product launches, facility openings and business acquisitions, thus materially impeding development of its business.

 

The Company is actively addressing the risk to business continuity represented by each of the above factors through the implementation of a broad range of measures throughout its structure and is re-assessing its response to the COVID-19 pandemic on an ongoing basis. The above risks individually or collectively may have a material impact on the Company’s ability to generate revenue.   Implementing measures to remediate the risks identified above may materially increase our costs of doing business, reduce our margins and potentially result in losses. While the Company is not currently in financial distress, if the Company’s financial situation materially deteriorates as a result of the impact of the pandemic, the Company could eventually be unable to meet its obligations to third parties, including observing financial covenants under the Facility, which in turn could lead to insolvency and bankruptcy of the Company.

 

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Failure to Complete Acquisitions

 

The Company currently expects to complete certain transactions in the future, including the ATG Acquisition and Grassroots Acquisition. These acquisitions are subject to a number of customary closing conditions including in certain instances, regulatory approval and may not close for a variety of reasons including if the closing conditions are not satisfied or waived, some of which may not be within the control of the Company. In addition, even if these transactions were to be completed, they may not close on terms or within the timing currently expected. If one or more of these transactions do not close or are completed pursuant to terms or timelines different than expected, it could have an adverse effect on the Company’s future capital plans and require the Company to reallocate funds.

 

Risks Related to the Senior Secured Debt Facility

 

The Facility requires the Company to satisfy certain negative covenants, including restrictions on its ability to pay dividends, to invest in non-wholly owned entities and to incur subordinated and non-subordinated debt. In addition, the Facility imposes certain financial covenants, including maintenance of minimum annual cash earnings and minimum unrestricted cash and cash equivalents. In addition, the Facility is subject to potential mandatory quarterly amortization. The amount, if any, is determined by a quarterly leverage ratio test. These covenants may prevent the Company from taking actions that it believes would be in the best interest of its business and may make it difficult for it to execute its business strategy successfully or effectively compete with businesses that are not subject to the same restrictions. The Company’s ability to comply with these covenants may be affected by economic, financial and industry conditions beyond its control, including credit or capital market disruptions. The breach of any of these covenants could result in a default that would permit the lenders under the Facility to declare all amounts outstanding to be due and payable, together with accrued and unpaid interest. There is no assurance that the Company will be able to secure additional financing to repay the Facility should cash flows from operations be insufficient to repay the indebtedness, whether it is in default or not. If the Company is unable to repay the indebtedness, the lenders could proceed against the collateral securing the indebtedness. This could have serious consequences to the Company’s financial position and results of operations and could cause it to become bankrupt or insolvent.

 

Unproven Business Strategy

 

While the Company has existing operations and is generating revenues, it plans to significantly expand its operations and staff to meet the requirements of its business initiatives.  The commercial response to the product offerings is still uncertain, and although the Company believes that its strategy incorporates advantages compared to other medical cannabis business models, if patients or consumers do not respond favorably to the Company’s products or if they take longer to develop its products or establish its customer base or it proves to be more costly than currently anticipated to develop its businesses, revenues may be adversely affected.

 

Service Providers

 

As a result of any adverse change to the approach in enforcement of U.S. cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse change in public perception in respect of the consumption of marijuana or otherwise, third party service providers to the Company could suspend or withdraw their services, which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.

 

Enforceability of Contracts

 

It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal at a federal level, judges may refuse to enforce contracts in connection with activities that violate federal law, even if there is no violation of state law. There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into if necessary. The Company cannot be assured that it will have a remedy for breach of contract, the lack of which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.

 

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Resale of the SVS on the CSE

 

The Company understands that almost all major securities clearing firms in the U.S. refuse to facilitate transactions related to securities of Canadian public companies involved in the marijuana industry. This is due to the fact that marijuana continues to be listed as a controlled substance under U.S. federal law, with the result that marijuana-related practices or activities, including the cultivation, possession or distribution of marijuana, are illegal under U.S. federal law. Accordingly, U.S. residents who acquire SVS as “restricted securities” may find it difficult — if not impossible — to resell such shares over the facilities of any Canadian stock exchange on which the SVS may then be listed including the CSE. It remains unclear what impact if any, this and any future actions among market participants in the U.S. will have on the ability of U.S. residents to resell any SVS that they may acquire in open market transactions.

 

Reliance on Management

 

The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results, financial condition or prospects.

 

News media have reported that U.S. immigration authorities have increased scrutiny of Canadian citizens who are crossing the U.S.-Canada border with respect to persons involved in cannabis businesses in the U.S. There have been a number of Canadians barred from entering the U.S. as a result of an investment in or act related to U.S. cannabis businesses. In some cases, entry has been barred for extended periods of time. Company employees who are not U.S. citizens traveling from Canada to the U.S. for the benefit of the Company may encounter enhanced scrutiny by U.S. immigration authorities that may result in the employee not being permitted to enter the U.S. for a specified period of time. If this happens to Company employees who are not U.S. citizens, then this may reduce our ability to manage effectively our business in the U.S. Competition.

 

The cannabis industry remains quite nascent, and so what the landscape will be in the future remains largely unknown, which in itself is a risk. Potential competitors, which in the future may include pharmaceutical companies, are also larger and better capitalized than the Company, may have longer operating histories and have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources. The market for the products that the Company offers or intends to offer is competitive.  The competition will most likely increase as more U.S. states permit the use of medicinal cannabis and new industry participants emerge. Increased competition may hinder the Company’s ability to successfully market its products and services.  The Company may not have the resources, expertise or other competitive requirements to compete successfully in the future.

 

Risks Inherent in an Agricultural Business

 

The Company’s business involves the cultivation of the cannabis plant. The cultivation of this plant is subject to agricultural risks related to insects, plant diseases, unstable growing conditions, water and electricity availability and cost, and force majeure events.  Although the Company cultivates its cannabis plants in indoor, climate controlled rooms staffed by trained personnel and in the future plans to cultivate cannabis plants in greenhouses, there can be no assurance that agricultural risks will not have a material adverse effect on the cultivation of its cannabis.  The Company may in the future cultivate cannabis plants outdoors, which would also subject it to related agricultural risks.

 

Unfavorable Publicity or Consumer Perception

 

The Company believes the adult-use and medical marijuana industries are highly dependent upon consumer perception regarding the safety, efficacy and quality of the marijuana produced. In particular, the Company’s financial performance in each state will depend on whether patients and physicians view its products as effective and safe for use. Under the laws of the states in which the Company and its affiliates operate, the participation of physicians and health care providers in the certification process is voluntary and therefore depends on a number of variables, including: medical professionals’ views as to the use of medical cannabis to treat qualifying conditions; the risks and benefits to individual patients or patient

 

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groups; the policies of particular medical practices; and patient demand. If physicians and other medical professionals do not certify patients where certification is required under state law, the Company’s business, financial position and results of operations may be negatively affected.

 

Public perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of marijuana products. There can be no assurance that future scientific research or findings, regulatory investigations, litigation, media attention or other publicity will be favorable to the marijuana market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory investigations, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or other publicity could have a material adverse effect on the demand for adult-use or medical marijuana and on the business, results of operations, financial condition, cash flows or prospects of the Company.

 

Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect. There is no assurance that such adverse publicity reports or other media attention will not arise. A negative shift in the public’s perception of cannabis in the U.S. or any other applicable jurisdiction could cause state jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, results of operations or prospects.

 

Product Liability

 

As a manufacturer and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of marijuana involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of marijuana alone or in combination with other medications or substances could occur. As a manufacturer, distributor and retailer of adult-use and medical marijuana, or in its role as an investor in or service provider to an entity that is a manufacturer, distributor and/or retailer of adult-use or medical marijuana, the Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

 

A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations, financial condition or prospects of the Company. There can be no assurances that the Company will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Company’s potential products or otherwise have a material adverse effect on the business, results of operations, financial condition or prospects of the Company.

 

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 labeling disclosure. Such recalls cause unexpected expenses of the recall and any legal proceedings that might arise in connection with the recall. This can cause loss of a significant amount of sales. In addition, a product recall may require significant management attention. Although the Company has detailed procedures in place for testing its products, 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 one of the Company’s products were subject to recall, the image of that product and the Company could be harmed. Additionally, product recalls can lead to increased scrutiny of operations by applicable regulatory agencies, requiring further management attention and potential legal fees and other expenses.

 

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Results of Future Clinical Research

 

Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids (such as cannabidiol (“CBD”) and THC remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC) and future research and clinical trials may discredit the medical benefits, viability, safety, efficacy, and social acceptance of cannabis or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of the Company’s securities should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this MD&A or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Difficulty Attracting and Retaining Personnel

 

The Company’s success depends to a significant degree upon its ability to attract, retain and motivate highly skilled and qualified personnel. Failure to attract and retain necessary technical personnel, sales and marketing personnel and skilled management could adversely affect the Company’s business. If the Company fails to attract, train and retain sufficient numbers of these highly qualified people, its prospects, business, financial condition and results of operations will be materially and adversely affected.

 

Dependence on Suppliers

 

The ability of the Company to compete and grow will be dependent on it 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 its required supply of equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Company’s capital expenditure plans may be significantly greater than anticipated by the Company’s management and may be greater than funds available to the Company, in which circumstance the Company may curtail, or extend the timeframes for completing, its capital expenditure plans. This could have an adverse effect on the business, financial condition, results of operations or prospects of the Company.

 

Reliance on Inputs

 

The marijuana business is dependent on a number of key inputs and their related costs including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the Company. In addition, any restrictions on the ability to secure required supplies or utility services or to do so on commercially acceptable terms could have a materially adverse impact on the business, financial condition and operating results. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services or to do so on appropriate terms and/or agreeable terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the Company.

 

Limited Market Data and Difficulty to Forecast

 

As a result of recent and ongoing regulatory and policy changes in the medical and adult-use marijuana industry, the market data available is limited and unreliable. Federal and state laws prevent widespread participation and hinder market research. Therefore, the Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the industry. Market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of the Company’s management

 

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team as of the date of this MD&A. A failure in the demand for its products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations, financial condition or prospects of the Company.

 

Intellectual Property Risks

 

The Company’s ability to compete in the future partly depends on the superiority, uniqueness and value of its intellectual property and technology, including both internally developed technology and technology licensed from third parties. To the extent the Company is able to do so, in order to protect its proprietary rights, the Company will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with its employees and third parties, and protective contractual provisions which may prove insufficient to protect the Company’s proprietary rights. Third parties may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to the Company’s proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on the Company’s business, results of operations or prospects.

 

As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the CSA, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to the Company. As a result, the Company’s intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third-parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, the Company can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal, state or local level. While many states do offer the ability to protect trademarks independent of the federal government, patent protection is wholly unavailable on a state level, and state-registered trademarks provide a lower degree of protection than would federally-registered marks.

 

Constraints on Marketing Products

 

The development of the Company’s business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the U.S. limits companies’ abilities to compete for market share in a manner similar to other industries. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Company’s sales and results of operations could be adversely affected.

 

Fraudulent or Illegal Activity by Employees, Contractors and Consultants

 

The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Company’s business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

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Information Technology Systems and Cyber-Attacks

 

The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology (“IT”) systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses.

 

In addition, the Company collects and stores personal information about its patients and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the Company’s business, financial condition and results of operations.

 

The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

 

Security Breaches

 

Given the nature of the Company’s products and its lack of legal availability outside of channels approved by the government of the U.S., as well as the concentration of inventory in its facilities, there remains a risk of shrinkage as well as theft. If there was a breach in security systems and the Company becomes victim to a robbery or theft, the loss of cannabis plants, cannabis oils, cannabis flowers and cultivation and processing equipment or if there was a failure of information systems or a component of information systems, it could, depending on the nature of any such breach or failure, adversely impact the Company’s reputation, business continuity and results of operations. A security breach at one of the Company’s facilities could expose the Company to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Company’s products.

 

Reliance on Management Services Agreements with Subsidiaries and Affiliates

 

The Company’s subsidiaries and other affiliates engage in the medicinal cannabis business through management services agreements entered into with state-licensed entities.  Under such agreements, its subsidiaries and affiliates perform a number of services, including cultivation, growing and handling of marijuana plants, trimming, curing and packaging of dry flower, patient advisory, lab and scientific research services, consultation on regulatory issues and a variety of management functions.  In exchange for providing these services, the Company’s subsidiaries and affiliates receive management fees which are a key source of revenue. Payment of such fees is dependent on the continuing validity and enforceability of the relevant management services agreements.  If such agreements are found to be invalid or unenforceable, or are terminated by the counterparty, this could have a material adverse effect on the business, prospects, financial condition, and operating results.

 

Website Accessibility

 

Internet websites are visible by people everywhere, not just in jurisdictions where the activities described therein are considered legal. As a result, to the extent the Company sells services or products via web-based links targeting only jurisdictions in which such sales or services are compliant with state law, the Company may face legal action in other

 

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jurisdictions which are not the intended object of any of the Company’s marketing efforts for engaging in any web-based activity that results in sales into such jurisdictions deemed illegal under applicable laws.

 

High Bonding and Insurance Coverage

 

There is a risk that a greater number of state regulatory agencies will begin requiring entities engaged in certain aspects of the business or industry of legal marijuana to post a bond or significant fees when applying, for example, for a dispensary license or renewal as a guarantee of payment of sales and franchise tax. The Company is not able to quantify at this time the potential scope for such bonds or fees in the states in which it currently or may in the future operate. Any bonds or fees of material amounts could have a negative impact on the ultimate success of the Company’s business.

 

The Company’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labor disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability.

 

Although the Company maintains insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance does not cover all the potential risks associated with its operations. The Company may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards encountered in the operations of the Company is not generally available on acceptable terms. The Company might also become subject to liability for pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon its business, results of operations, financial condition or prospects.

 

Risks of Leverage

 

Although the Company will seek to use leverage in connection with its investments in a manner it believes is prudent, such leverage will increase the exposure of an investment to adverse economic factors such as downturns in the economy or deterioration in the condition of the investment. If the Company defaults on unsecured indebtedness, the terms of the loan may require the Company to repay the principal amount of the loan and any interest accrued thereon in addition to heavy penalties that may be imposed. Because the Company may engage in financings where several investments are cross-collateralized, multiple investments may be subject to the risk of loss. As a result, the Company could lose its interest in performing investments in the event such investments are cross-collateralized with poorly performing or nonperforming investments.

 

In addition to leveraging the Company investments, the Company may borrow funds in its own name for various purposes and may withhold or apply from distributions amounts necessary to repay such borrowings. The interest expense and such other costs incurred in connection with such borrowings may not be recovered by income from investments purchased by the Company. If investments fail to cover the cost of such borrowings, the value of the investments held by the Company would decrease faster than if there had been no such borrowings. Additionally, if the investments fail to perform to expectation, the interests of investors in the Company could be subordinated to such leverage, which will compound any such adverse consequences.

 

Future Acquisitions or Dispositions

 

Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) the Company may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; and (v) loss or reduction of control over certain of the Company’s assets. Additionally, the Company may issue additional Subordinate Voting Shares in material amounts which would dilute the current shareholders’ holding in the Company or indirect holdings in the Company.

 

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The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.

 

Management of Growth

 

The Company may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the Company to deal with this growth may have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Performance Not Indicative of Future Results

 

The prior investment and operational performance of the Company is not indicative of the future operating results of the Company. There can be no assurance that the historical operating results achieved by the Company or its affiliates will be achieved by the Company, and the Company’s performance may be materially different.

 

Financial Projections May Prove Materially Inaccurate or Incorrect

 

The Curaleaf or Company financial estimates, projections and other forward-looking information or statements included in this MD&A are based on assumptions of future events that may or may not occur, which assumptions may not be disclosed in this MD&A. Shareholders of the Company should inquire of the Company and become familiar with the assumptions underlying any estimates, projections or other forward-looking information or statements. Projections are inherently subject to varying degrees of uncertainty and their achievability depends on the timing and probability of a complex series of future events. There is no assurance that the assumptions upon which these projections are based will be realized. Actual results may differ materially from projected results for a number of reasons including increases in operation expenses, changes or shifts in regulatory rules, undiscovered and unanticipated adverse industry and economic conditions, and unanticipated competition. Accordingly, the Company Shareholders should not rely on any projections to indicate the actual results the Company might achieve.

 

Conflicts of Interest

 

Conflicts of interest may arise as a result of the directors, officers and promoters of the Company also holding positions as directors or officers of other companies. They also invest and may invest in businesses, including in the cannabis sector, that compete directly or indirectly with the Company or act as customers or suppliers of the Company. Some of the individuals that are directors and officers of the Company have been and will continue to be engaged in the identification and evaluation of assets, businesses and companies on their own behalf and on behalf of other companies, and situations may arise where the directors and officers of the Company will be in direct competition with the Company. Conflicts, if any, will be subject to the procedures and remedies provided under the Business Corporations Act (British Columbia).

 

To the best of the Company’s knowledge, other than as disclosed below and elsewhere in this MD&A, there are no known existing or potential material conflicts of interest among the Company or a subsidiary of the Company and a director or officer of the Company or a subsidiary of the Company as a result of their outside business interests except that: (i) certain of the Company’s or its subsidiaries’ directors and officers serve as directors and officers of other companies, and therefore it is possible that a conflict may arise between their duties to the Company and their duties as a director or officer of such other companies, and (ii) certain of the Company’s or its subsidiaries’ directors and officers have portfolio investments consisting of minority stakes in businesses that may compete directly or indirectly with the Company or act as a customer of, or supplier to, the Company.

 

The Company has entered into a merger agreement for the acquisition of Cura Partners, a corporation in which Mr. Boris Jordan, a Principal Shareholder and Executive Chairman of the Company, holds an indirect interest. See the “Proposed Transactions - Cura Partners, Inc., an Oregon corporation (“Cura” or “Select”)” section of this MD&A.

 

62

 

Tax Risks

 

Section 280E of the Code, as amended prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the CSA). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. 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 and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses. Given these facts, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the Company.

 

63



Exhibit 4.4

 

 

CURALEAF HOLDINGS, INC.

 

Unaudited Condensed Interim Consolidated Financial Statements

As of and for the Three and Six Months Ended

June 30, 2020 and 2019

 

(Expressed in Thousands United States Dollars Unless Otherwise Stated)

 

 

 

Page(s)

 

 

Condensed Interim Consolidated Financial Statements

 

 

 

Condensed Interim Consolidated Statements of Financial Position (Unaudited)

1

 

 

Condensed Interim Consolidated Statements of Profits or Losses and Comprehensive Income (Unaudited)

2

 

 

Condensed Interim Consolidated Statements of Changes in Equity (Unaudited)

3

 

 

Condensed Interim Consolidated Statements of Cash Flows (Unaudited)

4

 

 

Notes to Condensed Interim Consolidated Financial Statements

5-33

 

 

Curaleaf Holdings, Inc.

Condensed Interim Consolidated Statements of Financial Position

Unaudited

(in thousands)

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

Note

 

2020

 

2019

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

122,763

 

$

42,310

 

Accounts receivable

 

3

 

18,197

 

18,335

 

Inventory, net

 

5

 

129,763

 

63,210

 

Biological assets

 

6, 19

 

27,025

 

19,197

 

Assets held for sale

 

7

 

35,050

 

—

 

Prepaid expenses and other current assets

 

 

 

7,342

 

6,479

 

Total current assets

 

 

 

340,140

 

149,531

 

Deferred tax asset

 

 

 

2,687

 

2,628

 

Notes receivable

 

8

 

83,635

 

57,166

 

Property, plant and equipment, net

 

9

 

179,687

 

129,812

 

Right-of-use assets

 

17

 

81,010

 

82,794

 

Intangible assets, net

 

10

 

404,110

 

185,635

 

Goodwill

 

10

 

179,955

 

69,326

 

Investments

 

4

 

51,244

 

51,209

 

Other assets

 

 

 

10,110

 

8,825

 

Total assets

 

 

 

$

1,332,578

 

$

736,926

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

 

 

$

25,300

 

$

12,742

 

Accrued expenses

 

 

 

30,585

 

18,016

 

Income tax payable

 

 

 

40,308

 

15,114

 

Current portion of lease liability

 

17

 

13,415

 

11,835

 

Current portion of notes payable

 

4, 11

 

6,290

 

17,000

 

Current contingent consideration liability

 

18

 

9,700

 

—

 

Liabilities held for sale

 

 

 

3,612

 

—

 

Other current liabilities

 

19

 

337

 

31,549

 

Total current liabilities

 

 

 

129,547

 

106,256

 

Deferred tax liability

 

 

 

85,587

 

22,642

 

Notes payable

 

11

 

273,559

 

87,953

 

Lease liability

 

2,17

 

81,868

 

81,319

 

Non-controlling interest redemption liability

 

4, 19

 

2,694

 

2,694

 

Contingent consideration liability

 

4, 18

 

81,662

 

32,616

 

Total liabilities

 

 

 

654,917

 

333,480

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Share capital

 

 

 

992,141

 

693,699

 

Treasury shares

 

 

 

(5,208

)

(5,208

)

Reserves

 

 

 

(155,469

)

(146,819

)

Accumulated deficit

 

 

 

(150,027

)

(132,910

)

Total Curaleaf Holdings, Inc. shareholders’ equity

 

12

 

681,437

 

408,762

 

Redeemable non-controlling interest contingency

 

4

 

(2,694

)

(2,694

)

Non-controlling interest

 

4

 

(1,082

)

(2,622

)

Total shareholders’ equity

 

 

 

677,661

 

403,446

 

Total liabilities and shareholders’ equity

 

 

 

$

1,332,578

 

$

736,926

 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

1

 

Curaleaf Holdings, Inc.

Condensed Interim Consolidated Statements of Profits or Losses and Comprehensive Income

Unaudited

(in thousands, except for share and per share amounts)

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

 

 

June 30, 

 

June 30, 

 

 

 

Note

 

2020

 

2019

 

2020

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Retail and wholesale revenues

 

 

 

$

99,579

 

$

37,726

 

$

176,635

 

$

65,494

 

Management fee income

 

 

 

17,901

 

10,763

 

37,342

 

18,246

 

Total revenues

 

 

 

117,480

 

48,489

 

213,977

 

83,740

 

Cost of goods sold

 

 

 

56,844

 

22,469

 

100,856

 

39,614

 

Gross profit before impact of biological assets

 

 

 

60,636

 

26,020

 

113,121

 

44,126

 

Realized fair value amounts included in inventory sold

 

 

 

(22,423

)

(15,478

)

(43,613

)

(25,833

)

Unrealized fair value gain on growth of biological assets

 

6

 

43,014

 

16,870

 

79,761

 

29,471

 

Gross profit

 

 

 

81,227

 

27,412

 

149,269

 

47,764

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

14

 

40,466

 

28,029

 

86,324

 

51,298

 

Share-based compensation

 

13

 

4,833

 

4,489

 

9,334

 

6,270

 

Depreciation and amortization

 

9,10

 

14,237

 

7,195

 

26,924

 

12,091

 

Total operating expenses

 

 

 

59,536

 

39,713

 

122,582

 

69,659

 

Income (Loss) from operations

 

 

 

21,691

 

(12,301

)

26,687

 

(21,895

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

3,573

 

2,436

 

6,419

 

4,919

 

Interest expense

 

11

 

(11,357

)

(3,983

)

(21,849

)

(8,147

)

Interest expense related to lease liabilities

 

17

 

(2,132

)

(1,348

)

(4,290

)

(2,315

)

Other income (expense)

 

11

 

(77

)

(1,047

)

2,529

 

(1,073

)

Total other expense

 

 

 

(9,993

)

(3,942

)

(17,191

)

(6,616

)

Income (Loss) before provision for income taxes

 

 

 

11,698

 

(16,243

)

9,496

 

(28,511

)

Income tax expense

 

 

 

(13,534

)

(8,192

)

(26,783

)

(6,753

)

Net loss and comprehensive loss

 

 

 

(1,836

)

(24,435

)

(17,287

)

(35,264

)

Less: Net income (loss) attributable to non-controlling interest

 

 

 

193

 

106

 

(170

)

(513

)

Net loss attributable to Curaleaf Holdings, Inc.

 

 

 

$

(2,029

)

$

(24,541

)

$

(17,117

)

$

(34,751

)

Loss per share attributable to Curaleaf Holdings, Inc. — basic and diluted

 

15

 

$

(0.00

)

$

(0.05

)

$

(0.03

)

$

(0.08

)

Weighted average common shares outstanding — basic and diluted

 

15

 

533,192,806

 

461,313,741

 

520,446,921

 

459,499,816

 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

2

 

Curaleaf Holdings, Inc.

Condensed Interim Consolidated Statements of Changes in Equity

Unaudited

(in thousands, except for share amounts)

 

 

 

Share capital
(Note 12)

 

Treasury

 

Share-Based

 

Other

 

 

 

 

 

Total
Curaleaf
Holdings,
Inc.

 

Redeemable
non -
controlling
interest

 

Non-controlling

 

Redeemable
non-
controlling

 

Total

 

 

 

# of Shares

 

 

 

shares

 

reserves

 

reserves

 

Total

 

Accumulated

 

shareholders’

 

contingency

 

interest

 

interest

 

shareholders’

 

 

 

SVS

 

MVS

 

Amount

 

(Note 12)

 

(Note 13)

 

(Note 4)

 

reserves

 

deficit

 

equity

 

(Note 4)

 

(Note 4)

 

(Note 4)

 

equity

 

Balances as of December 31, 2018

 

335,292,331

 

122,170,705

 

$

657,525

 

$

(4,325

)

$

6,698

 

$

(153,459

)

$

(146,761

)

(65,`666

)

$

440,773

 

$

(2,957

)

$

—

 

$

(2,174

)

$

435,642

 

Repurchase of shares

 

(70,100

)

—

 

—

 

(338

)

—

 

—

 

—

 

—

 

(338

)

—

 

—

 

—

 

(338

)

Exercise of stock options

 

3,478,196

 

—

 

7,268

 

—

 

(699

)

—

 

(699

)

—

 

6,569

 

—

 

—

 

—

 

6,569

 

Share-based compensation

 

—

 

—

 

—

 

—

 

6,270

 

—

 

6,270

 

—

 

6,270

 

—

 

—

 

—

 

6,270

 

Issuance of shares in connection with acquisitions

 

2,351,860

 

—

 

16,193

 

—

 

—

 

—

 

—

 

—

 

16,193

 

—

 

—

 

—

 

16,193

 

Non-controlling interest in connection with acquisitions

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

2,156

 

—

 

2,156

 

Conversion of MVS to SVS

 

10,000,000

 

(10,000,000

)

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Net loss

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(34,751

)

(34,751

)

—

 

—

 

(513

)

(35,264

)

Balances as of June 30, 2019

 

351,052,287

 

112,170,705

 

$

680,986

 

$

(4,663

)

$

12,269

 

$

(153,459

)

$

(141,190

)

$

(100,417

)

$

434,716

 

$

(2,957

)

$

2,156

 

$

(2,687

)

$

431,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2019

 

366,114,366

 

103,970,705

 

$

693,699

 

$

(5,208

)

$

20,517

 

$

(167,336

)

$

(146,819

)

$

(132,910

)

$

408,762

 

$

(2,694

)

$

2,156

 

$

(4,778

)

$

403,446

 

Issuance of shares in connection with acquisitions

 

55,790,122

 

—

 

268,799

 

—

 

—

 

—

 

—

 

—

 

268,799

 

—

 

—

 

—

 

268,799

 

Minority buyouts

 

3,788,920

 

—

 

25,752

 

—

 

—

 

(16,490

)

(16,490

)

—

 

9,262

 

—

 

—

 

1,710

 

10,972

 

Exercise of stock options

 

4,221,843

 

—

 

3,891

 

—

 

(3,012

)

—

 

(3,012

)

—

 

879

 

—

 

—

 

—

 

879

 

Share-based compensation

 

—

 

—

 

—

 

—

 

9,334

 

—

 

9,334

 

—

 

9,334

 

—

 

—

 

—

 

9,334

 

Non cash bonus

 

—

 

—

 

—

 

—

 

1,518

 

—

 

1,518

 

—

 

1,518

 

—

 

—

 

—

 

1,518

 

Conversion of MVS to SVS

 

10,000,000

 

(10,000,000

)

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Net income (loss)

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(17,117

)

(17,117

)

—

 

(640

)

470

 

(17,287

)

Balances as of June 30, 2020

 

439,915,251

 

93,970,705

 

$

992,141

 

$

(5,208

)

$

28,357

 

$

(183,826)

 

$

(155,469

)

$

(150,027

)

$

681,437

 

$

(2,694

)

$

1,516

 

$

(2,598

)

$

677,661

 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

3

 

Curaleaf Holdings, Inc.

Condensed Interim Consolidated Statements of Cash Flows

Unaudited

(in thousands)

 

 

 

 

 

Six months ended
June 30,

 

 

 

Note

 

2020

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

 

 

$

(17,287

)

$

(35,264

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

34,983

 

14,913

 

Share-based compensation

 

 

 

10,852

 

6,270

 

Non-cash interest expense

 

 

 

5,633

 

3,194

 

Unrealized gain on changes in fair value of biological assets

 

 

 

(79,761

)

(29,471

)

Realized fair value amounts included in inventory sold

 

 

 

43,613

 

(11,974

)

(Gain)/loss on sale of property, plant and equipment

 

 

 

—

 

575

 

Deferred taxes

 

 

 

6,503

 

216

 

Write off of acquisition costs

 

 

 

—

 

1,135

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

 

8,522

 

(3,998

)

Biological assets

 

 

 

26,852

 

36,925

 

Inventory

 

 

 

(46,197

)

(10,376

)

Prepaid expenses and other current assets

 

 

 

1,299

 

(406

)

Other assets

 

 

 

(1,442

)

(205

)

Accounts payable

 

 

 

4,614

 

1,706

 

Income taxes payable

 

 

 

21,803

 

3,044

 

Accrued expenses

 

 

 

1,827

 

2,174

 

Net cash provided by (used in) operating activities

 

 

 

21,814

 

(21,542

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

(51,511

)

(43,015

)

Prepayment of acquisition consideration

 

 

 

—

 

(25,757

)

Payments made on completion of acquisitions

 

 

 

(51,188

)

—

 

Net assets acquired from acquisitions, net of cash acquired

 

 

 

—

 

(53,384

)

Amounts advanced for notes receivable

 

 

 

(14,100

)

(13,757

)

Net cash used in investing activities

 

 

 

(116,799

)

(135,913

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from senior unsecured notes

 

 

 

 

 

 

 

Cash received from financing agreement

 

 

 

185,723

 

—

 

Lease liability payments

 

9

 

(11,164

)

(2,282

)

Repurchase of common stock

 

 

 

—

 

(338

)

Exercise of stock options

 

 

 

879

 

805

 

Net cash provided by (used in) financing activities

 

 

 

175,438

 

(1,815

)

Net change in cash

 

 

 

80,453

 

(159,270

)

Cash at beginning of period

 

 

 

42,310

 

266,616

 

Cash at end of period

 

 

 

122,763

 

107,346

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

 

 

18,092

 

4,549

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Recognition of right of use assets and lease liabilities

 

 

 

—

 

61,168

 

Issuance of shares in connection with minority buyouts

 

 

 

10,972

 

—

 

Issuance of shares in connection with acquisitions

 

 

 

268,799

 

16,193

 

Contingent consideration incurred in connection with acquisitions

 

 

 

68,012

 

14,475

 

Forgiveness of note receivable in connection with acquisition

 

 

 

751

 

—

 

Seller note incurred in connection with acquisition

 

 

 

—

 

8,000

 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

4

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 1 — Operations of the company

 

Curaleaf Holdings, Inc. (the “Company”, “Curaleaf”, or the “Group”), formerly known as Lead Ventures, Inc. (“LVI”), was incorporated under the laws of British Columbia, Canada on November 13, 2014. Curaleaf operates as a life science company developing full scale cannabis operations, with core competencies in cultivation, manufacturing, dispensing and medical cannabis research.

 

On October 25, 2018, the Company completed a reverse takeover transaction, and completed a related private placement which closed one day prior on October 24, 2018. Following the transactions, the Company’s subordinate voting shares (“SVS”) were listed on the Canadian Securities Exchange (“CSE”) under the symbol “CURA” and on the OTCQX under the symbol “CURLF”.

 

The head office and principal address of the Company is 301 Edgewater Place #405, Wakefield, MA 01880. The Company’s registered and records office address is located at Suite 1700-666 Burrard Street, Vancouver, British Columbia, Canada.

 

For the purposes of these unaudited condensed interim consolidated financial statements, the terms “Company” and “Curaleaf” mean Curaleaf Holdings, Inc. and, unless the context otherwise requires, includes its subsidiaries. Any references to the cultivation, processing, manufacturing, extraction, retail operations, dispensing or distribution of cannabis, logistics or similar terms specifically relate only to our state-licensed subsidiary entities. Operations of the licensed subsidiary entities are dependent on each entity’s license type, and the applicable state law and associated regulations.

 

Note 2 — Basis of presentation

 

The unaudited condensed interim consolidated financial statements have been prepared in compliance with International Accounting Standard 34 - Interim Financial Reporting. The Company followed the same accounting policies and methods of application as those disclosed in the annual audited consolidated financial statements for the year ended December 31, 2019. The interim consolidated financial statements should be read in conjunction with the annual financial statements of the Company for the year ended December 31, 2019, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

 

These unaudited condensed interim consolidated financial statements were approved by the Board of Directors and authorized for issue by the Board of Directors on August 14, 2020.

 

Functional currency

 

The Company and its subsidiaries’ functional currency, as determined by management, is the United States (“U.S.”) dollar. The consolidated financial statements are presented in U.S. dollars unless otherwise stated.

 

Basis of consolidation

 

Affiliates are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity and is exposed to the variable returns from its activities. The financial statements of affiliates are included in the consolidated financial statements from the date that control commences until the date that control ceases.

 

These consolidated financial statements include the accounts of the Company and its direct subsidiaries, indirect subsidiaries that are not wholly owned, and other entities consolidated other than on the basis of ownership:

 

5

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

 

 

State of

 

2020

 

2019

 

Business name

 

operations

 

ownership%

 

ownership%

 

CLF AZ, Inc.

 

AZ

 

100

%

100

%

CLF NY, Inc.

 

NY

 

100

%

100

%

Curaleaf CA, Inc.

 

CA

 

100

%

100

%

Curaleaf KY, Inc.

 

KY

 

100

%

100

%

Curaleaf Massachusetts, Inc.

 

MA

 

100

%

100

%

Curaleaf MD, LLC

 

MD

 

100

%

100

%

Curaleaf OGT, Inc.

 

OH

 

100

%

100

%

Curaleaf PA, LLC

 

PA

 

100

%

100

%

Curaleaf, Inc.

 

MA

 

100

%

100

%

Focused Investment Partners, LLC

 

MA

 

100

%

100

%

CLF Maine, Inc.

 

ME

 

100

%

100

%

PalliaTech RI, LLC

 

RI

 

100

%

100

%

PalliaTech CT, Inc.

 

CT

 

100

%

100

%

PalliaTech OR, LLC (formerly Groen)

 

OR

 

100

%

100

%

PalliaTech Florida, Inc.

 

FL

 

100

%

100

%

PalliaTech Florida, LLC

 

FL

 

88.6

%

77.2

%

Curaleaf Florida, LLC

 

FL

 

92

%

70

%

CLF MD Processing, LLC

 

MD

 

100

%

100

%

PT Nevada, Inc. (Note 4)

 

NV

 

100

%

100

%

CLF Sapphire Holdings, Inc. (Note 4)

 

OR

 

100

%

—

 

HMS Health LLC (Note 4)

 

MD

 

—

 

—

 

HMS Processing LLC (Note 4)

 

MD

 

—

 

—

 

HMS Sales LLC (Note 4)

 

MD

 

—

 

—

 

MI Health LLC (Note 4)

 

MD

 

—

 

—

 

Town Center Wellness, LLC (Note 4)

 

MD

 

—

 

—

 

 

All intercompany balances and transactions were eliminated on consolidation.

 

Significant accounting judgments, estimates and assumptions

 

The preparation of the Company’s consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods. Except as described below, the significant judgments, estimates and assumptions made by management in preparing the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2020 and 2019 were the same as those that applied to the annual audited consolidated financial statements.

 

Biological assets

 

Biological assets are dependent upon estimates of future economic benefits as a result of past events to determine the fair value through an exercise of significant judgment by the Company. In estimating the fair value of an asset or a liability, the Company uses market observable data to the extent it is available. The Company uses the average selling price per gram in the market in which the biological assets are produced to determine fair value. The Company assesses market prices on a quarterly basis in order to ensure biological assets are measured at the most relevant fair value.

 

6

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Business combinations

 

In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 — Financial Instruments with the corresponding gain or loss being recognized in the consolidated statement of profits and losses. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied.

 

Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.

 

The Company utilizes the guidance prescribed by Amendments to IFRS 3 — Definition of a Business (the “IFRS 3 Amendment”). The IFRS 3 Amendment changes the definition of a business and allows entities to use a concentration test to determine if transactions should be accounted for as a business combination or an asset acquisition. Under the optional concentration test, where substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business and the transaction would be accounted for as an asset acquisition. Management performs a concentration test where appropriate and if the concentration of assets is 85% or above, the transaction is generally accounted for as an asset acquisition.

 

Share-based payment arrangements

 

The Company uses the Black-Scholes valuation model to determine the fair value of options granted to employees and directors under share-based payment arrangements, where appropriate. In instances where stock options have performance or market conditions, the Company utilizes the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

 

Accounts receivable

 

Trade receivables are amounts due from customers for goods sold in the ordinary course of business. They are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are recognized initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognized at fair value. The Company holds the trade receivables with the objective to collect the contractual cash flows. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due.

 

The valuation of allowances for uncollectible trade receivables requires assumptions including estimated credit losses based on customer history, industry concentrations, and the Company’s knowledge of the financial conditions of its customers. Uncertainty relates to the actual collectability of customer balances that can vary based on management’s estimates and judgment.

 

7

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Assets held for sale

 

The accounting policy for assets held for sale applied in these unaudited condensed interim consolidated financial statements is new in comparison to the audited consolidated financial statements as of and for the year ended December 31, 2019. The Company classifies assets held for sale in accordance with IFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations.” When the Company makes the decision to sell an asset or to stop some part of its business, the Company assesses if such assets should be classified as an asset held for sale. To classify as an asset held for sale, the asset or disposal group must meet all of the following conditions: i) the asset is available for immediate sale in its present condition, ii) management is committed to a plan to sell, iii) an active program to locate a buyer and complete the plan has been initiated, iv) the asset is being actively marketed for sale at a sales price that is reasonable in relation to its fair value, v) the sale is highly probable within one year from the date of classification, and vi) actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. Assets held for sale are measured at the lower of its carrying amount or fair value less cost to sell (“FVLCTS”) unless the asset held for sale meets the exceptions as denoted by IFRS 5. FVLCTS is the amount obtainable from the sale of the asset in an arm’s length transaction, less the costs of disposal. Once classified as held for sale, any depreciation and amortization cease to be recorded (see Note 7).

 

Deferred taxes

 

Significant estimates are required in determining the current and deferred assets and liabilities for income taxes. Various internal and external factors may have favorable or unfavorable effects on the income tax assets and liabilities. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations and changes in overall levels of pre-tax earnings. Such changes could impact the assets and liabilities recognized in the balance sheet in future periods.

 

Discount rate for leases

 

IFRS 16 - Leases requires lessees to discount lease payments using the rate implicit in the lease, if that rate is readily available. If that rate cannot be readily determined, the lessee is required to use its incremental borrowing rate. The Company generally uses the incremental borrowing rate when initially recording real estate leases as the implicit rates are not readily available as information from the lessor regarding the fair value of underlying assets and initial direct costs incurred by the lessor related to the leased assets is not available. The Company determines the incremental borrowing rate as the interest rate the Company would pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

 

COVID-19 Estimation Uncertainty

 

The novel coronavirus commonly referred to as “COVID-19” was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions.

 

While these effects are expected to be temporary, the duration of the business disruptions and related financial impact cannot reasonably be estimated at this time. In addition, it is possible that estimates in the Company’s financial statements will change in the near term as a result of COVID-19 and the effect of any such changes could be material, which could result in, among other things, impairment of long-lived assets including intangibles and goodwill. The Company is closely monitoring the impact of the pandemic on all aspects of its business.

 

8

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

New, amended and future IFRS pronouncements

 

The following IFRS standards have been recently issued by the IASB. The Company is assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein.

 

Amendment to IFRS 3: Definition of a Business

 

In October 2018, the IASB issued the IFRS 3 Amendment. The IFRS 3 Amendment clarifies the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The IFRS 3 Amendment provides an assessment framework to determine when a series of integrated activities is not a business. The IFRS 3 Amendment is effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020, however early application is permitted. The Company elected early application of the IFRS 3 Amendment and elects whether to apply, or not apply, the test to each transaction separately.

 

IAS 1: Presentation of Financial Statements & IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

 

In October 2018, the IASB issued “Definition of Material”, an amendment to IAS 1 — Presentation of Financial Statements and IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of material and to align the definition used in the Conceptual Framework and the standards themselves. Materiality is defined as “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” This amendment is effective for the annual period beginning January 1, 2020.

 

The following is a brief summary of the new standards issued but not yet effective:

 

Amendments to IAS 1: Classification of Liabilities as Current or Non-Current

 

In January 2020, the IASB issued Classification of Liabilities as Current or Non-current (“Amendments to IAS 1”). The Amendments to IAS 1 aim to promote consistency in applying the requirements by helping companies determine whether, in the statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current (due or potentially due to be settled within one year) or non-current. The Amendments to IAS 1 include clarifying the classification requirements for debt a company might settle by converting it into equity. The Amendments to IAS 1 are effective for annual reporting periods beginning on or after January 1, 2022, with earlier application permitted.

 

Amendments to IAS 37: Onerous Contracts — Cost of Fulfilling a Contract

 

In May 2020, the IASB issued Onerous Contracts — Cost of Fulfilling a Contract (“Amendments to IAS 37”) amending the standard regarding costs a company should include as the cost of fulfilling a contract when assessing whether a contract is onerous. The amendment is effective for annual reporting periods beginning on or after January 1, 2022.

 

Note 3 — Accounts receivable

 

Accounts receivable consist of the following:

 

9

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

 

 

June 30, 

 

December 31, 

 

 

 

2020

 

2019

 

Trade accounts receivable

 

$

21,904

 

$

17,339

 

Other receivables

 

164

 

996

 

Transferred to assets held for sale

 

(3,871

)

—

 

Total trade and other receivables

 

$

18,197

 

$

18,335

 

 

Note 4 — Acquisitions

 

A summary of acquisitions completed during the six months ended June 30, 2020 and the year ended December 31, 2019 is provided below:

 

 

 

Six months ended June 30, 2020

 

Purchase price allocation

 

Cura (2)

 

Remedy (1)

 

Arrow (1)

 

Assets acquired:

 

 

 

 

 

 

 

Cash

 

$

12,555

 

172

 

613

 

Accounts receivable, net

 

8,516

 

15

 

—

 

Prepaid expenses and other current assets

 

2,232

 

3

 

—

 

Inventory

 

22,074

 

—

 

508

 

Property, plant and equipment, net

 

9,061

 

319

 

1,854

 

Right-of-use assets

 

9,627

 

—

 

—

 

Other assets

 

760

 

—

 

—

 

Intangible assets :

 

 

 

 

 

 

 

Licenses

 

124,120

 

—

 

38,435

 

Trade name

 

27,590

 

—

 

—

 

Service agreements

 

57,380

 

1,933

 

—

 

Non-compete agreements

 

4,770

 

—

 

—

 

Goodwill

 

112,301

 

—

 

—

 

Deferred tax liabilities

 

(54,624

)

—

 

(1,552

)

Liabilities assumed

 

(34,016

)

(106

)

(2,177

)

Consideration transferred

 

$

302,346

 

2,336

 

37,681

 

 

 

 

2019 Acquisitions

 

Purchase price allocation

 

Acres (2)

 

Glendale (1)

 

Phyto (1)

 

Emerald (1)

 

Eureka (1)

 

Blackjack (1)

 

HMS (1)

 

Elevate (1)

 

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

478

 

$

330

 

$

37

 

$

747

 

$

490

 

$

120

 

$

501

 

$

101

 

Accounts receivable

 

884

 

92

 

—

 

188

 

82

 

—

 

1,052

 

—

 

Prepaid expenses and other current assets

 

114

 

21

 

143

 

253

 

876

 

—

 

211

 

53

 

Inventory

 

3,812

 

422

 

103

 

724

 

587

 

333

 

414

 

93

 

Biological assets

 

567

 

—

 

—

 

—

 

 

 

—

 

—

 

—

 

Property, plant and equipment

 

5,994

 

1,407

 

—

 

103

 

357

 

—

 

—

 

68

 

Other assets

 

45

 

107

 

—

 

15

 

—

 

—

 

—

 

—

 

Intangible assets :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

22,340

 

17,060

 

7,424

 

15,970

 

35,253

 

7,187

 

32,775

 

1,937

 

Trade name

 

370

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Non-compete agreements

 

700

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Goodwill

 

17,471

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Deferred tax liabilities

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Liabilities assumed

 

(5,178

)

(660

)

(38

)

—

 

(1,284

)

(915

)

(2,654

)

(151

)

Non-controlling interest

 

—

 

—

 

—

 

—

 

—

 

(2,156

)

—

 

—

 

Consideration transferred

 

$

47,597

 

$

18,779

 

$

7,669

 

$

18,000

 

$

36,361

 

$

4,569

 

$

32,299

 

$

2,101

 

 

10

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

(1)         Acquisition accounted for as an asset acquisition under IFRS 3.

(2)         Acquisition accounted for as a business combination under IFRS 3.

 

Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.

 

Goodwill arising from acquisitions consists largely of the synergies and economies of scale expected from combining the operations of the businesses. These synergies include the elimination of redundant facilities and functions and the use of the Company’s existing commercial infrastructure to expand sales.

 

2020 acquisitions

 

Cura Partners, Inc., an Oregon corporation (“Cura” or “Select”)

 

On February 1, 2020, the Company completed the acquisition of Select through the Company’s subsidiary CLF Sapphire Holdings, Inc. The acquisition included Select’s manufacturing, processing, distribution, and marketing operations and all adult-use and medical cannabis products marketed under the Select brand name, including all intellectual property (the “Cura Transaction”).

 

Due to changes in market conditions, Curaleaf and Select mutually agreed on October 30, 2019 to reduce the base consideration payable upon closing of the Cura Transaction. Under the amended and restated merger agreement (the “Amended Merger Agreement”), the number of SVS payable at closing (“Closing Shares”) of the Cura Transaction was 48,275,476 with an additional 3,074,149 SVS to be held in escrow until the 18 month anniversary of the closing date (“Escrow Shares”). The fair value of the Closing Shares was $251,911 and the fair value of the Escrow Shares was $17,381. There is an additional 52,495,584 SVS to be payable to Select equity holders contingent upon Curaleaf achieving certain calendar year 2020 revenue targets based on Select-branded extract sales beginning at a target of $130,000 with maximum achievement at $250,000. The fair value of the Contingent Shares was $32,423. In addition, Select equity holders will also be eligible to receive an earn-out of up to $200,000 from the issuance of additional SVS, contingent upon Curaleaf exceeding $300,000 in calendar year 2020 revenue for Select-branded extract sales. The contingent consideration related to Cura had a fair value of $32,423. There were 2 dissenting Select shareholders who elected to receive cash in lieu of merger consideration.  They were paid $631 in April 2020.

 

Revenue and net loss from Cura Partners included in the consolidated statement of profits and losses for the six months ended June 30, 2020 was $38,303 and $12,039, respectively.

 

Arrow Alternative Care, Inc. (“Arrow 1”), Arrow Alternative Care #2, Inc. (“Arrow 2”), Arrow Alternative Care #3, Inc. (“Arrow 3”), each a Delaware corporation (collectively, the “Arrow Companies” or “Arrow”)

 

In March 2020, the Company signed definitive agreements to acquire Arrow 1, Arrow 2 and Arrow 3 (respectively, “Transaction 1”, “Transaction 2” and “Transaction 3”, and collectively the “Arrow Transactions”), which operated licensed medical cannabis dispensaries in Stamford, Hartford, and Milford, Connecticut. The aggregated consideration to be paid for the Arrow Companies is $37,681, consisting of $16,298 cash and $21,383 in SVS. The Closing of Transaction 1 and Transaction 3 occurred in April 2020. While management control of, and all economic interest in, Arrow 2 passed to the Company in April 2020, the formal closing of Transaction 2 occurred on August 3, 2020. The consideration for Arrow 1 was $10,412 and was paid in cash at closing. The consideration for Arrow 2 was $15,048 of which $9,333 was paid in SVS and the remainder in cash. Finally, the consideration for Arrow 3 was $12,227 which was paid by the issuance of 1,861,149 SVS. Certain “top up” shares are now due as additional consideration in connection with Transaction 3.

 

11

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Revenue and net income from Arrow included in the consolidated statement of profits and losses for the six months ended June 30, 2020 was $6,093 and $836, respectively.

 

Remedy Compassion Center, Inc. (“Remedy”)

 

Remedy owns and operates a duly licensed registered medical marijuana and cultivation facility in the state of Maine. In October 2016, the Company entered into a Management Services Agreement with Remedy (“Remedy MSA”) under which the Company provided services in the areas of cultivation, extraction, and other consulting. Under the Remedy MSA, Remedy maintained exclusive control and possession, and was solely responsible for final decision-making regarding all aspects of the business. The Company recognized management fee income for services rendered under the Remedy MSA.

 

Until February 2020, Remedy operated as a Maine nonprofit corporation when changes in Maine regulations allowed for conversion to a for-profit corporation. In February 2020, Remedy converted to a for-profit corporation as approved by their independent Board of Directors. In connection with the conversion, the Remedy MSA was terminated and the Company entered into a Registered Dispensary Management Agreement (“Remedy Operating Agreement”) which resulted in consolidation of Remedy.  Total consideration included forgiveness of debt of $2,336.

 

Revenue and net loss from Remedy included in the consolidated statement of profits and losses for the six months ended June 30, 2020 was $1,072 and $88, respectively.

 

2019 acquisitions

 

HMS Health LLC (“HMS”), HMS Processing LLC, MI Health LLC, and HMS Sales LLC,  HMS Health LLC, all Maryland limited liability companies (the “HMS Companies”)

 

In January 2019, the Company completed the acquisition of the HMS Companies which concluded as a $30,000 convertible financing. Prior to funding, HMS spun off its cannabis processing license and cannabis dispensing license into separate entities, HMS Processing LLC and HMS Sales LLC, respectively. There was an additional adjustment of $447 upon closing as part of the agreement. The loans, together with accrued interest, are convertible into equity of each of the HMS Companies upon receipt of all required regulatory approvals. In addition, the owners of the HMS Companies will receive additional consideration of $2,000 in SVS at the then-current market price upon completed conversion of the loans. The Company recorded a liability of $1,852 for the additional consideration.

 

Town Center Wellness, LLC, dba Elevate Takoma, a Maryland limited liability company (“Elevate”)

 

In January 2019, the Company paid $2,101 cash for an option to acquire the license associated with Elevate, a dispensary located in Takoma Park, MD.

 

Naturex II, LLC, dba Blackjack Collective, a Nevada limited liability company (“Blackjack”)

 

In October 2017, the Company entered into an agreement to acquire 51.2% of Blackjack by purchasing a 64% interest in VSLV Management, a related party, which owned 80% of Blackjack. The purchase price was in the form of 4,105,988 SVS valued at $3,001. The Company issued these shares of Curaleaf Holdings, Inc. into escrow for release to the members of VSLV Management upon regulatory approval of the transaction. In January 2019, the Company entered into an agreement to acquire an additional 18% of Blackjack from minority owners for cash consideration of $1,260. Furthermore, in October 2019, the Company entered into an agreement to acquire the remaining interests in VSLV Management for the issue of 286,246 additional SVS upon closing of the transaction.

 

The Company’s total controlling ownership in Blackjack as of April 1, 2019, the date it took control of Blackjack, was 69.2%. The Company recognized the residual 30.8% of unowned membership interest as a $2,156 non-controlling interest

 

12

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

in equity. As a result of its agreement to acquire the remaining interest in VSLV Management, the Company’s controlling ownership interest was increased to 98% as of October 11, 2019. An additional $308 of payables due to the Company were effectively forgiven as part of the purchase price.

 

EC Investment Partners, LLC, a Nevada limited liability company (“Eureka”)

 

In April 2019, the Company acquired all of the membership interests of Eureka.  Total consideration of $36,361 consisted of $5,608 in cash, settlement of $5,000 of debt owed to the Company, and $14,239 settled through the issuance of 1,663,511 SVS.  In addition, the sellers may be entitled to additional consideration in the form of additional SVS based on the excess of Eureka’s EBITDA for the twelve-month period starting July 1, 2019 above $5,000. The Company recorded contingent consideration of $11,514 associated with the contingent consideration.

 

Absolute Healthcare, Inc. dba Emerald Dispensary, an Arizona non-profit corporation (“Emerald”)

 

In May 2019, the Company acquired exclusive rights to operate the Emerald dispensary in Gilbert, AZ, whose license is held by Absolute Healthcare, Inc. Total consideration for the transaction was $18,000, of which $10,000 in cash was paid upfront, $5,000 was paid in cash in January 2020, and the balance of $3,000 was paid in May 2020. (see Note 11).

 

Phytotherapeutics Management Services, LLC, an Arizona non-profit corporation (“Phyto”)

 

In July 2019, the Company completed the acquisition of Phyto, which operates under the license of Phytotherapeutics of Tucson, LLC. The close of the transaction resulted in the license being applied to a newly developed dispensary located in Phoenix, AZ.

 

Aggregate agreed upon consideration for Phyto was $7,669, consisting of cash of $5,669, 65,511 SVS valued at $500 and a Company promissory note in the amount of $1,500 with a maturity date of 18 months from the close of the transaction with an interest rate of 7.5% (Note 11). The transaction completed in July 2019.

 

Glendale Greenhouse, an Arizona non-profit corporation (“Glendale”)

 

In August 2019, the Company completed the acquisition of Glendale, which operates under the license of PP Wellness as a vertically integrated cannabis cultivation, processing, and dispensary company.

 

Consideration for Glendale included 173,050 SVS valued at $1,500 and cash of $8,279. The Company also issued two promissory notes with a combined amount of $5,000 with a maturity date of 18 months from the close of the transaction date and an interest rate of 7%. The Company also issued a promissory note in the amount of $2,500 with an interest rate of 7%, which was paid in February 2020 (Note 11). Additionally, the Company will issue SVS with a value of $1,500 12 months after the close of the transaction.

 

Acres Cannabis, a Nevada limited liability company (“Acres”)

 

In October 2019, the Company completed the acquisition of Acres, which included a cultivation facility in Amargosa Valley, Nevada and a large dispensary located in Las Vegas, Nevada, with a second dispensary under construction. Total consideration for the transaction was $47,597, of which $15,000 in cash was paid upon signing, $9,500 was paid upon receiving regulatory approval of the license transfer for the dispensary in January 2020, as well as a $500 holdback. Total consideration also included $12,856 which was settled through the issuance of 3,108,183 SVS, $8,569 which was settled through the issuance of 2,039,062 SVS upon receiving regulatory approval of the license transfer for the dispensary in January 2020, and $1,172 of contingent consideration which is payable if certain financial targets are met.

 

13

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Pending acquisitions

 

The following acquisitions were signed, but were not completed prior to June 30, 2020 . The results of the following entities are not included in the consolidated results of the Company:

 

Alternative Therapies Group, Inc, a Massachusetts corporation (“ATG”)

 

In August 2018, the Company entered into an agreement to acquire ATG, which includes a 53,600 square foot cultivation and processing facility in Amesbury, Massachusetts and intends to enter into supply agreements with ATG’s three dispensaries in Massachusetts. Consideration for ATG is $50,000, $42,500 of which was prepaid in cash in December 2018 in order to solidify the Company’s intent to complete the purchase of ATG and was recorded as a non-current asset. The remaining $7,500 is due at the close of the transaction. The closing of the transaction is subject to achievement of certain milestones and regulatory approval.

 

Ohio Grown Therapies, LLC, an Ohio limited liability company (“OGT”)

 

In May 2019, the Company entered into an agreement granting it an option to acquire OGT for $20,000. The Company paid $5,000 cash in May 2019 and $7,500 in July 2020. The remaining consideration will be paid upon completion of certain milestones, culminating with regulatory approval of the transfer of the final licenses and OGT facility to Curaleaf.  The closing of this transaction is currently pending regulatory approval.

 

GR Companies, Inc., a Delaware company (“Grassroots”)

 

In July 2019, the Company entered into an agreement to acquire Grassroots (“Grassroots Acquisition”).  On June 22, 2020, Curaleaf entered into an Amended and Restated Agreement and Plan of Merger (the “Grassroots Merger Agreement”) which amended and restated the original definitive agreement and amended certain terms of the Grassroots Acquisition. Closing of the Grassroots Acquisition occurred on July 23, 2020.

 

At closing, the Company issued (i) 103,455,816 SVS to the benefit of the former holders of common stock of Grassroots, and (ii) 12,851,005 SVS to be held in escrow in accordance with the terms of the Grassroots Merger Agreement. The total consideration paid in connection with the Grassroots Acquisition does not include a cash component. In addition, the parties have resolved that certain Grassroots assets in Illinois, Ohio and Maryland are designated for sale to comply with local limitations on license ownership. The transaction price remains subject to usual working capital and other adjustments. The Company incurred transaction costs of approximately $5,564.

 

Virginia’s Kitchen, LLC, a Colorado company d/b/a Blue Kudu (“Blue Kudu”)

 

In February 2020, the Company signed a definitive agreement to acquire 100% of Blue Kudu, a Colorado-licensed processor and producer of cannabis edibles, operating an 8,400 square foot facility in Denver, Colorado. The consideration consisted of 322,580 SVS, $1,384 cash at closing of the transaction and a 5% note of up to $500 due ten and a half months from closing. The transaction closed in July 2020.

 

Curaleaf, New Jersey, Inc. (“CLNJ”)

 

In February 2011, the Company entered into a Management Services Agreement (“NJ MSA”) with CLNJ (formerly Compassionate Sciences ATC Inc.). As required under state law, CLNJ was formed as a New Jersey nonprofit corporation without shareholders acting through its governing body, the Board of Trustees (“NJ Board”). CLNJ operated medical dispensary, processing, and cultivation facilities as permitted by the state of New Jersey. Under the NJ MSA, the Company acted as an independent contractor providing services in the areas of cultivation, extraction, and other consulting services. The Company recognized management fee income for services rendered under the NJ MSA. In addition to the NJ MSA,

 

14

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

the Company entered into a Conditionally Convertible Promissory Note (“NJ Note”) (see Note 8). The NJ Note allowed the Company to acquire CLNJ when the regulations in New Jersey changed to allow nonprofit corporations to convert to for-profit corporations.

 

In July 2019, New Jersey Governor Murphy signed an amendment to the New Jersey Compassionate Use Medical Marijuana Act (the “Act”) known as the Jake Honig Compassionate Use Medical Cannabis Act (“Jake Honig Act”). The Jake Honig Act authorized the New Jersey nonprofit corporations that hold Alternative Treatment Center Permits (“ATC Permits”) to sell or transfer their permits and other assets to for-profit entities. Due to changes in New Jersey regulations, CLNJ received approval from the state of New Jersey for the transfer of the ATC Permit to  Curaleaf NJ II, Inc, a wholly owned subsidiary of the Company. In conjunction with the transfer of the ATC Permit, the Company entered into an Asset Purchase Agreement (“CLNJ APA”). As part of the CLNJ APA, CLNJ agreed to sell and transfer the ATC Permit and substantially all of its other assets to Curaleaf NJ II. The transaction closed in July 2020.  As a result of the close of the sale and transfer of the assets, the $83,233 balance of the NJ Note was applied to the purchase price.

 

Primary Organic Therapy, Inc. (d/b/a Maine Organic Therapy) (“MEOT”)

 

MEOT owns and operates a duly licensed registered medical marijuana and cultivation facility in the state of Maine. In January 2017, the Company entered into a Management Services Agreement with MEOT (“MEOT MSA”) under which the Company provided services in the areas of financial services, compliance consulting, and human resources management. Under the MEOT MSA, MEOT maintained exclusive control and possession, and was solely responsible for final decision-making regarding all aspects of the business and the Company acted solely in an advisory capacity. The Company recognized management fee income for services rendered under the MEOT MSA.

 

The MEOT MSA was terminated in July 2020, and MEOT entered into a new MSA agreement (“Verdure MSA”) with Verdure, Inc. (“Verdure”), an entity in which the Company’s CEO, Joseph Lusardi had an ownership interest. The Company acquired Verdure in July 2020 for $8,000 cash and a cash earn-out of $2,000 based on MEOT’s achievement of certain earnings targets. Current Maine regulations require that licensed medical marijuana dispensaries be owned by residents of Maine.  However, under the Verdure MSA, the Company has acquired operational control and substantially all of the economic benefit of MEOT’s business.  The acquisition of Verdure resulted in the Company controlling MEOT in accordance with IFRS 10.

 

15

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 5 — Inventory

 

Inventory consist of the following:

 

 

 

June 30, 

 

December 31, 

 

 

 

2020

 

2019

 

Raw materials

 

 

 

 

 

Harvested cannabis

 

$

3,689

 

$

5,780

 

Harvested trim

 

9,727

 

2,890

 

Total raw materials

 

13,416

 

8,670

 

Work-in-process

 

 

 

 

 

Processing

 

47,288

 

15,998

 

Finished goods

 

 

 

 

 

Consumables

 

8,139

 

8,668

 

Flower

 

3,595

 

3,661

 

Extracts

 

21,149

 

14,663

 

Total finished goods

 

32,883

 

26,992

 

Fair value adjustment to inventory related to biological assets

 

38,402

 

11,550

 

Transferred to assets held for sale

 

(2,226

)

—

 

 

 

$

129,763

 

$

63,210

 

 

Note 6 — Biological assets

 

The following table is a reconciliation of carrying amount of the biological assets:

 

Balance at December 31, 2018

 

$

4,491

 

Assets obtained in acquisitions

 

469

 

Unrealized fair value gain on growth of biological assets

 

29,471

 

Increase in biological assets due to capitalized costs

 

11,974

 

Transferred to inventory upon harvest

 

(37,395

)

Balance at June 30, 2019

 

$

9,010

 

 

 

 

 

Balance at December 31, 2019

 

$

19,197

 

Unrealized fair value gain on growth of biological assets

 

79,761

 

Increase in biological assets due to capitalized costs

 

38,884

 

Transferred to inventory upon harvest

 

(109,349

)

Transferred to assets held for sale

 

(1,468

)

Balance at June 30, 2020

 

$

27,025

 

 

Biological assets consist of actively growing cannabis plants to be harvested as agricultural produce.

 

The average grow cycle of plants up to the point of harvest is approximately twelve weeks. Plants in production are plants that are in the flowering stage and are valued at fair value less cost to complete and cost to sell, where fair value represents the Company’s selling price per gram of dried cannabis. As of June 30, 2020, and December 31, 2019, it was expected that the Company’s biological assets would yield 11,241,640 and 7,031,057 grams of cannabis when harvested, respectively. See Note 19 for the inputs and sensitivity analysis for the fair value of the biological assets.

 

16

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 7 — Assets held for sale

 

Assets held for sale consist of the following:

 

 

 

HMS Assets

 

Curaleaf MD

 

Total

 

Balance at January 1, 2020

 

$

—

 

$

—

 

$

—

 

Transferred in

 

30,669

 

4,381

 

35,050

 

Total assets held for sale at June 30, 2020

 

$

30,669

 

$

4,381

 

$

35,050

 

 

The Company has been exploring the sale of HMS Health, LLC, cultivation operations and HMS Processing, LLC (together with HMS Health, LLC, “HMS Assets”), processing operations. Such a sale would enable the Company to acquire the cultivation and processing assets that were previously owned by Grassroots while complying with limits on license ownership in the state of Maryland. The cultivation and processing assets of Grassroots in Maryland were spun off prior to the acquisition of Grassroots by the Company, and the Company intends to purchase those assets when approved by the Maryland regulators. The Company continues to actively market the HMS Assets with the intent of divesting these assets and acquiring the Maryland business formerly held by Grassroots. As a result, the Company has classified the HMS Assets as assets held for sale.

 

In addition to the HMS Assets, the Company intends to divest of Curaleaf Maryland, Inc., its licensed processing business in Maryland, to ensure compliance with Maryland regulations. The Company has signed definitive documents to sell 100% of Curaleaf Maryland, Inc. and are awaiting regulatory approval from the state of Maryland to complete the transaction. As a result, the Company classified these assets as held for sale.

 

Note 8 — Notes receivable

 

Notes receivable consist of the following:

 

 

 

June 30, 

 

December 31, 

 

 

 

2020

 

2019

 

Notes receivable Curaleaf NJ, Inc. (Note 4)

 

$

83,233

 

$

56,437

 

Notes receivable Virginia’s Kitchen, LLC (Note 4)

 

402

 

—

 

Notes receivable Remedy Compassion Center, Inc. (Note 4)

 

—

 

729

 

Total notes receivable

 

$

83,635

 

$

57,166

 

 

17

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 9 — Property, plant and equipment

 

Property, plant and equipment and related accumulated depreciation consist of the following:

 

 

 

June 30, 

 

December 31, 

 

 

 

2020

 

2019

 

Land

 

$

487

 

$

487

 

Building and improvements

 

105,790

 

87,563

 

Furniture and fixtures

 

47,368

 

37,526

 

Information technology

 

2,839

 

1,858

 

Construction in progress

 

59,002

 

20,387

 

Transferred to assets held for sale

 

(2,032

)

—

 

Total property and equipment

 

213,454

 

147,821

 

Less: Accumulated depreciation

 

(33,767

)

(18,009

)

Property, plant and equipment, net

 

$

179,687

 

$

129,812

 

 

Note 10 — Goodwill and intangible assets

 

Identifiable intangible assets consist of the following:

 

 

 

2019

 

2020

 

 

 

Balance at

 

 

 

Purchase price

 

Transferred to

 

Year-to-date

 

Balance at 

 

 

 

December 31,

 

Acquisitions

 

adjustments

 

assets held for sale

 

amortization

 

June 30,

 

Licenses

 

$

182,969

 

$

162,555

 

$

175

 

$

(19,720

)

$

(12,245

)

$

313,734

 

Trade names

 

1,921

 

27,590

 

—

 

(50

)

(903

)

28,558

 

Service agreements

 

—

 

59,313

 

—

 

(30

)

(2,406

)

56,877

 

Non-compete agreements

 

745

 

4,770

 

—

 

—

 

(574

)

4,941

 

Total intangible assets, net

 

$

185,635

 

$

254,228

 

$

175

 

$

(19,800

)

$

(16,128

)

$

404,110

 

 

Amortization of intangible assets was $8,975 and $2,265 for the three months ended June 30, 2020 and 2019, respectively and $16,128 and $4,071 for the six months ended June 30, 2020 and 2019, respectively.

 

The Company has determined that goodwill associated with all acquisitions is associated with the cannabis operations segment. There was no goodwill associated with the non-cannabis operations segment as of June 30, 2020 or December 31, 2019. The changes in the carrying amount of goodwill for the cannabis operations segment were as follows:

 

 

 

Total

 

Balance at December 31, 2019

 

$

69,326

 

Purchase price adjustments

 

76

 

Acquisition of Cura (Note 4)

 

112,301

 

Transferred to assets held for sale (Note 7)

 

(1,748

)

Balance at June 30, 2020

 

$

179,955

 

 

There were no indications of goodwill impairment for any Cash Generating Units (“CGU”s) for the three and six months ended June 30, 2020 or 2019.

 

18

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 11 — Notes payable

 

Notes payable consist of the following:

 

 

 

June 30, 

 

December 31, 

 

 

 

2020

 

2019

 

Financing Agreement — 2021

 

 

 

 

 

Principal amount and interest accrued

 

$

—

 

$

90,795

 

Unamortized debt discount

 

—

 

(5,773

)

Net carrying amount

 

—

 

85,022

 

 

 

 

 

 

 

Financing Agreement — 2023

 

 

 

 

 

Principal amount

 

300,000

 

—

 

Unamortized debt discount

 

(28,137

)

—

 

Net carrying amount

 

271,863

 

—

 

 

 

 

 

 

 

Secured Promissory Notes - 2029

 

1,253

 

2,505

 

Seller note payable

 

6,290

 

17,000

 

Other notes payable

 

443

 

426

 

Total notes payable

 

$

279,849

 

$

104,953

 

 

 

 

 

 

 

Current portion of notes payable

 

6,290

 

17,000

 

Long term notes payable

 

273,559

 

87,953

 

Total notes payable

 

$

279,849

 

$

104,953

 

 

Financing Agreement — 2021

 

In August 2018, the Company issued $85,000 of senior secured debt (the “Financing Agreement — 2021”). In connection with this agreement, the Company paid a fee of $1,700 upon the initial funding.

 

The Financing Agreement — 2021 accrued interest at a rate of 15% per annum, of which 10% was payable in cash quarterly and 5% was payable in kind. Principal and interest were due in full on August 23, 2021.  The Financing Agreement — 2021 was secured by a guarantee of each wholly-owned direct and indirect subsidiary of the Company, as well as a pledge of the Company’s assets and each such guarantor and contained certain negative covenants, including restrictions on its ability to pay dividends, invest in non-wholly owned entities and to incur non-subordinated debt.

 

The Financing Agreement — 2021 was able to be pre-paid in tranches of up to $25,000 or $50,000 upon 90 or 180 days written notice. Any amount prepaid once the outstanding principal falls below $25,000 was subject to a prepayment premium.

 

In connection with the Financing Agreement — 2021, the Company issued warrants to purchase 3,598,492 shares of common stock for a nominal value. The liability component of the notes was recorded at fair value of $77,556 and the equity component at the residual amount of $7,444. A debt discount was reflected as a reduction of the carrying value of the long-term debt on the Company’s consolidated statements of financial position and was amortized to interest expense over the term of the notes using the effective interest method.

 

The Company recognized interest expense under the Financing Agreement — 2021 of $3,314 for the three months ended June 30, 2019, but did not recognize interest expense for the three months ended June 30, 2020. The Company recognized interest expense of $455 and $6,522 for the six months ended June 30, 2020 and 2019, respectively.

 

19

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

The Company satisfied in full its obligations including early repayment fees of $9,500 under the Financing Agreement — 2021 in connection with and out of the proceeds from the new senior secured debt facility Financing Agreement — 2023. The repayment of the loan was accounted for as a modification into Financing Agreement — 2023.

 

Financing Agreement — 2023

 

In January 2020, the Company closed on a Senior Secured Term Loan Facility (the “Facility”) from a syndicate of lenders totaling $300,000. The notes bear interest at a rate of 13.0% per annum, payable quarterly in arrears with maturity in December 2023 and contain certain principal prepayment premiums. The Company satisfied its obligations in full under the Financing Agreement — 2021 in connection with, and out of the proceeds of the Facility.

 

The Company recognized interest expense under the Financing Agreement — 2023 of $11,299 and $21,278 for the three and six months ended June 30, 2020, respectively, including interest expense related to the amortization of the debt discount of $1,549 and $3,186, respectively.

 

Secured Promissory Notes — 2029

 

In January 2017, the Company entered into secured promissory notes (the “Secured Promissory Notes — 2029”) with certain individuals for an aggregate principal amount of $2,505.

 

The Secured Promissory Notes — 2029 accrue interest at a rate of 12% per annum on the first $224 and 14% per annum on the remaining balance. Principal and interest are due in full on May 1, 2029.

 

The Company recognized interest expense under the Secured Promissory Notes — 2029 of $43 and $55 for the three months ended June 30, 2020 and 2019, respectively and $87 and $55 for the six months ended June 30, 2020 and 2019, respectively.

 

The Company paid $1,252 and the respective accrued interest for a total of $1,651 in connection with the minority owner buyout in February 2020 (Note 19).  In August 2020, the other half of the Remaining Florida Minority Holders agreed to sell their remaining 11.4% equity in PT Florida for consideration of 2,375,000 SVS and the repayment of the remaining Secured Promissory Notes — 2029 in the amount of $1,750 (Note 20).  The Company expects final settlement with the Remaining Florida Minority Holders will occur in August 2020.

 

Seller note

 

The Company issued certain notes payable in conjunction with the Emerald acquisition in the amount of $8,000, the Glendale acquisition in the amount of $7,500, and the Phyto acquisition in the amount of $1,500. The Company paid $5,000 and the accrued interest related to the Emerald acquisition in January 2020 and the remaining $3,000 and accrued interest was paid in May 2020. The Company paid $2,500 and the accrued interest related to the Glendale acquisition in February 2020 (see Note 4).

 

Future maturities

 

As of June 30, 2020, future principal payments due under Notes payable were as follows:

 

20

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Period

 

Amount

 

2020 (remaining six months)

 

$

6,290

 

2021

 

—

 

2022

 

—

 

2023

 

300,000

 

2024

 

—

 

2025 and thereafter

 

1,696

 

 

 

$

307,986

 

 

Note 12 — Shareholders’ equity

 

The authorized and issued share capital of the Company is as follows:

 

Authorized

 

As of June 30, 2020, the authorized share capital consists of an unlimited number of multiple voting shares (“MVS”) without par value and an unlimited number of subordinate voting shares (“SVS”) without par value.

 

Issued

 

Holders of the MVS are entitled to 15 votes per share and are entitled to notice of and to attend any meeting of the shareholders, except a meeting of which only holders of another particular class or series of shares will have the right to vote. As of June 30, 2020 and December 31, 2019, the MVS represented approximately 17.6% and 22.1%, respectively, of the total issued and outstanding shares and 76.2% and 81%, respectively, of the voting power attached to such outstanding shares. The MVS are convertible into SVS on a one-for-one basis at any time at the option of the holder or upon termination of the MVS structure. The MVS structure will terminate automatically on October 25, 2021. It will also terminate automatically upon the occurrence of the following events: (i) transfer or disposition of the MVS by the Company’s Executive Chairman, Boris Jordan, to one or more third parties which are not certain permitted holders as described in the Company’s Articles, and (ii) Mr. Jordan or his permitted holders no longer beneficially owning, directly or indirectly and in the aggregate, at least 50% of the issued and outstanding SVS and MVS. In 2019, the holder of 18,200,000 MVS voluntarily converted 18,200,000 MVS into SVS. In April and May 2020, the holder of 10,000,000 MVS voluntarily converted 10,000,000 MVS into SVS. As of June 30, 2020, the Company had 93,970,705 MVS issued and outstanding.

 

Holders of the SVS are entitled to one vote per share. As of June 30, 2020, the Company had 439,915,251 SVS issued and outstanding.

 

In February 2020, 47,528,650 SVS were issued in connection with the acquisition of Select. (Note 4)

 

The Company had reserved 59,320,662 SVS and 52,237,230 SVS, as of June 30, 2020 and December 31, 2019, respectively, for the issuance of stock options under the Company’s 2018 Long Term Incentive Plan (see Note 13).

 

Treasury shares

 

For the three and six months ended June 30, 2019, the Company repurchased an aggregate of 70,100 SVS for a total purchase price of $338. The amount is reflected as treasury shares in the consolidated statement of financial position.

 

21

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 13 — Share-based payment arrangements

 

Stock option programs

 

The 2011 and 2015 Equity Incentive Plans of Curaleaf, Inc. provide for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other share-based awards. In connection with the Business Combination, all unexercised stock options of Curaleaf, Inc. issued and outstanding under the 2011 and 2015 Equity Incentive Plans were converted to the option to receive an equivalent substitute option under the 2018 Long Term Incentive Plan (the “LTIP”).  The LTIP provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards, dividend equivalents, and other share-based awards.  The number of SVS reserved for issuance under the LTIP is calculated as 10% of the aggregate number of SVS and MVS outstanding on an “as-converted” basis.

 

Stock option valuation

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes valuation model, where appropriate. In instances where stock options have performance or market conditions, the Company utilizes the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option.

 

The weighted average inputs used in the measurement of the grant date fair values of the equity-settled share-based payment plans were as follows:

 

 

 

June 30, 

 

 

 

2020

 

2019

 

Fair value at grant date

 

$

3.40

 

$

7.07

 

Share price at grant date

 

$

5.69

 

$

9.02

 

Exercise price

 

$

4.54

 

$

8.84

 

Expected volatility

 

90.8

%

87.7

%

Expected life

 

5.9years

 

7.2years

 

Expected dividends

 

—

%

—

%

Risk-free interest rate (based on government bonds)

 

0.50

%

2.19

%

 

The expected volatility is estimated based on the historical volatility of a publicly traded set of peer companies. The expected life in years represents the period of time that options granted are expected to be outstanding. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 

During the three months ended June 30, 2020 and 2019, the Company recorded share-based compensation in the amount of $4,833 and $4,489, respectively. During the six months ended June 30, 2020 and 2019, the Company recorded share-based compensation in the amount of $9,334 and $6,270, respectively.

 

22

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Reconciliation of outstanding share options

 

The number and weighted-average exercise prices of share options under the share option program were as follows:

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Number of

 

average

 

Number of

 

average

 

 

 

options

 

exercise price

 

options

 

exercise price

 

 

 

2020

 

2020

 

2019

 

2019

 

Outstanding at January 1

 

26,919,515

 

$

1.78

 

31,269,448

 

$

0.94

 

Forfeited during the six month period

 

(487,570

)

7.13

 

(163,550

)

0.49

 

Exercised during the six month period

 

(3,970,996

)

0.22

 

(3,478,196

)

0.21

 

Granted during the six month period

 

1,865,124

 

4.54

 

1,512,075

 

8.84

 

Rollover grants in connection with acquisition (Note 4)

 

4,820,663

 

9.98

 

—

 

—

 

Outstanding at June 30

 

29,146,736

 

$

2.12

 

29,139,777

 

$

1.48

 

Options exercisable at June 30

 

18,578,714

 

$

0.58

 

18,833,493

 

$

0.24

 

 

Restricted stock units (“RSUs”)

 

The number of RSUs awarded under the 2018 LTIP Plan were as follows:

 

 

 

Number of RSUs

 

 

 

2020

 

2019

 

Outstanding at January 1

 

2,170,064

 

166,215

 

Forfeited during the six month period

 

(180,526

)

—

 

Released during the six month period

 

(250,847

)

—

 

Granted during the six month period

 

1,507,414

 

908,789

 

Outstanding at June 30

 

3,246,105

 

1,075,004

 

RSUs vested at June 30

 

414,119

 

—

 

 

Note 14 — Selling, general and administrative expense

 

Selling, general and administrative expenses consist of the following:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2020

 

2019

 

2020

 

2019

 

Selling, general and administrative expenses:

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

$

22,131

 

$

12,637

 

$

40,900

 

$

23,501

 

Sales and marketing

 

5,010

 

2,433

 

8,618

 

5,628

 

Rent and occupancy

 

1,338

 

341

 

2,162

 

2,015

 

Travel

 

930

 

1,739

 

2,593

 

2,703

 

Professional fees

 

4,862

 

7,554

 

18,948

 

10,899

 

Office supplies and services

 

3,802

 

1,933

 

6,587

 

3,656

 

Other

 

2,393

 

1,392

 

6,516

 

2,896

 

Total selling, general and administrative expense

 

$

40,466

 

$

28,029

 

$

86,324

 

$

51,298

 

 

23

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 15 — Earnings per share

 

Basic and diluted loss per share attributable to Curaleaf Holdings, Inc. was calculated as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2020

 

2019

 

2020

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(1,836

)

$

(24,435

)

$

(17,287

)

$

(35,264

)

Less: Net income (loss) attributable to redeemable non-controlling interest

 

193

 

106

 

(170

)

(513

)

Net loss attributable to Curaleaf Holdings, Inc. — basic and diluted

 

$

(2,029

)

$

(24,541

)

$

(17,117

)

$

(34,751

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic and diluted

 

533,192,806

 

461,313,741

 

520,446,921

 

459,499,816

 

Loss per share — basic and diluted

 

$

(0.00

)

$

(0.05

)

$

(0.03

)

$

(0.08

)

 

The Company’s potentially dilutive securities, which include options to purchase shares of stock, have been excluded from the computation of diluted net loss per share as the effect would reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to shareholders is the same. The Company excluded the following potential shares, presented based on amounts outstanding at each period end, from the computation of diluted loss per share attributable to Curaleaf Holdings, Inc. for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Six months ended

 

 

 

June 30, 

 

 

 

2020

 

2019

 

Options to purchase common stock

 

29,146,736

 

29,139,777

 

 

In addition to the potentially dilutive securities noted above, as of June 30, 2020, the Company has 688,349 SVS held in escrow in connection with the Eureka acquisition and 3,074,149 SVS held in escrow in connection with the Cura Partners acquisition (See Note 4).

 

Note 16 — Segment reporting

 

The Company operates in two segments: the production and sale of cannabis via retail and wholesale channels (“Cannabis Operations”); and providing professional services including cultivation, processing, retail know-how and back office administration, intellectual property licensing, real estate leasing services and lending facilities to medical and adult-use cannabis licensees under management service agreements (“Non-Cannabis Operations”).

 

 

 

Cannabis

 

Non-Cannabis

 

Total

 

For the six months ended June 30, 2020:

 

 

 

 

 

 

 

Revenues

 

$

176,635

 

$

37,342

 

$

213,977

 

Gross profit

 

111,927

 

37,342

 

149,269

 

Income (loss) from operations

 

31,373

 

(4,686

)

26,687

 

Net income (loss)

 

23,721

 

(41,008

)

(17,287

)

 

24

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

 

 

Cannabis

 

Non-Cannabis

 

Total

 

For the six months ended June 30, 2019:

 

 

 

 

 

 

 

Revenues

 

$

65,494

 

18,246

 

$

83,740

 

Gross profit

 

29,518

 

18,246

 

47,764

 

Loss from operations

 

(11,335

)

(10,560

)

(21,895

)

Net loss

 

(15,115

)

(20,149

)

(35,264

)

 

 

 

Cannabis

 

Non-Cannabis

 

Held for sale

 

Total

 

As of June 30, 2020:

 

 

 

 

 

 

 

 

 

Total assets

 

$

688,768

 

$

608,760

 

$

35,050

 

$

1,332,578

 

Total liabilities

 

128,708

 

522,597

 

3,612

 

654,917

 

 

 

 

Cannabis

 

Non-Cannabis

 

Held for sale

 

Total

 

As of December 31, 2019:

 

 

 

 

 

 

 

 

 

Total assets

 

$

465,169

 

$

271,757

 

$

—

 

$

736,926

 

Total liabilities

 

93,785

 

239,695

 

—

 

333,480

 

 

Note 17 — Commitments and contingencies

 

Leases

 

The Company leases its facilities under operating leases that provide for the payment of real estate taxes and other operating costs in addition to normal rent.

 

At June 30, 2020, approximate future minimum payments due under non-cancellable operating leases were as follows:

 

Period

 

Scheduled payments

 

2020 (remaining six months)

 

10,152

 

2021

 

19,302

 

2022

 

20,166

 

2023

 

17,570

 

2024 and thereafter

 

65,856

 

Total undiscounted lease liability

 

133,046

 

Impact of discount

 

(35,743

)

Lease liability at June 30, 2020

 

97,303

 

Less current portion of lease liability

 

(13,415

)

Less current lease liabilities transferred to liabilities associated with assets held for sale

 

(9

)

Less long-term lease liabilities transferred to liabilities associated with assets held for sale

 

(2,011

)

Long-term portion of lease liability

 

$

81,868

 

 

Real estate leases typically extend for a period of 1—10 years. Some leases for office space include extension options exercisable up to one year before the end of the cancellable lease term. Typically, options to renew leases are for an additional period of 5 years after the end of the initial contract term and are at the option of the Company as the lessee. Lease payments are in substance fixed, and certain real estate leases include annual escalation clauses with reference to an index or contractual rate.

 

The Company leases machinery and equipment, but does not purchase or guarantee the value of leased assets. The Company considers these assets to be of low-value or short-term in nature and therefore no right-of use assets and lease

 

25

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

liabilities are recognized for these leases. Expenses recognized relating to short-term leases and leases of low value during the three and six months ended June 30, 2020 and 2019 were immaterial.

 

The Company leases space for its offices, cultivation centers, and retail dispensaries. Key movements relating to the right-of-use lease asset balances are presented below:

 

 

 

Scheduled payments

 

Carrying amount, January 1, 2020

 

$

82,794

 

Additions to leased assets

 

8,794

 

Depreciation charges

 

(8,655

)

Transferred to assets held for sale

 

(1,923

)

Carrying amount, June 30, 2020

 

$

81,010

 

 

The total interest expense on lease liabilities for the three months ended June 30, 2020 and 2019 was $2,132 and $1,348, respectively. The total interest expense on lease liabilities for the six months ended June 30, 2020 and 2019 was $4,290 and $2,315, respectively.

 

The total cash outflow for lease liability payments for the three months ended June 30, 2020 and 2019 was $5,000 and $2,599, respectively. The total cash outflow for lease liability payments for the six months ended June 30, 2020 and 2019 was $11,835 and $4,597, respectively.

 

Indemnification agreements

 

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and senior management team that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnification agreements. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its consolidated financial statements.

 

Legal

 

The Company is involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits are provided to the extent that losses are deemed both probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is management’s opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on the Company.

 

Among other legal disputes, the Company is currently involved in the following proceedings:

 

Connecticut Arbitration.  Pursuant to the Second Amended and Restated Operating Agreement of Doubling Road Holdings, LLC, the holders (the “Holders”) of a majority of the Series A-2 Units of Doubling Road Holdings had the right to require that PalliaTech CT, LLC or any Affiliate purchase all of the Series A-2 Units in exchange for shares of PalliaTech, Inc. (now Curaleaf, Inc.), the parent of PalliaTech CT, pursuant to a defined “Buy-Out Exchange Ratio.”  On October 25, 2018, the Holders, Curaleaf, and others entered into a Stipulation of Settlement in order to resolve a dispute

 

26

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

with respect to the applicable Buy-Out Exchange Ratio for the Put Right.  The Stipulation of Settlement provided, among other things, that PalliaTech CT purchased the Holders’ interests in exchange for (1) a payment of $40,142; (2) 4,755,548 SVS of Curaleaf Holdings, Inc.; and (3) the potential for additional equity in Curaleaf Holdings depending on the results of a “Settlement Second Appraisal.”  Pursuant to the Settlement Second Appraisal, dated December 12, 2019, and the terms of the Stipulation of Settlement, the Holders received 2,016,859 additional SVS.  On January 23, 2020, the Holders filed new claims in arbitration including for fraudulent inducement and breach of contract, relating primarily to a lock-up agreement that the Holders signed in connection with the Stipulation of Settlement.  A schedule for the arbitration has not yet been established.

 

Florida Arbitration / Litigation.  On December 10, 2018, Jayson Weisz and SRC Medical Partners, LLC initiated an arbitration against PalliaTech Florida LLC.  On March 19, 2019, Weisz and SRC derivatively on behalf of PalliaTech Florida LLC filed a complaint against Defendants Curaleaf Florida LLC, PalliaTech Florida, Inc., Joseph Lusardi, and Boris Jordan in the Complex Business Litigation Section in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. Plaintiffs’ derivative Complaint seeks the judicial dissolution of Curaleaf Florida LLC and asserts various causes of action against Defendants, including for breach of contract, civil conspiracy, breach of fiduciary duty, fraudulent transfer, and a declaratory judgment appointing Robins to the Board of Managers.  On January 10, 2020, Weisz, JRF Group, and the Curaleaf entities entered into a Stipulation of Settlement pursuant to which all claims of Weisz and JRF Group against the Company and its affiliates were released without compensation and the Company purchased JRF Group’s interest in PalliaTech Florida LLC for consideration of 1,772,062 SVS and $2,500 in cash.  During February 2020, SRC, PalliaTech Florida LLC, PalliaTech Florida, Inc., and Lusardi participated in a final arbitration hearing. In June 2020, the arbitrator issued a final order regarding SRC’s claims in the dispute.  While no damages were awarded, the Company was ordered to buyout SRC’s interest in PT Florida.  Based on the order, the parties agreed that Curaleaf would acquire SRC’s interest in PT Florida for no cash and 2,375,000 SVS.  In addition, in connection with this transaction, the Company agreed to pay SRC $1,750 cash to retire principal and interest on the half of the Secured Promissory Notes — 2029 held by SRC.  The Company expects the acquisition and retirement of the note to be completed in August 2020.

 

Securities Class Action.  On August 5, 2019, a purported class action was filed against Curaleaf, Joseph Lusardi, Neil Davidson, and Jonathan Faucher in the United States District Court for the Eastern District of New York on behalf of persons or entities who purchased or otherwise acquired publicly traded securities of the Company from November 21, 2018 to July 22, 2019.  On January 6, 2020, an Amended Class Action Complaint was filed against Defendants.  The Amended Class Action Complaint alleges that Defendants made materially false and/or misleading statements regarding Curaleaf’s CBD products based on a July 22, 2019 letter received from the U.S. Food and Drug Administration (“FDA Letter”).  According to the Amended Class Action Complaint, the FDA Letter states that several of the CBD products sold on Curaleaf’s website were “misbranded drugs” in violation of the Federal Food, Drug, and Cosmetic Act.  The Amended Class Action Complaint asserts claims (1) against all Defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and (2) against Lusardi, Davidson, and Faucher for alleged violations of Section 20(a) of the Securities Exchange Act of 1934.  On March 6, 2020, the Defendants filed a motion to dismiss arguing that the Amended Class Action Complaint failed to allege (1) any false or misleading statement or omission, (2) scienter, (3) any domestic transactions, or (4) control person liability.

 

Taxes

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The U.S. parent company is currently under audit by the Internal Revenue Service (“IRS”) for the years ending December 31, 2016 through December 31, 2018.  The IRS has proposed adjustments relating to the U.S. parent company’s treatment of expenses under Section 280E, however, as of June 30, 2020, there has been no resolution to any adjustments. Although the Company currently believes all its tax positions can be sustained, the ultimate resolution of tax matters could have a significant impact on the Company’s consolidated financial statements. The Company’s tax years are still open under statute from December 31, 2016, to the present.

 

27

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Note 18 — Related party transactions

 

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company incurred the following transactions with related parties during the three and six months ended June 30, 2020 and 2019:

 

 

 

Three months ended

 

Six months ended

 

Balances as of

 

 

 

June 30, 

 

June 30, 

 

June 30, 

 

December 31,

 

 

 

2020

 

2019

 

2020

 

2019

 

2020

 

2019

 

Transaction

 

Related party transactions

 

Related party transactions

 

Balance receivable (payable)

 

Processing fees (1)

 

$

535

 

$

—

 

$

1,194

 

$

—

 

$

—

 

$

—

 

Consulting fees (2)

 

—

 

3

 

—

 

313

 

—

 

—

 

Travel and reimbursement (2)

 

—

 

106

 

—

 

375

 

—

 

—

 

Rent expense (3)

 

(60

)

60

 

(120

)

120

 

—

 

—

 

Contingent liability (4)

 

—

 

—

 

—

 

—

 

(9,700

)

(18,000

)

Senior Unsecured Note - 2019 (5)

 

—

 

58

 

—

 

117

 

—

 

—

 

 

 

$

475

 

$

227

 

$

1,074

 

$

925

 

$

(9,700

)

$

(18,000

)

 

(1) For the three and six months ended June 30, 2020, the Company recognized direct expenses of $535 and $1,194, respectively for processing expenses with Sisu Extracts. Sisu Extracts, a state licensed processor in California, performed toll processing services for the Company during the quarter.  Cameron Forni, Select President, holds a passive investment in Sisu Extracts.

 

(2) For the three and six months ended June 30, 2019, the Company recognized consulting, travel and business development expenses related to the Company of $109 and $688, respectively as payment to Sputnik Group LTD, a company controlled by Boris Jordan, Executive Chairman as of June 30, 2019. As of  June 30, 2020, the Sputnik Group LTD no longer meets the definition of a related party.

 

(3) For the three months ended June 30, 2020 and 2019, the Company recognized a rent expense credit of $60 and rent expense of $60, respectively, for a sublease between Curaleaf NY and Measure 8 Venture Partners, a company controlled by Boris Jordan, Executive Chairman. For the six months ended June 30, 2020 and 2019, the Company recognized a rent expense credit of $120 and rent expense of $120, respectively for the sublease.

 

(4) As of June 30, 2020 and 2019, the Company had a contingent consideration liability of $9,700 and $18,000, respectively for the purchase of CLMA payable upon the achievement of certain milestones. The liability is payable to PT Mass Holdings, LLC, of which Joseph F. Lusardi, the Company’s Chief Executive Officer, is a member. In June 2020, the Company made a cash payment of $8,300 to PT Mass Holdings, LLC as partial payment of the contingent consideration liability.

 

(5) For the three and six months ended June 30, 2019, the Company recognized interest expense of $58 and $117, respectively, to Boris Jordan, Executive Chairman, and MedTech International Group, LLC, a company controlled by Boris Jordan for interest on the Senior Unsecured Notes — 2019. The Company satisfied its full obligations under the Senior Unsecured Notes in December 2019, thus no interest expense is recognized in 2020.

 

The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Key

 

28

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

management personnel compensation and other related party expenses for the three and six months ended June 30, 2020 and 2019 are as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Key management personnel compensation

 

2020

 

2019

 

2020

 

2019

 

Short-term employee benefits

 

$

1,251

 

$

588

 

$

2,287

 

$

1,026

 

Other long-term benefits

 

12

 

6

 

19

 

120

 

Share-based payments

 

4,598

 

3,586

 

8,152

 

4,962

 

 

 

$

5,861

 

$

4,180

 

$

10,458

 

$

6,108

 

 

Note 19 — Fair value measurements

 

The Company’s financial instruments consist of cash, restricted cash and cash equivalents, notes receivable, accounts payable, accrued expenses, long-term debt and redeemable non-controlling contingency. The fair values of cash, restricted cash, notes receivable, accounts payable and accrued expenses approximate their carrying values due to the relatively short-term to maturity. The Company’s long-term notes payable carrying value at the effective interest rate approximates fair value.

 

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:

 

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 — Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and

Level 3 — Inputs for the asset or liability that are not based on observable market data.

 

The Company’s assets measured at fair value on a nonrecurring basis include investments, long-lived assets, indefinite-lived intangible assets and goodwill. The Company reviews the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually as of December 31, for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to be Level 3 measurements.

 

There have been no transfers between fair value levels during the three and six months ended June 30, 2020 and 2019.

 

 

 

Fair value measurements

 

 

 

as of June 30, 2020 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Biological assets

 

$

—

 

$

—

 

$

27,025

 

$

27,025

 

 

 

$

—

 

$

—

 

$

27,025

 

$

27,025

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Non-controlling interest redemption and contingent consideration liabilities

 

$

—

 

$

—

 

$

84,356

 

$

84,356

 

 

 

$

—

 

$

—

 

$

84,356

 

$

84,356

 

 

29

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

 

 

Fair value measurements

 

 

 

as of December 31, 2019 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Biological assets

 

$

—

 

$

—

 

$

19,197

 

$

19,197

 

 

 

$

—

 

$

—

 

$

19,197

 

$

19,197

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Non-controlling interest redemption and contingent consideration liabilities

 

$

—

 

$

—

 

$

35,310

 

$

35,310

 

 

 

$

—

 

$

—

 

$

35,310

 

$

35,310

 

 

Biological assets

 

The fair value of biological assets is categorized in Level 3 on the fair value hierarchy. The Company measures its biological assets at fair value less costs to sell. This is determined using a model which estimates the expected harvest yield in grams for plants that are actively growing, and then adjusts that amount for the expected selling price per gram in the market in which the biological asset is growing. The estimates used in determining the fair value of biological assets are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods. The significant assumptions used in determining the fair value of biological assets include:

 

·                  Expected yield by plant — represents the expected number of grams of finished cannabis inventory which are expected to be obtained from each harvested cannabis plant;

 

·                  Wastage of plants — represents the weighted average percentage of biological assets which are expected to fail to mature into cannabis plants that can be harvested;

 

·                  Duration of the production cycle — represents the weighted average number of weeks out of the 12 week growing cycle that biological assets have reached as of the measurement date;

 

·                  Percentage of costs incurred as of this date compared to the total costs expected to be incurred — this is calculated as the cost per gram of harvested cannabis to complete the sale of cannabis plants post harvest, consisting of the cost of direct and indirect materials and labor related to further production, labeling, and packaging;

 

·                  Percentage of costs incurred for each stage of plant growth — represents the direct and indirect production costs incurred that are capitalized; and

 

·                  Market values — this is calculated as the current market price per gram in the market in which the biological asset is being produced. This is expected to approximate future selling price.

 

The Company accretes fair value on a straight line basis according to stage of growth. As a result, a cannabis plant that is 50% through its 12 week growing cycle would be ascribed approximately 50% of its harvest date expected fair value. All plants are to be harvested cannabis and as of June 30, 2020 and December 31, 202019, on average, were 57% and 49% complete, respectively. An increase or decrease in the estimated sale price would result in a significant change in the fair value of biological assets.

 

30

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Non-controlling interest contingency and buyout

 

During 2018 the Company agreed to acquire the remaining non-controlling interest in Costa Nursery Farms, LLC, d/b/a Modern Health Concepts (“MHC”) and Double Road Holdings, LLC (“DRH”), thereby rendering void the non-controlling interest put options and call options purchased by the non-controlling interest from the original agreements. The MHC acquisition consideration was $25,000 in cash as well as SVS and the DRH acquisition consideration was $40,142 in cash as well as SVS. Upon each acquisition, the Company reversed the non-controlling interest contingency liabilities.

 

The non-controlling interest in MHC of $12,000 was calculated using the fair value method of the assets acquired and liabilities assumed. The value used in this determination was the purchase price for the controlling interest. The Company used the fair value method as it believes that the risks and rewards of the acquired entity are shared by the Company and the non-controlling interest. The MHC Agreement contained a put option under which the non-controlling interest could require the Company to redeem its equity interest in MHC. The redemption value was to be determined by mutual agreement or by an independent valuation expert subject to certain parameters that include a “floor” amount of $12,000 and a “ceiling” amount equal to 75% of the excess of the fair market value over $40,000 times the percentage interest held by the non-controlling interest (30% at the acquisition date). The Company had a call option under which it may require the non-controlling interest to sell under the same terms.

 

PT Florida is owned 77.2% by the Company and 22.8% by third parties (the “Remaining Florida Minority Holders”). The Remaining Florida Minority Holders, through their 22.8% non-controlling interest in PT Florida, indirectly held a 15.9% non-controlling interest in MHC as of December 31, 2019. In January 2020, half of the Remaining Minority Holders agreed to sell their 11.4% equity in PT Florida for consideration of $2,500 cash and 1,772,062 SVS, valued at $12,272. In addition, in connection with this transaction, the Company paid the selling Remaining Minority Holders  $1,651 cash to retire principal and interest on the half of the Secured Promissory Notes — 2029 held by the selling Remaining Minority Holders. (See Note 11).

 

In October 2018, the Company agreed to acquire from the minority members of DRH (the “DRH Minority Members”) their remaining 49% membership interests in DRH (the “DRH Minority Membership Units”) in consideration for $40,142 in cash (the “Connecticut Minority Buy-Out”) and $41,747 which was settled through the issuance of 4,755,548 SVS. The number of SVS to be paid to the DRH Minority Members for the DRH Minority Membership Units may be adjusted based upon an independent valuation to be conducted following the completion of the Business Combination. The valuation was to establish the value of DRH as a percentage of the value of Curaleaf Inc. as of March 8, 2018 (the “Exchange Ratio”), and then convert the Exchange Ratio into a percentage of the fully diluted equity as of the date of the Business Combination, not taking into account shares to be issued in connection with the Private Placement (the “Diluted Share Count”). Upon completion of this valuation, the number of additional SVS to be issued to DRH Minority Members was to be determined based on a prescribed formula, provided that the aggregate number of SVS issued to the DRH Minority Holders shall not exceed an additional 1.96% of the Diluted Share Count representing 8,962,380 SVS. In February 2020, the Company issued 2,016,858 SVS to the former minority members of DRH as a result of the independent valuation.

 

As of June 30, 2020 and December 31, 2019 the Company recognized a non-controlling interest redemption liability in the amount of $2,694 and $16,174, respectively, with the offset being recognized in redeemable non-controlling interest buyout as contra equity.  An increase or decrease in the weighted average cost of capital (“WACC”) would result in a significant change in the fair value of the non-controlling interest contingency.

 

31

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

Financial risk management

 

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below:

 

Credit risk

 

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s notes and accounts receivable. The maximum credit exposure at June 30, 2020 and December 31, 2019 is the carrying amount of cash and cash equivalents, accounts receivable and notes receivable. The Company does not have significant credit risk with respect to its customers. All cash and cash equivalents are placed with major U.S. financial institutions.

 

The Company provides credit to its wholesale and MSA customers in the normal course of business and has established processes to mitigate credit risk. The amounts reported in the consolidated statements of financial positions are net of allowances for bad debts, estimated by the Company’s management based on prior experience and its assessment of the current economic environment. The Company reviews its trade receivable accounts regularly and reduces amounts to their expected realizable values by adjusting the allowance for doubtful accounts when management determines that the account may not be fully collectible. The Company applies the IFRS 9 simplified approach to measuring expected credit losses (“ECL”) which uses a lifetime expected loss allowance for all trade receivables. The Company has not adopted credit policies in an effort to minimize those risks. As of June 30, 2020, future loan receivable receipts were as follows:

 

Period

 

Amount

 

2020 (remaining six months)

 

$

83,635

 

2021

 

—

 

2022

 

—

 

2023

 

—

 

2024

 

—

 

2025 and thereafter

 

—

 

 

 

$

83,635

 

 

Liquidity risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.

 

Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cash and cash equivalents bear interest at market rates. The Company’s notes receivable and financial debts have fixed rates of interest and therefore expose the Company to interest rate fair value risk.

 

Capital management

 

The Company’s objectives when managing capital are to ensure that there are adequate capital resources to safeguard the Company’s ability to continue as a going concern and maintain adequate levels of funding to support its ongoing operations and development such that it can continue to provide returns to shareholders and benefits for other stakeholders.

 

32

 

Curaleaf Holdings, Inc.

Notes to Condensed Interim Consolidated Financial Statements

(in thousands, except for gram, share and per share amounts)

 

The capital structure of the Company consists of items included in shareholders’ equity and debt, net of cash and cash equivalents. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the Company’s underlying assets. The Company plans to use existing funds, as well as funds from the future sale of products to fund operations and expansion activities. As of June 30, 2020 and December 31, 2019, the Company was not subject to externally imposed capital requirements.

 

Note 20 — Subsequent events

 

The Company has evaluated subsequent events through August 19, 2020, the date the consolidated financial statements were available to be issued.

 

On July 20, 2020, Curaleaf completed the private placement offering previously announced on July 2, 2020 (the “Offering”). Under the initial tranche, subscribers purchased an aggregate of 3,541,429 SVS for aggregate gross proceeds of approximately CAD $27,269. Subsequent to setting the initial tranche, the Company secured a second tranche investment, which was part of the Offering which closed on July 20, 2020. Under the second tranche, a subscriber purchased 842,269 SVS for gross proceeds of approximately CAD $6,787. In aggregate, the Offering generated approximately CAD $34,056 in gross proceeds for the Company in exchange for 4,383,698 SVS. The Offering was conducted in connection with the closing of the Grassroots Acquisition (see Note 4).

 

In August 2020, the Company closed on a sale and leaseback transaction at its Mount Dora, Florida cultivation facility.  In the transaction, the Company sold leasehold improvements with a gross value of $44,940 for $41,000 and entered into a new 15 year lease on the entire property with the new owner.  Net of transaction costs and security deposits, the Company received $39,068 at closing.

 

In August 2020, the other half of the Remaining Florida Minority Holders agreed to sell their remaining 11.4% equity in PT Florida for consideration of 2,375,000 SVS and the repayment of the remaining Secured Promissory Notes — 2029 in the amount of $1,750.  The Company expects final settlement with the Remaining Florida Minority Holders will occur in August 2020.

 

See Note 4 for information regarding acquisitions that were signed or closed after June 30, 2020.

 

33



Exhibit 4.5

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020

 

(Amounts in thousands, except share and per share amounts)

 

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Curaleaf Holdings, Inc. (the “Company” or “Curaleaf”) is for the three and six months ended June 30, 2020 and 2019 prepared as of August 19, 2020. It is supplemental to, and should be read in conjunction with, the Company’s unaudited condensed interim consolidated financial statements and the accompanying notes for the three and six months ended June 30, 2020 and 2019. For the purposes of this MD&A, the terms “Company” and “Curaleaf” mean Curaleaf Holdings, Inc. and, unless the context otherwise requires, includes its subsidiaries. Any references to the cultivation, processing, manufacturing, extraction, retail operations, dispensing or distribution of cannabis, logistics or similar terms specifically relate only to our state-licensed subsidiary entities. Operations of the licensed subsidiary entities are dependent on each entity’s license type, and the applicable state law and associated regulations.  Additional information regarding Curaleaf is available on the Company’s website at www.curaleaf.com or through the SEDAR website at www.sedar.com. The Company’s interim financial statements have been prepared in compliance with International Accounting Standard 34 - Interim Financial Reporting. The Company followed the same accounting policies and methods of application as those disclosed in the annual audited consolidated financial statements of the Company for the year ended December 31, 2019. The Company’s interim financial statements should be read in conjunction with the annual audited consolidated financial statements of the Company for the year ended December 31, 2019, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Financial information presented in this MD&A is presented in United States (“U.S.”) dollars (“$” or “US$”), unless otherwise indicated.

 

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 — Continuous Disclosure Obligations of the Canadian Securities Administrators and Staff Notice 51-352 (Revised) — Issuers with US Marijuana Related Activities (“Staff Notice 51-352”).

 

This MD&A contains “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States securities laws (“forward-looking statements”). Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on management’s current beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions of the Company. In addition, the Company may make or approve certain statements in future filings with Canadian securities regulatory authorities, in press releases, or in oral or written presentations by representatives of the Company that are not statements of historical fact and may also constitute forward-looking statements. All statements, other than statements of historical fact, made by the Company that address activities, events or developments that the Company expects or anticipates will or may occur in the future are forward-looking statements, including, but not limited to, statements preceded by, followed by or that include words such as “may”, “will”, “would”, “could”, “should”, “believes”, “estimates”, “projects”, “potential”, “expects”, “plans”, “intends”, “anticipates”, “targeted”, “continues”, “forecasts”, “designed”, “goal”, or the negative of those words or other similar or comparable words and includes, among others, information regarding: expectations for the effects and potential benefits of any transactions; expectations for the effects of the pandemic of the novel coronavirus (“COVID-19”) on the business’ operations and financial condition; statements relating to the business and future activities of, and developments related to, the Company after the date of this MD&A, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Company’s business, operations and plans; expectations that planned acquisitions will be completed; expectations that licenses applied for will be obtained; potential future legalization of adult-use and/or medical cannabis under U.S. federal law; expectations of market size and growth in the U.S. and the states in which the Company operates; expectations for other economic, business, regulatory and/or competitive factors related to the Company or the cannabis industry generally; the ability for U.S. holders of securities of the Company to sell them on the Canadian Securities Exchange (“CSE”); and other events or conditions that may occur in the future. Forward-looking statements may relate to future financial conditions, results of operations, plans, objectives, performance or business developments. These statements speak only as of and at the date they are made and are based on information currently available and on the then current expectations. Holders of securities of the Company are cautioned that forward-looking statements are not based on historical facts but instead are based on reasonable assumptions and estimates of management of the Company at the time they were provided or made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any

 

1

 

future results, performance or achievements expressed or implied by such forward-looking statements, including, but not limited to, the following risks and uncertainties which are discussed in greater detail in the “Risk Factors” section of the Company’s annual MD&A for the year ended December 31, 2019: business structure risks; legal and regulatory risks inherent in the cannabis industry; financing risks related to additional financing and restricted access to banking; general regulatory and legal risks including risk of civil asset forfeiture; risks relating to anti-money laundering laws and regulations; lack of access to U.S. bankruptcy protections, heightened scrutiny by regulatory authorities; risk of legal, regulatory or political change, general regulatory and licensing risks, limitations on ownership of licenses, regulatory action and approvals from the Food and Drug Administration and risks of litigation; environmental risks including environmental regulation and unknown environmental risks; general business risks including risks related to COVID-19 pandemic, failure to complete acquisitions; risks related to the senior secured debt facility, unproven business strategy, service providers, enforceability of contracts, resale of the SVS (as defined below) on the CSE; reliance on the expertise and judgment of senior management of the Company, and ability to retain such senior management; the concentrated voting control of the Company’s Executive Chairman, Boris Jordan, risks inherent in an agricultural business; unfavorable publicity or consumer perception, product liability, product recalls, results of future clinical research, difficulty attracting and retaining personnel, dependence on suppliers, reliance on inputs, limited market data and difficulty to forecast, intellectual property risks, constraints on marketing products, fraudulent or illegal activity by employees, contractors and consultants, information technology systems and cyber-attacks, security breaches, reliance on management services agreements with subsidiaries and affiliates, website accessibility, high bonding and insurance coverage, risks of leverage, future acquisitions or dispositions; , management of growth, performance not indicative of future results and financial projections may prove materially inaccurate or incorrect, conflict of interest; tax risks as well as those risk factors discussed in the “Risk Factors” section of the Company’s Annual Information Form dated September 23, 2019. Both the Company’s annual MD&A and Annual Information Form are available on SEDAR at www.sedar.com.

 

The discussion of risk factors in this MD&A has been updated to include discussion of risks related to the current pandemic caused by the spread of COVID-19.   The nature and scope of the pandemic and its impact are rapidly developing, and it is difficult for management to identify at the current time all risks, or quantify those identified, or to assess their impact on particular financial measures and operating results.  Nevertheless, discussion under “Risk Factors” identifies potential areas of negative potential impact that may be caused by the pandemic.

 

The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. In particular, but without limiting the foregoing, disclosure in this MD&A as well as statements regarding the Company’s objectives, plans and goals, including future operating results and economic performance may make reference to or involve forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Certain of the forward-looking statements and other information contained herein concerning the cannabis industry, its medical, adult-use and hemp-based CBD markets, and the general expectations of the Company concerning the industry and the Company’s business and operations are based on estimates prepared by the Company using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which the Company believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Company is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry involves risks and uncertainties that are subject to change based on various factors.

 

A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. You should not place undue reliance on forward-looking statements contained in this MD&A. Such forward-looking statements are made as of the date of this MD&A. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

 

This MD&A contains future-oriented financial information and financial outlook information (collectively, “FOFI”) about the Company’s prospective results of operations, production and production efficiency, commercialization, revenue and cash on hand, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth in

 

2

 

the above paragraph. FOFI contained in this MD&A was approved by management as of the date of this MD&A and was provided for the purpose of providing further information about the Company’s future business operations. The Company disclaims any intention or obligation to update or revise any FOFI contained in this MD&A, whether as a result of new information, future events or otherwise, unless required pursuant to applicable law. Readers are cautioned that the FOFI contained in this MD&A should not be used for purposes other than for which it is disclosed herein.

 

UPDATE ON COVID-19 PANDEMIC

 

COVID-19 was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

 

The Company has taken responsible measures with respect to the COVID-19 pandemic to maximize the safety of staff working at its facilities. This includes reorganizing physical layouts, adjusting schedules to improve social distancing, implementing health screening measures for employees and applying rigorous standards for personal protective equipment. Certain markets, such as Massachusetts and Nevada experienced a greater impact on sales due to prolonged business interruption and reduced foot traffic in certain locations. Other markets, such as Florida and New York have not been significantly impacted by COVID-19 and in some cases, stores in those markets have generated increased sales. The Company’s facilities continue to be operational and the Company is working closely with the authorities to ensure it is following or exceeding the stated guidelines related to COVID-19. For instance, the Company has modified store operations in certain locations, with an increased focus on direct-to-consumer delivery and enabling a curbside pickup option for its customers. See “Risk Factors — Risks Related to the COVID-19 Pandemic” for additional details.

 

OVERVIEW OF THE COMPANY

 

Curaleaf operates as a life science company developing full scale cannabis operations, with core competencies in cultivation, manufacturing, dispensing and medical cannabis research.  Curaleaf is a leading vertically integrated medical and wellness cannabis operator in the United States. Headquartered in Wakefield, Massachusetts, the Company had as of June 30, 2020 operations in 18 states including operating 57 dispensaries, 15 cultivation sites and 24 processing sites with a focus on highly populated, limited license states, including New York, New Jersey, Florida and Massachusetts. The Company leverages its extensive research and development capabilities to distribute cannabis products with the highest standard for safety, effectiveness, consistent quality and customer care. The Company is committed to leading the industry in education and advancement through research and advocacy. The Company markets to medical and adult-use customers through brand strategies intended to build trust and loyalty.

 

The Company was one of the first professionally managed companies to enter the U.S. legal cannabis industry, which is one of the fastest growing industries in the U.S. and still in its early stages of maturity. Formed in 2010, the Company began as a medical device company, and was the first to develop and patent a medical cannabis vaporizing unit capable of delivering single metered doses of cannabis medicine to patients.

 

Currently, the Company is a diversified holding company dedicated to delivering market-leading products and services while building trusted national brands within the legal cannabis industry. Through its team of physicians, pharmacists, medical experts and industry innovators, the Company has developed a portfolio of branded cannabis-based therapeutic offerings in multiple formats and a strategic network of branded retail dispensaries. Exemplifying its commitment to quality, Curaleaf’s Florida operations were the first in the cannabis industry to receive the Safe Quality Food certification under the Global Food Safety Initiative, setting a new standard of excellence.

 

Curaleaf Holdings, Inc., formerly known as Lead Ventures, Inc. (“LVI”), was incorporated under the laws of British Columbia, Canada on November 13, 2014. The Company changed its name to “Curaleaf Holdings, Inc.” as part of the business combination between Curaleaf, Inc. and Lead Ventures, Inc., which closed on October 25, 2018.

 

3

 

The Company’s Subordinated Voting Shares (“SVS”) are listed for trading on the CSE under the ticker symbol “CURA” and on the OTCQX® Best Market under the ticker symbol “CURLF”.

 

In order to achieve its strategy, the Company has completed several acquisitions since its formation.  The Company expects to continue to actively pursue other acquisitions, dispositions and investment opportunities in the future.

 

The unaudited condensed interim consolidated financial statements of the Company include the financial statements of the Company and its direct subsidiaries, indirect subsidiaries that are not wholly owned by the Company and other entities consolidated other than on the basis of ownership:

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

State of

 

2020

 

2019

 

Business name

 

operations

 

ownership%

 

ownership%

 

CLF AZ, Inc.

 

AZ

 

100

%

100

%

CLF NY, Inc.

 

NY

 

100

%

100

%

Curaleaf CA, Inc.

 

CA

 

100

%

100

%

Curaleaf KY, Inc.

 

KY

 

100

%

100

%

Curaleaf Massachusetts, Inc.

 

MA

 

100

%

100

%

Curaleaf MD, LLC

 

MD

 

100

%

100

%

Curaleaf OGT, Inc.

 

OH

 

100

%

100

%

Curaleaf PA, LLC

 

PA

 

100

%

100

%

Curaleaf, Inc.

 

MA

 

100

%

100

%

Focused Investment Partners, LLC

 

MA

 

100

%

100

%

CLF Maine, Inc.

 

ME

 

100

%

100

%

PalliaTech RI, LLC

 

RI

 

100

%

100

%

PalliaTech CT, Inc.

 

CT

 

100

%

100

%

PalliaTech OR, LLC (formerly Groen)

 

OR

 

100

%

100

%

PalliaTech Florida, Inc.

 

FL

 

100

%

100

%

PalliaTech Florida, LLC

 

FL

 

88.6

%

77.2

%

Curaleaf Florida, LLC

 

FL

 

92

%

70

%

CLF MD Processing, LLC

 

MD

 

100

%

100

%

PT Nevada, Inc.

 

NV

 

100

%

100

%

CLF Sapphire Holdings, Inc.

 

OR

 

100

%

—

 

HMS Health LLC

 

MD

 

—

 

—

 

HMS Processing LLC

 

MD

 

—

 

—

 

HMS Sales LLC

 

MD

 

—

 

—

 

MI Health LLC

 

MD

 

—

 

—

 

Town Center Wellness, LLC

 

MD

 

—

 

—

 

 

Company Performance and Objectives

 

The Company is currently active in numerous cannabis programs across the U.S. In the U.S., 37 states have legalized the use of medical cannabis for patients with certain qualifying conditions. In most of these medical states, a regulatory framework is in place whereby patients can receive a recommendation from a certified physician to purchase medical cannabis in approved dispensaries. In the U.S., 11 states have legalized cannabis for adult-use. In many of these adult-use states, customers can purchase cannabis from approved dispensaries by providing identification proving the customer is 21 years of age or older.

 

A key aspect of the Company’s business plan is achieving “vertical integration” in each cannabis program in which it operates. Vertical integration means controlling the entire supply chain: from cultivating cannabis, to processing the cannabis into oils and other formulated products and, ultimately, selling the end-product to customers and/or patients.

 

The Company plans to continue growth of its operations via expansion in three dimensions: acquiring licenses in limited-license markets, increasing presence in current markets, and increasing exposure in mass markets. While the Company’s

 

4

goal is to have its own licensed operations in each of its markets, we may enter a market through production and/or marketing arrangements where such arrangements provide opportunity for accelerated roll-out.

 

Limited-License Markets. The majority of the markets in which the Company currently operates have formal regulations limiting the number of cannabis licenses that will be awarded, thus forming high barriers to entry, limited market participants, and protected market share in these limited-license states. Curaleaf intends to apply for new licenses or acquire businesses within limited-license markets in which the Company does not currently operate.

 

Increasing Presence in Current Markets. The Company plans to grow within its current markets by pursuing opportunities for vertical integration, acquiring additional dispensary licenses and/or entering into production and marketing relationships to further build its retail brand and expand its retail footprint, and intends to apply for new licenses as available and determined by each state.

 

Increasing Exposure in Mass Markets. The Company has established itself as a market leader and has become a dominant player due to its competitive pricing, experienced management, strong capitalization and strong brand goodwill. In mass markets exhibiting a free market dynamic typical of other industries, such as California, Nevada, and Oregon, the Company intends to leverage its extensive experience to grow cannabis and/or process more efficiently and reliably, while taking advantage of wholesale and retail opportunities and establishing a strong brand.

 

The Company expects acquisition related costs, marketing and selling expenses, and capital expenditures to increase as it expands its presence in current markets and expands into new markets.

 

Operating Segments

 

The Company currently operates in two segments:

 

Cannabis Operations

 

The Company engages in the production and sale of cannabis via retail and wholesale channels. As of June 30, 2020, the Company operated 57 retail dispensaries in 10 states, 15 cultivation sites in 11 states and 24 processing sites in 15 states which sell cannabis through wholesale channels.

 

Non-Cannabis Operations

 

The Company provides professional services including cultivation, processing and retail know-how and back office administration, intellectual property licensing, real estate leasing services and lending facilities to medical and adult-use cannabis licensees under management service agreements. The Company provides services to three integrated medical cannabis licenses; one license in New Jersey, one license in Massachusetts, and one license in Maine. The financial results of these entities are not included into the consolidated financial statements of the Company because the Company does not have control over these operations in accordance with IFRS 10. The Company recognized management fee income for services rendered to these operations.

 

Principal Products and Services

 

The Company, through its subsidiaries and affiliates, operates in highly regulated markets that require expertise in cultivation, manufacturing, retail operations and logistics. The Company leverages its extensive research and development capabilities to assist its state-licensed entities to manufacture cannabis products in multiple formats with the highest standards for safety, effectiveness, consistent quality and customer care. Currently, the Company’s subsidiary entities cultivate, process, market and/or dispense a wide-range of permitted cannabis products across its operating markets, including: flower, pre-rolls and flower pods, dry-herb vaporizer cartridges, concentrates for vaporizing such as pre-filled vaporizer cartridges and disposable vaporizer pens, concentrates for dabbing such as distillate droppers, mints, topical balms and lotions, tinctures, lozenges, capsules and edibles.

 

5

 

In most of the Company’s markets, its licensed entities are vertically integrated, meaning the entire supply chain is managed from seed to sale, cultivating cannabis flower, processing the flower into manufactured products, and selling the product to registered patients and/or legal adult-use consumers. In most states in which its licensed entities operate, products are sold under the Curaleaf and Select brands, and in Curaleaf dispensaries. The Company is committed to be the industry’s leading resource in education and advancement through research and advocacy, and is focused on developing a trusted, national brand.

 

The Company believes that it has developed the in-house resources to ensure its state-licensed entities maintain best practices in cannabis cultivation, processing and dispensing and are dedicated to staying at the forefront of technology in the industry. The Company continues to invest strategically in infrastructure to ensure its state-licensed entities maintain low overall production costs and adaptability in their product mix to ensure timely response to the rapidly developing cannabis market. The Company intends to use its footprint to share know-how and technology throughout its operation.

 

·            Cultivation: The Company’s cultivation facilities have grown over 180 strains of cannabis, which have been tested and characterized for yield, cannabinoid content and other properties. Additionally, the Company’s state-licensed entities cultivate cannabis using a variety of methods, including greenhouse, outdoor, indoor, and two-tier indoor cultivation.

 

·            Extraction and Purification: The Company’s extraction facilities use proprietary processes for cannabis and terpene purification. The Company believes its manufacturers are industry leaders in achieving the desired composition of cannabinoids and terpenes in finished products through processing and purification, thereby enabling timely response to trends in medical product formulation.

 

·            Formulation and Quality Control: The Company’s processing facilities produce across the range of solid, liquid and inhaled products utilizing its vast in-house knowledge and experience. By combining expert cultivation, manufacturing and analytical laboratory operations, our processors have developed a complete in-house quality assurance and quality control program. In-house quality assurance enables rapid product development cycles and production of higher quality consumer products.

 

Research and Development

 

The Company’s research and development activities primarily focus on optimizing cultivation and manufacturing techniques and developing new manufactured products.

 

The Company collects data on the number of grams of cannabis flower produced per watt of light, per square foot, and per plant. This allows cultivators to gain insights on optimal cultivation methods by adjusting certain variables such as cannabis strain variety and plant spacing. The Company’s cultivators also institute pest management techniques in facilities and document successes and failures, sharing this knowledge across its cultivation operations.

 

The Company also researches new methods of cannabis extraction for the development of new manufactured products. The Company’s research and development activities operate on an on-going basis as the Company continually seeks to improve current methods for our licensed businesses.

 

Production and Sales

 

The Company currently has 22 cultivation facilities totaling approximately 1.6 million square feet. Current annual production capacity in these facilities is estimated at over 150,000 pounds of dry flower. The Company currently has 30 processing facilities. Each new manufacturing site is built to ISO 8 clean room specifications and employs advanced nutritional and pharmaceutical formulations technology for optimal delivery methods.  Each production facility (cultivation and processing) primarily focuses on the commercialization of cannabis products, with a strict focus on quality control and patient care. Illustrating this commitment, our Florida operations were the first in the cannabis industry to receive the Safe Quality Food certification under the Global Food Safety Initiative. See Risks Related to the COVID-19 Pandemic in the ‘Risk Factors’ section of the Company’s MD&A.

 

6

 

The Company’s primary method of sales currently occur in its licensed dispensaries across the U.S. Also, the Company’s dispensaries also offer home delivery services across the States of Arizona, Florida, Nevada and New York, in compliance with all state regulations. In Florida, our licensee also offers drive-thru service at two of its dispensaries. In multiple States, our dispensaries offer customers the option to order online to pick-up in store. Curaleaf aims to expand dispensaries e-commerce operations and delivery operations, where permitted, to offer convenient access for its customers and meet the demands of an evolving retail landscape.

 

Intellectual Property

 

The Company has developed multiple proprietary product formats, technologies and processes to ensure the high quality of licensees’ premium cannabis products. These proprietary technologies and processes include its cultivation and extraction techniques, product formulations and cannabis delivery and monitoring systems.

 

The Company has spent considerable time and resources to establish a premium and recognizable brand amongst consumers and retailers in the cannabis industry. The Company has three federally registered patents with the United States Patent and Trademark Office (“USPTO”). Additionally, as of June 30, 2020, 19 trademarks were currently filed and pending approval with the USPTO, and we are actively pursuing the filing of additional trademarks at both the federal and state levels.

 

In addition to its patent and pending trademarks, Curaleaf owned, as of June 30, 2020, 254 website domains, including www.curaleaf.com, as well as numerous social media accounts across all major platforms.

 

Competitive Conditions

 

The cannabis industry is highly competitive.  We compete on quality, price, brand recognition and distribution strength.  Our cannabis products compete with other products for consumer purchases, as well as shelf space in retail dispensaries and wholesaler attention.  We compete with numerous cannabis producing companies with various business models, from small family-owned operations to multi-billion-dollar market capitalized multi-state operators.  In certain markets, such as California, there are also a number of illegally operating dispensaries, which serve as competition as well.  The Company maintains an operational footprint of primarily limited-license States, with natural high barriers to entry and limited market participants. The majority of the markets in which our licensees operate have formal regulations limiting the number of cannabis licenses that will be awarded, helping to ensure the Company’s market share is protected in these limited-market States under the current regulatory framework.

 

As cannabis remains federally illegal in the U.S., businesses seeking to enter the industry face additional challenges when accessing capital. Presently, there exists no reliable source of U.S. bank lending or equity capital available to fund operations in the U.S. cannabis sector. Nevertheless, the Company is well-capitalized, and believes that the level of expertise and significant capital investment required to operate its large-scale, vertically integrated cannabis operations make it difficult and inefficient for smaller cannabis operators to enter this sector of the market. Due to the rapid growth of the cannabis industry in the U.S., we acknowledge that the Company will face competition from other companies accessing equity capital markets in the sector.

 

The States We Operate In, Their Legal Framework and How It Affects Our Business

 

Arizona Operations

 

Arizona’s medical cannabis program was introduced in November 2010 when voters approved the Proposition 203 “Arizona Medical Marijuana Initiative” ballot measure that legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

 

The Arizona Department of Health Services has allocated 130 medical cannabis dispensary certificates. Each dispensary certificate permits the license holder to open one dispensary and gives the license holder the option to open one cultivation facility and/or one processing facility. Cultivation and processing sites can be located anywhere in the state and are not restricted based on where the license holder’s dispensary is located. Dispensaries are limited to their district for their first

 

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three years of operation. All dispensaries must be not-for-profit. Extracted oils, edibles, and flower products are permitted. Wholesale transactions are permitted. In June 2018, an Arizona appeals court ruled that extracted cannabis oils such as vaporizer cartridges were illegal. In January 2019, the Arizona Supreme Court agreed to review the legality of medical marijuana extracts such as vaporizer cartridges. In May 2019, the Arizona Supreme Court unanimously ruled that medical marijuana extracts are legal, meaning dispensaries can continue to sell oil-based formulations such as vaporizer cartridges.

 

In April 2018, the Company acquired Swell Farmacy, a holding company that operated four licensed dispensaries through Master Service Agreements (“MSAs”). The dispensaries are located in the Phoenix area, which boasts 162,000 of the state’s 245,000 patients. In May 2018, the Company entered into a 10-year lease to operate a 100,000 square foot indoor cultivation facility, 50,000 square feet of which is already constructed for cultivation on a 68-acre plot of land with the prospect of further expansion, including greenhouse and outdoor grows. In November 2018, the Company acquired Midtown Roots, a holding company operating the only dispensary located in downtown Phoenix. In May 2019, the Company acquired the exclusive rights to operate the Emerald dispensary, the only dispensary in the town of Gilbert, which is located in the Metro Phoenix area. In June 2019, the Company announced two separate acquisitions, Glendale Greenhouse, a vertically integrated cannabis business operating a cultivation and processing facility, as well as a dispensary, and Phytotherapeutics Management Services, LLC, which operates a dispensary that was subsequently moved to a newly developed, flagship dispensary located at 2175 N 83rd Avenue, which has close access to the I-10 Freeway. The Company may acquire additional dispensaries in this market, which is one of the biggest programs in the U.S. In February 2020, the Company closed the acquisition of Cura Partners, Inc., owners of the Select brand. Select is a leading wholesale brand in Arizona, among other states.

 

In July 2020, the Company acquired GR Companies, Inc. (“Grassroots”), a cannabis multi-state operator, with one dispensary license in Arizona. See “Proposed Transactions” section of this MD&A.

 

Arkansas Operations

 

Arkansas’s medical cannabis program was introduced in November 2016 when 53% of voters approved Issue 6, the “Medical Marijuana Amendment,” which legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in May 2019.

 

The Arkansas Department of Health (“AR DOH”) is the regulatory agency that oversees the program. The market is divided into two main classes of licenses: cultivation/processing and dispensary. The AR DOH has awarded 5 cultivation/processing licenses and 32 dispensary licenses. As of June 30, 2020, there were 24 operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in Arkansas, among other states, which manages one dispensary license in Arkansas. See “Proposed Transactions” section of this MD&A.

 

California Operations

 

California’s medical cannabis program was introduced in 1996 when voters passed the Proposition 215 ballot initiative, that allowed patients with a valid doctor’s recommendation to possess and cultivate cannabis for personal medical use. In October 2015, Governor Brown signed the Medical Cannabis Regulation and Safety Act into law, which provided a regulatory framework around the longstanding, though unregulated, medical cannabis industry. In November 2016, voters approved Proposition 64, the Adult Use of Marijuana Act, with 57% of the vote, legalizing adult-use cannabis in the state. Dispensaries began selling to customers 21 years of age and older in January 2018.

 

The Medicinal and Recreational Cannabis Regulation and Safety Act creates the general framework for the regulation of commercial medicinal and adult-use cannabis in California. Three state agencies are responsible for licensing and regulating each aspect of the industry: the Bureau of Cannabis Control regulates retailers, distributors, testing labs, microbusinesses, and temporary cannabis events; the Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, regulates manufacturers of cannabis-infused edibles for both medical and nonmedical use; and the California Department of Food and Agriculture regulates cultivators of medicinal and adult-use cannabis.

 

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Permitted products include oil-based formulations, edibles, and flower. Wholesaling and home delivery are permitted.

 

In December 2018, the Company received a manufacturing, distribution, and mobile dispensing license from the City of Davis, California. In January 2019, the Company received its California state licenses for manufacturing and distribution. In April 2019, the Company acquired Eureka, a Monterey County, California, based operator with a cultivation facility in the Salinas Valley. In February 2020, the Company acquired Cura Partners, Inc., owners of the Select brand. Select is a leading wholesale brand in California, among other states.

 

Colorado Operations

 

Colorado’s medical cannabis program was introduced in November 2000, when 54% of voters approved “Amendment 20”. Colorado became the first state in the nation to legalize adult-use cannabis when 55% of voters approved “Amendment 64” in November 2012. The first adult-use dispensaries opened in January 2014.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

 

In February 2020, the Company signed a definitive agreement to acquire Blue Kudu, a Colorado-licensed processor and producer cannabis edibles, operating an 8,400 square feet facility in Denver, Colorado. The transaction was completed on July 10, 2020.  See “Proposed Transactions” section of this MD&A.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., owners of the Select brand, a wholesale brand in Colorado, among other states.

 

Connecticut Operations

 

Connecticut’s medical cannabis program was introduced in May 2012 when the General Assembly passed legislation PA 12-55 ‘An Act Concerning the Palliative Use of Marijuana.’ The program is divided into two classes of licenses: producers and dispensaries. Producers cultivate and process medicinal cannabis and wholesale to dispensaries. Dispensaries sell cannabis directly to patients and must have a pharmacist on staff.

 

The program launched with six dispensary licensees and four producer licensees. The first dispensaries sold to patients in September 2014.

 

In January 2016, the Connecticut Department of Consumer Protection (“CTDCP”), the agency that oversees the program, approved three additional dispensary licenses. In December 2018, the CTDCP issued nine additional dispensary licenses, bringing the total to 18 licensed dispensaries in the state. As of June 2020, 17 of these dispensaries were operational.

 

Extracted oils and flower products are permitted. Edibles are permitted with the exception of confectionaries.

 

Curaleaf holds one of the four approved producer licenses in the state. The Company began wholesaling in October 2014 and, as of June 30, 2020, sells to all 17 of the state’s operational dispensaries. Curaleaf previously operated a 40,000 square foot facility but has recently moved to a new 55,000 square foot facility which includes cultivation space, extraction, purification facilities, and a commercial kitchen for the production of edibles. In April 2020, the Company acquired Arrow Alternative Care, the largest dispensary chain in the state with three dispensaries operating across the metro areas of Stamford, Milford and Hartford. In June 2020, the Company launched the first sales of the Select brand in Connecticut.

 

In July 2020, the Company acquired Grassroots., a cannabis multi-state operator in Connecticut, among other states, with one dispensary license in Connecticut. See “Proposed Transactions” section of this MD&A.

 

Florida Operations

 

Florida’s medical cannabis program was introduced in June 2014 when the Florida Legislature passed the Compassionate Medical Cannabis Act of 2014 (“CMCA”). The CMCA permitted low-THC cannabis oils to be dispensed and purchased

 

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by patients suffering from cancer and epilepsy. Under this program, six organizations called Medical Marijuana Treatment Centers (“MMTCs”) were licensed to dispense low-THC cannabis to patients.

 

In November 2016, Florida voters approved the Amendment 2 “Expand Medical Marijuana” ballot measure with 71% of the vote. This constitutional amendment expanded the program by legalizing cannabis oils for individuals with specific debilitating diseases or conditions, including chronic pain, as determined by a licensed state physician. In June 2018, Governor Scott signed Senate Bill 8-A: “Medical Use of Marijuana,” which outlined how patients can qualify and receive medical cannabis under the state’s constitutional amendment. The bill also increased the number of available MMTC licenses to 17, with 14 of these licenses issued as of year-end 2018. In April 2019, as the result of a joint settlement, the state awarded additional licenses, and as of the date hereof a total of 22 licenses have been granted in the state.

 

A single MMTC license allows for the cultivation, processing, and dispensing of cannabis products. Originally, each MMTC was permitted to open up to 25 dispensaries statewide. With each additional 100,000 qualified patients, the dispensary cap increased by five for each MMTC. However, the limit on dispensaries per MMTC no longer applies, as it expired on April 1, 2020.

 

Permitted products originally included oil-based formulations. Rules permitting the sale of edible medical cannabis products are under development. In May 2018, a district court judge ruled that Florida’s medical cannabis constitutional amendment requires the Department of Health to permit sales of smokable medical cannabis flower. Smokable flower was introduced as a permitted form factor in March 2019, shortly after Governor DeSantis signed a bill that repealed the state’s ban on smokable medical cannabis flower.

 

Each MMTC is required to cultivate and process all medical cannabis products they dispense. Wholesale transactions are permitted on a case by case basis to alleviate shortages. Home delivery is permitted.

 

The Company holds one of the original six vertically-integrated medical cannabis licenses issued in the state. In October 2016, Curaleaf’s Florida business became the third license holder to begin sales to patients. As of June 30, 2020, Curaleaf operated a 24,000 square foot indoor growing facility, a 278,000 square foot greenhouse growing facility, and 28 dispensaries, with plans to open additional dispensaries in 2020.

 

Illinois Operations

 

In 2013, the Illinois General Assembly passed the Compassionate Use of Medical Cannabis Pilot Program Act (410 ILCS 130), Public Act 98-0122 (the “Illinois Act”), which was signed into law by the Governor on August 1, 2013 and went into effect on January 1, 2014. The Illinois Act allows an individual who is diagnosed with a debilitating condition to register with the state to obtain cannabis for medical use. The program currently allows 60 Dispensing Organizations (each, a “DO”) and 22 cultivation centers state-wide; all separately registered in a non-vertically integrated model. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower. Overall, the program is administered by the Illinois Department of Public Health (the “IDPH”), the Illinois Department of Financial and Professional Regulations (the “IDFPR”) is the regulatory agency overseeing the medical marijuana program for Dos and the Illinois Department of Agriculture (the “IDOA”) is the regulatory agency overseeing the medical marijuana program for cultivation centers.

 

In June 2019, Illinois governor signed legislation legalizing marijuana for recreational use. The Cannabis Regulation and Tax Act, legalizing and regulating marijuana for recreational use, went into effect on June 25, 2019, however recreational sales of marijuana began in the state on January 1, 2020. The adult use program allowed existing medical marijuana license holders to apply for Early Approval Adult Use Dispensing Organization (“EAAUDO”) licenses to be able to sell adult use product at existing medical marijuana dispensaries (known as “co-located” or “same site” dispensaries) on January 1, 2020, and to have the privilege of opening a secondary adult use only retail site for every medical marijuana dispensary location the DO already had in its portfolio. All EAAUDO license holders were also required to commit to the state’s groundbreaking Social Equity program either through a financial contribution, grant agreement, donation, incubation program, or sponsorship program. IDFPR will also be issuing an additional 75 Adult Use Dispensing Organization (“AUDO”) licenses in 2020. IDFPR is also expected to issue an additional 110 AUDO licenses by December 21, 2021. No single person or entity can have direct or indirect financial interest in more than 10 adult use dispensary licenses.

 

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In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in Illinois, among other states. Grassroots owns a cultivation and processing facility in Illinois and its acquisition of five dispensary licenses from associated individuals is currently pending regulatory approval. Five dispensaries currently operate under these licenses, which permit up to ten dispensaries to be operated.   See “Proposed Transactions” section of this MD&A.

 

Maine Operations

 

Maine’s medical cannabis program was introduced in November 1999 when voters approved Question 2, the ‘Maine Medical Marijuana for Specific Illnesses Initiative,’ with 61% of the vote. This program permitted qualified patients, or their designated caregiver, to grow and consume cannabis, but did not create a licensing structure whereby entities could apply to cultivate, process, and/or dispense cannabis.

 

In November 2009, Maine voters expanded the medical program by passing Question 5, the ‘Maine Medical Marijuana Initiative, with 59% of the vote, which established a licensing structure in which eight vertically-integrated, not-for-profit dispensaries could sell cannabis directly to registered patients. The first dispensary opened to patients in October 2010. Medical dispensaries are vertically-integrated and cultivate, process, and dispense products to patients. Wholesaling is only permitted in emergency situations. Extracted oils, edibles, and flower products are permitted.

 

In November 2016, Maine voters approved Question 1, the ‘Maine Marijuana Legalization Measure,’ which legalized adult-use cannabis sales in the state. In May 2018, the Maine legislature overrode a veto by Governor LePage to formally approve the cannabis legalization legislation that lays the groundwork for the adult-use market. The law passed in May 2018 establishes separate classes of licenses (dispensaries, cultivators, processors) with no caps in place on the number of licenses that can be issued. In February 2019, the Department of Administrative and Financial Services, which oversees both the medical and adult-use programs, selected a consultant to write the rules and regulations for the adult-use program. Draft rules were released in April 2019; finalized and signed by the Governor in June 2019. The Office of Marijuana Policy is now accepting and processing adult-use applications and have issued numerous conditional adult-use licenses to date. The Office of Marijuana Policy originally expected the first adult-use stores to open in June 2020; however, the current timetable is unclear due to impacts of the COVID-19 pandemic.

 

Each medical licensee is permitted to open one dispensary. In July 2018, the Maine legislature overrode yet another veto by Governor LePage to formally approve a sweeping medical marijuana reform bill that regulates caregiver operations and approves the issuance of six new dispensary licenses. The bill also removes the requirement that medical cannabis license holders operate as not-for-profit entities, paving the way for the conversion of existing license holders to for-profit corporations. This bill went into effect in December 2018, though rules around the issuance of new medical licenses are still under development. As of June 30, 2020, there were still eight vertically-integrated medical dispensaries in Maine.

 

The Company provides management services to two of the eight integrated medical cannabis licensees in the state: Maine Organic Therapy (“MEOT”) and Remedy Compassion Center (“RCC”). MEOT operates a 30,000 square foot indoor grow facility and a dispensary. RCC operates a small grow facility and a dispensary and obtains most of its product wholesale via MEOT. MEOT and RCC have both been serving patients since 2010. The Company plans to open adult-use locations in Maine and is actively applying for adult-use licenses and identifying adult-use locations so it can participate in the adult-use market once sales begin.

 

Maryland Operations

 

Maryland’s medical cannabis program was introduced in May 2013 when then Governor O’Malley signed House Bill 1101 into law. The Maryland Medical Cannabis Commission issued preliminary licenses to 102 dispensaries, 15 cultivators, and 15 processors in 2016. The first dispensaries opened to patients in December 2018.

 

The market is divided into three classes of licenses: dispensaries, cultivators, and processors. Wholesaling occurs between cultivators and processors, cultivators and dispensaries, and processors and dispensaries. Originally, no one company could directly control multiple licenses of the same class, but this restriction was changed in May 2019 when Governor Hogan signed a bill that permitted a single company to own up to four dispensaries. Dispensary locations are tied to the Senate

 

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District in which they were awarded, with the exception of dispensary licenses that were awarded to applicants who also were awarded a cultivation license. These dispensaries can be located at the discretion of the license holder. Permitted products include oil-based formulations and flower. Edibles are prohibited.

 

In April 2018, the Maryland House and Senate approved a bill, which was later signed by Governor Hogan, that expanded the license pool, adding seven additional cultivation licenses, for a total of 22, and 13 additional processing licenses, for a total of 28. As of June 30, 2020, there were approximately 92 operational dispensaries, 17 operational cultivators, and 18 operational processors.

 

Curaleaf received one of 102 preliminary medical cannabis dispensary licenses in December 2016. The Company launched its dispensary in the first quarter of 2018, shortly after the market launched in December 2017. The Company also acquired a company holding a cannabis processing license, which began operations in the first quarter of 2018.

 

In January 2019, the Company completed a convertible debt financing with the owners of the HMS/MI Businesses which consist of one cultivation, one processing, and two dispensaries. Concurrently with completion of the convertible debt financing, the Company entered into supply, offtake, branding and services agreements with the HMS/MI Businesses.  Conversion of the debt into the equity of the HMS/MI Businesses is expected, subject to regulatory approval, when the licenses become subject to transfer under current law, starting in August 2020. The Company also announced in January 2019 that it had entered into an option purchase agreement to purchase all of Town Center Wellness, LLC, subject to regulatory approval, which operates the Elevate Takoma dispensary located in Takoma Park, Maryland, that was subsequently rebranded as Curaleaf Takoma.

 

In May 2019, Maryland passed legislation allowing for the sale of edibles in the market, and the Company has constructed a processing and manufacturing facility at Curaleaf’s Frederick facility in anticipation of the implementation of these rules.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., owners of the Select brand. Select is a leading wholesale brand in Maryland, among other states.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator. In connection with the acquisition, the Company acquired the right to purchase entities affiliated with certain former Grassroots shareholders that own a cultivation and processing facility and a dispensary in Maryland and that manage another dispensary in Maryland. See “Proposed Transactions” section of this MD&A.

 

Massachusetts Operations

 

Massachusetts’ medical cannabis program was established by “An Act for the Humanitarian Medical Use of Marijuana” in November 2012 when voters passed Ballot Question 3 “Massachusetts Medical Marijuana Initiative” with 63% of the vote. The first dispensary opened in June 2015.

 

In November 2016, Massachusetts voters legalized adult-use cannabis by passing ballot Question 4 — Legalize Marijuana with 54% of the vote. In March 2018, the Cannabis Control Commission (the “CCC”), the regulatory body, was set up to regulate the adult-use market and approve the rules that will govern the industry. In July 2019, Governor Baker signed legislation that laid the groundwork for the adult-use market. While the CCC originally aimed to officially launch adult-use sales on July 1, 2018, issues such as a lack of licensed testing labs and disagreements with city and town officials over agreements with cannabis businesses slowed the rollout, and the first adult-use sale did not take place until November 2018.

 

The Department of Health originally oversaw the medical cannabis program, but in December 2018 transferred oversight to the CCC, a change which was mandated by the aforementioned July 2018 legislation. Each medical licensee must be vertically-integrated and may have up to three medical dispensaries. Licensed medical dispensaries are given priority in adult-use licensing. As of June 30, 2020, there were 47 adult-use dispensaries permitted to open across the state; however, as a result of the COVID-19 pandemic, Governor Charlie Baker ordered the closure of all adult-use dispensaries, effective from March 24, 2020 through May 25, 2020. All adult-use sales were prohibited through the duration of the order, though

 

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medical dispensaries were permitted to remain open for medical sales. As of the date hereof, all adult-use dispensaries are permitted to resume adult-use sales.

 

The CCC oversees the adult-use cannabis program. Adult-use cultivators are grouped into 11 tiers of production—ranging from up to 5,000 square feet to no larger than 100,000 square feet — and regulators will bump a licensee down to a lower tier if that licensee has not shown an ability to sell at least 70% of what it produces. Medical dispensaries that wish to add the ability to sell cannabis products to non-patients will be required to reserve 35% of their inventory or the six-month average of their medical cannabis sales for medical cannabis patients. In order to achieve an adult-use license, a prospective licensee must first sign a “Host Community Agreement” with the town in which it wishes to locate. Roughly two-thirds of municipalities in the state have a ban or a moratorium in place that prohibits cannabis businesses from operating within their jurisdiction.

 

In both the medical and adult-use markets, extracted oils, edibles, and flower products are permitted. Wholesaling is also permitted.

 

The Company holds an integrated medical cannabis license and operates a 54,000 square foot indoor grow and three dispensaries, one licensed for medical and adult-use sales in Oxford, one licensed for medical sales in Hanover, one licensed for adult-use sales in Provincetown, and one licensed for adult-use sales in Ware. In February 2019, Curaleaf exercised an option to purchase an adjacent unit in its cultivation facility, thereby expanding its cultivation facility to 104,000 square feet.

 

On August 9, 2019, the Company announced that it had been granted approval by the CCC for the Company’s reverse takeover transaction, which the CCC deemed a change of ownership and control.

 

The Company expects to acquire Alternative Therapies Group (“ATG”), another licensed medical cannabis operator in Massachusetts, which operates a 53,000 square foot cultivation facility and processing facility. See “Proposed Transactions” section of this MD&A.

 

Michigan Operations

 

Michigan’s medical cannabis program was introduced in November 2008, when 63% of voters approved the “Michigan Compassionate Care Initiative.” In November 2018, 56% of voters approved the “Michigan Regulation and Taxation of Marijuana Act,” which legalized adult-use cannabis in the state. The first adult-use dispensaries opened in December 2019.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., owners of the Select brand, a wholesale brand in Michigan, among other states.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in Michigan, among other states. See “Proposed Transactions” section of this MD&A.

 

Missouri

 

Missouri’s medical cannabis program was introduced in November 2018 when 66% of voters approved Amendment 2, the “Medical Marijuana and Veteran Healthcare Services Initiative,” which legalized medical cannabis for patients with certain qualifying conditions. The first dispensary is expected to open by the end of 2020.

 

The Missouri Department of Health and Senior Services (“MO DHSS”) is the regulatory agency that oversees the program. The market is divided into three main classes of licenses: cultivation, processing, and dispensary. The MO DHSS has awarded 60 cultivation, 86 processing, and 192 dispensary licenses. As of June 30, 2020, there were no operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

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In July 2020, the Company closed the acquisition of Grassroots, which holds five dispensary licenses and one processing license in Missouri.

 

Nevada Operations

 

Nevada’s medical cannabis program was introduced in June 2013 when the legislature passed SB374, legalizing the medicinal use of cannabis for certified patients. The first dispensaries opened to patients in August 2015.

 

In November 2016, Nevada voters approved Question 2 with 55% of the vote, legalizing adult-use cannabis in the state. Adult-use sales launched under an “early-start” program on July 1, 2018. This market is divided into five classes of licenses: dispensaries, cultivators, distribution, product manufacturing, and testing. Licenses are tied to the locality in which they were awarded. In December 2018, the Nevada Department of Taxation, the agency which oversees the cannabis program, issued 61 new dispensary licenses. As of June 30, 2020, there were approximately 68 operational dispensaries, 134 operational cultivators, and 96 operational processors. Effective March 20, 2020, Governor Steve Sisolak ordered the closure of all dispensary storefronts, meaning that, through the duration of the order, all cannabis sales in Nevada were made via delivery. On May 1, 2020, Governor Sisolak permitted cannabis dispensaries to offer curbside pickup, in addition to delivery. On May 9, 2020, Governor Sisolak permitted the resumption of in-store sales, with certain health and safety limits, as part of the governor’s plan to reopen the state.

 

Extracted oils, edibles, and flower products are permitted. Wholesaling is permitted.

 

In 2018, the Company agreed to acquire a 10,000 square foot licensed indoor cannabis cultivation and a licensed dispensary, operating in Las Vegas, Nevada. Both businesses are licensed for both medical and adult-use sales. Each of these transactions are subject to regulatory approval. In March 2019, the Company agreed to acquire Acres, a company with a 269,000 square foot operating cultivation facility and further expansion as needed on 37 acres of land in Amargosa Valley, Nevada, a large dispensary located in the Las Vegas, Nevada, and a dispensary license for a future site in Ely, Nevada. The transaction consisted of two stages, with the Company closing the acquisition of the cultivation and processing assets of Acres in October 2019. The Acres businesses financial results were consolidated as of November 2019 in conjunction with completion of the cultivation and processing component of the transaction.  The acquisition of the Acres dispensaries and processing facility closed in January 2020.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., owners of the Select brand. Select is a leading wholesale brand in Nevada, among other states.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in Nevada, among other states, which holds rights in seven dispensary licenses in Nevada. See “Proposed Transactions” section of this MD&A.

 

New Jersey Operations

 

New Jersey’s medical cannabis program was introduced in January 2010 when then Governor Corzine signed the New Jersey Compassionate Use Medical Marijuana Act (“NJCUMMA”) into law. The NJCUMMA legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in December 2012.

 

In March 2018, under the direction of Governor Murphy, who campaigned on a platform that included cannabis legalization, the New Jersey Department of Health (“NJDOH”) issued the Executive Order 6 Report, which immediately expanded the medical cannabis program in numerous ways, including adding chronic pain and anxiety as qualifying conditions, doubling the monthly product limit, and permitting current licensees to open satellite dispensaries. In August 2018, the NJDOH began accepting applications for the licensing of six additional Alternative Treatment Centers (“ATCs”). These licenses were awarded in December 2018, and as of June 30, 2020, there were nine operational ATCs dispensing medical cannabis to patients from a total of 11 dispensaries. In December 2019, the New Jersey state legislature passed a bill to add an initiative to the November 2020 ballot that will allow voters to decide whether to legalize the sale of adult-use cannabis in the state.

 

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A single ATC license allows for the cultivation, processing, and dispensing of medical cannabis products. Originally, each ATC was permitted to open one dispensary, located within the same facility in which the ATC cultivated and processed. With the Executive Order 6 Report, each ATC can now open two additional satellite dispensaries within their NJDOH- designated region for a total of three dispensaries each, as well as satellite production facilities. Wholesaling is permitted with approval from the NJDOH.

 

Extracted oils and flower products are permitted. The Executive Order 6 Report recommended adding edibles as a permitted product, with rulemaking for edibles the responsibility of the state legislature. As of the date hereof, the legislature has yet to develop rules for edibles, and a timeline for edibles rulemaking is yet to be determined.

 

Originally, ATCs were required to be non-profit entities. However, pursuant to the “Jake Honig Compassionate Use Medical Cannabis Act”, signed into law on July 2, 2019, ATCs are permitted to sell or transfer their license to a for-profit entity, pending NJDOH approval.

 

In July 2020, the Company announced the completion of the acquisition of the assets of Curaleaf NJ, Inc., a vertically integrated medical cannabis non-profit corporation that holds one of the original six medical licenses in New Jersey. The Company now owns 100% of the Curaleaf NJ, Inc. (“Curaleaf NJ”) ATC operations, assets and licenses in New Jersey, for which it previously provided management services. Curaleaf NJ owns a property that includes 46,890 square feet of cultivation space. Curaleaf NJ also owns an adjacent 12,000 square feet facility, of which 4,000 square feet is utilized for dispensary operations, with the remainder used for ancillary operations such as packaging and storage. Since the start of sales in October 2015, Curaleaf NJ has established itself as a market leader, dispensing 36% of all product sold in the state in 2018. In accordance with the recently adopted regulations described above, Curaleaf NJ plans to open two more dispensary locations in the state, as well as an additional cultivation facility, for which the Company has secured a 128,500 square foot facility in the township of Winslow, NJ.

 

New York Operations

 

New York’s medical cannabis program was introduced in July 2014 when Governor Cuomo signed the Compassionate Care Act, which legalized cannabis oils for patients with certain qualifying conditions. Under this program, five organizations, called Registered Organizations (each, an “RO”) were licensed to dispense cannabis oil to patients, with the first sale to a patient completed in January 2016.

 

In December 2016, the New York State Department of Health (“NYSDOH”) added chronic pain as a qualifying condition. In the month-and-a-half following the addition of chronic pain, the number of registered patients increased by 18%. In August 2018, the NYSDOH granted licenses to five additional ROs. A single RO license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four dispensaries in NYSDOH- designated regions throughout the state. Each RO is permitted to open one cultivation/processing facility. Each RO is required to cultivate and process all medical cannabis products they dispense; however, wholesale transactions are permitted with approval from the state.

 

In November 2018, Governor Cuomo signed a bill to add post-traumatic stress disorder as a qualifying condition. In July 2018, the NYSDOH added opioid replacement as a qualifying condition, meaning any condition for which an opioid could be prescribed is now a qualifying condition for medical cannabis. In August 2018, Governor Cuomo, prompted by a NYSDOH study which concluded the “positive effects” of cannabis legalization “outweigh the potential negative impacts,” appointed a group to draft a bill for regulating legal adult-use cannabis sales in New York. During the 2019 state legislative session, Governor Cuomo proposed adult-use legalization in his budget proposal, though the legislature failed to include legalization in the final budget, and also failed to pass a legalization bill during the session. In January 2020, Governor Cuomo again included cannabis legalization in his budget proposal, a proposal which, as of the date hereof, is still being considered by the legislature.

 

Permitted products include oil-based formulations (vaporizer cartridges, tinctures, capsules), and ground-flower sold in tamper-proof vessels. Home delivery is also permitted.

 

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The Company was awarded a vertically-integrated license in May 2018 with the right to open 4 dispensaries. The Company is only one of 10 license holders in the state. The Company currently operates 4 dispensaries located in Newburgh, Plattsburgh, Queens, and Nassau County, as well as a 72,000 square feet cultivation and manufacturing facility in Ravena, New York.

 

North Dakota Operations

 

North Dakota’s medical cannabis program was introduced in November 2016 when 64% of voters approved Measure 5, “Medical Marijuana,” which legalized medical cannabis for patients with certain qualifying conditions. The first sales were made to patients in March 2019.

 

The North Dakota Department of Health (“ND DOH”) is the regulatory agency that oversees the program. The market is divided into two main classes of licenses: cultivation/processing and dispensary. The ND DOH has awarded 2 cultivation/processing licenses and 8 dispensary licenses. As of June 30, 2020, all 8 dispensaries were operational. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in North Dakota, among other states, with four dispensary licenses and one cultivation and processing facility in North Dakota. See “Proposed Transactions” section of this MD&A.

 

Ohio Operations

 

Ohio’s medical cannabis program was introduced in June 2016 when House Bill 523 was signed into law. In November 2018, the state issued 12 ‘Level I’ cultivation licenses, which permit up to 25,000 square feet of canopy, and 12 ‘Level II’ cultivation licenses, which permit up to 3,000 square feet of canopy. In June 2018, the state issued 56 dispensary licenses. In August 2018, the state issued seven processing licenses, and over the next few months issued seven additional processing licenses. In January 2019, the state issued an additional 26 processing licenses for a total of 40 across the state. Due to controversies around the scoring of cultivation applications and ensuing appeals, there are currently 57 dispensary licenses, 19 ‘Level I’ cultivation licenses, 13 ‘Level II’ cultivation licenses, and 43 processing licenses in the state. The first dispensaries opened in January 2019.

 

The Ohio Department of Commerce is responsible for regulating cultivators and processors. The Ohio State Board of Pharmacy is responsible for regulating dispensaries and the patient and caregiver registry. The Ohio State Medical Board is responsible for certifying physicians and reviewing petitions to add qualifying medical conditions.

 

Extracted oils, edibles, and non-combustible flower products are permitted.

 

The Company was awarded a preliminary processing license in Amelia, Ohio in early 2019. The Company has relinquished this license due to the dissolution of the Village of Amelia and the absorption of the licensed processor site into a town that does not permit cannabis activities. In May 2019, the Company entered into an agreement granting it an option to acquire the licenses and operations of Ohio Grown Therapies (“OGT”), a holder of one of the 19 Level 1 cultivation licenses and a processing license. OGT completed construction of a 32,000 square foot production facility in Johnstown, Ohio, and received its final licenses on July 1, 2020. The transfer of the OGT licenses and operations to the Company is pending regulatory approval.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in Ohio, among other states, with rights to acquire one cultivation facility, one processing facility and two dispensaries in Ohio. The Company will own and operate the dispensaries upon receipt of regulatory approval.  Due to license ownership limitations in Ohio, the Company is planning to dispose of its rights in the cultivation and processing facility. See “Proposed Transactions” section of this MD&A.

 

16

 

Oklahoma Operations

 

Oklahoma’s medical cannabis program was introduced in June 2018, when 57% of voters approved Oklahoma State Question 788, the “Medical Marijuana Legalization Initiative.” The first medical dispensaries opened in October 2018.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. Extracted oils, edibles, and flower products are permitted.

 

In May 2020, the Company announced the expansion of the Select brand to the Oklahoma medical cannabis market.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in Oklahoma, among other states. See “Proposed Transactions” section of this MD&A.

 

Oregon Operations

 

Oregon’s medical cannabis program was introduced in November 1998 when voters approved Measure 67, the Oregon Medical Marijuana Act.

 

In November 2014, voters approved Measure 91, the ‘Oregon Legalized Marijuana Initiative’, which legalized adult-use cannabis in the state. In October 2015, the first adult-use dispensaries opened.

 

The market is divided into six classes of licenses: dispensaries, cultivators, wholesalers, processors, laboratories and research. To date the market has had a more relaxed licensing structure which has led to an oversupply of product. In 2018, Oregon cultivators grew three times the amount of cannabis that could legally be consumed in the market. In response to a report highlighting the issues in Oregon, the U.S. Attorney for Oregon, Billy Williams, said, “The recent HIDTA Insight Report on marijuana production, distribution, and consumption in Oregon confirms what we already know—it is out of control.”

 

In June 2018, the Oregon Liquor Control Commission, which regulates the adult-use program, announced they would not process any new adult-use license applications in order to work through the backlog that has developed as the result of 3,432 applications being submitted as of May 2018. In July 2018, the Oregon Health Authority, which regulates the medical program, conceded in a report that it has not provided effective oversight of growers and others in the industry.

 

Extracted oils, edibles, and flower products are permitted.

 

The Company holds a producer license and a processing license for adult-use and operates a 20,000 square foot outdoor cultivation center and an adjacent 17,000 square foot indoor facility for indoor growing and large-scale CO2 extraction and manufacturing. In July 2018, the Company acquired a dispensary, which launched operations in Portland, Oregon at the end of 2018.

 

In February 2020, the Company closed the acquisition of Cura Partners, Inc., owners of the Select brand. Select is a leading wholesale brand in Oregon, among other states.

 

Pennsylvania Operations

 

Pennsylvania’s medical cannabis program was introduced in April 2016 when Governor Wolf signed into law SB 3 “Medical Marijuana Act”, which legalized medical cannabis oils for patients with certain qualifying conditions. The law also called for a class of licenses, called “clinical registrant” licenses, whereby accredited medical institutions in the state can partner with medical cannabis companies to conduct research. There are two primary classes of licenses: licenses to grow/process cannabis products, and licenses to dispense cannabis products to patients. Grower/processors wholesale products to dispensaries. In June 2018, the Pennsylvania Department of Health (“PADOH”) awarded licenses to 12 grower/processors as well as 27 dispensary licensees. Each dispensary license permits the licensee to open up to three dispensaries in the region in which the license was awarded. In February 2018, the first dispensaries opened to patients.

 

17

 

In May 2018, a Commonwealth Court judge halted the PADOH’s planned “clinical registrant” program whereby up to eight Pennsylvania medical schools would partner with licensed medical cannabis organizations to conduct research. In June 2018, Governor Wolf signed a bill to re-implement the clinical registrant program. Regulations for this program are in development. In June 2018, the PADOH awarded licenses to an additional 13 grower/processors. In December 2018, the PADOH awarded an additional 23 dispensary licenses.

 

Originally, only oil-based formulations were permitted. In April 2018, the PADOH approved flower as a permitted medical cannabis product offering, and dispensaries began to offer flower to patients in August 2018.

 

The Company has partnered with an accredited medical school to obtain a “Clinical Registrant” license in Pennsylvania. In February 2020, the Company’s Pennsylvania subsidiary was approved as a Clinical Registrant in Pennsylvania by the Commonwealth’s Department of Health, Office of Medical Marijuana. Under this designation, the Pennsylvania subsidiary is entitled to open a cultivation and processing facility and up to six dispensaries, under the Commonwealth’s medical marijuana research program. Pennsylvania’s medical cannabis program has created this class of license to promote cooperation between industry and academia in the research of medical benefits of cannabis. To support its presence in Pennsylvania, the Pennsylvania subsidiary has leased a 49,200 square foot production facility in King of Prussia, Pennsylvania.

 

In July 2020, the Company acquired Grassroots, a cannabis multi-state operator in Pennsylvania, among other states. Grassroots’ subsidiaries hold cultivation, processing and three dispensary licenses, and also have rights to acquire a fourth dispensary license. Each dispensary license entitles the license holder to operate up to three dispensaries.  The Pennsylvania subsidiaries currently have an operating cultivation and processing facility and nine dispensaries. See “Proposed Transactions” section of this MD&A.

 

Utah Operations

 

Utah’s medical cannabis program was introduced in November 2018, when 53% of voters approved “Proposition 2, Medical Marijuana Initiative”. In December 2018, the state legislature passed a bill that legalized medical cannabis but implemented several changes to the Proposition 2 ballot erasure, including removing home cultivation rights for patients and adding a requirement that dispensaries employ pharmacists.

 

The market is divided into three main classes of licenses: cultivation, processing, and retail. In July 2019, the Utah Department of Agriculture and Food (“UDAF”) awarded eight cultivation licenses. In January 2020, the Utah Department of Health awarded 14 retail licenses. The UDAF has been issuing processing licenses on a rolling basis throughout early 2020. All medical cannabis form factors are permitted, as is wholesaling. The market is expected to begin sales in 2020.

 

In January 2020, the Company was awarded a medical cannabis retail license from the Utah Department of Health. The Company plans to open a dispensary in Lindon, Utah for medical patients by the end of 2020, pending final approvals from regulators. Also, in January 2020, the Company announced that it received preliminary approval for a processing license by the UDAF. The notice grants Curaleaf permission to begin the build out of its processing facility, and the Company expects to complete the build out by the end of 2020.

 

Vermont Operations

 

Vermont’s medical cannabis program was introduced in May 2004 when Senate Bill 76 was approved by the Vermont House and Senate and became law without the governor’s signature. This legislation permitted state-qualified patients to grow and possess marijuana for medicinal purposes. This legislation was expanded in June 2007 when Senate Bill 7 was approved by the Vermont House and Senate and again became law without the governor’s signature. Senate Bill 7 expanded the list of qualifying conditions and increased the number of plants that patients may legally cultivate, among other things. In June 2011, the Vermont legislate passed Senate Bill 17, the “Vermont Marijuana for Symptom Relief Act,” which, among other things, authorized a state-regulated system for medical cannabis sales through licensed dispensaries. The first sales were made to patients in 2012. In January 2018, Vermont became the first state to legalize cannabis via the legislature when Governor Scott signed H. 511, which legalized possession of up to one ounce of cannabis, among other

 

18

 

things, though did not create a state-regulated system for adult-use sales. As of June 30, 2020, there is still no system for commercial adult-use sales in Vermont.

 

The Vermont Department of Public Safety (“VT DPS”) is the regulatory agency that oversees the medical program. The market consists of five vertically integrated licenses. Each license permits the owner to operate a grow/processing facility and up to two dispensaries. As of June 30, 2020, there were 7 operational dispensaries. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower.

 

In July 2020, the Company acquired Grassroots, which operates two dispensaries and one grow and processing facility in Vermont. See “Proposed Transactions” section of this MD&A.

 

Components of Our Results of Operations

 

Revenue

 

Retail and Wholesale Revenue

 

The Company derives its retail and wholesale revenue in states in which it is licensed to cultivate, process, distribute, and sell cannabis. The Company sells directly to customers at its retail stores and sells wholesale to other dispensaries or processors not owned by the Company. For the three and six months ended June 30, 2020, our wholesale revenue represented approximately 33% and 31% of total retail and wholesale revenue, respectively. For the three and six months ended June 30, 2019, wholesale revenue represented approximately 17% and 17% of total retail and wholesale revenue, respectively.

 

Management Fee Income

 

Management fee (or revenue from Non-Cannabis Operations) income represents revenue related to management services agreements pursuant to which the Company provides professional services, including cultivation, processing and retail know-how and back office administration, intellectual property licensing, real estate leasing services and lending facilities to medical and adult-use cannabis licensees. The Company recognizes revenue from these consulting services on a straight-line basis over the term of third-party consulting agreements as services are provided.

 

Cost of Goods Sold

 

Cost of goods sold are derived from costs related to the cultivation and production of cannabis and from wholesale purchases made from other licensed producers operating within state markets in which the Company operates. Cost of goods sold includes the costs directly attributable to the production of inventory and includes amounts incurred in the cultivation and manufacture of finished goods, such as flower, concentrates, and edibles.  Direct and indirect costs include, but are not limited to material, labor, supplies, depreciation expense on production equipment, utilities, and facilities costs associated with cultivation.

 

Change in Fair Value of Biological Assets

 

Biological assets are considered plants that are actively growing. In accordance with IAS 41 — Agriculture, biological assets are recorded at fair value at the time of harvest, less costs to sell, which are transferred to inventory. The amount transferred becomes the carrying value of the inventory on a go-forward basis. When the inventory is sold, the fair value is relieved from inventory and the amount is expensed to the cost of goods sold. The cost of goods sold also includes the product cost and costs related to products acquired from other suppliers.

 

Gross Profit

 

Gross profit is revenue less cost of goods sold. During the three and six months ended June 30, 2020 and 2019 the Company did not operate at full capacity and the Company expects gross profit to increase over the foreseeable future as it continues to invest in its current operations.

 

19

 

Operating Expenses

 

Salaries and benefits include non-cost-of-goods sold labor for each retail location and corporate labor expenses. The Company expects salaries and benefits to increase proportionally with store openings in the foreseeable future, but these expenses are expected to level off as operations are scaled in each market.

 

Sales and marketing expenses consist of selling costs to support the Company’s retail stores including branding and marketing expenses and product development expenses. The Company expects selling costs to increase proportionally with each retail store opening.

 

Professional fees consist of accounting, legal and acquisition related expenses. The Company expects these fees to increase as expansion continues and subsequent acquisitions occur.

 

Other general and administrative expenses consist of travel, general office supplies and monthly services, facilities and occupancy, insurance, director fees and new business development expenses.

 

Other Income (Expense)

 

Interest income

 

The Company has notes receivable with various parties that earn interest income at rates ranging from 8% to 18%.

 

Interest expense

 

Interest expense consists of interest on outstanding borrowings under various promissory note agreements as well as amortization of debt discounts.

 

Other income (expense)

 

Other income consists of gains related to the modification of debt discount, offset by the gains and losses on the disposal of assets.

 

Income taxes

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable.

 

As the Company operates in the legal cannabis industry, the Company is subject to Section 280E of the Internal Revenue Code (“IRC”) which prohibits businesses engaged in the trafficking of controlled substances (within the meaning of Schedule I and II of the CSA) from deducting normal business expenses associated with the sale of cannabis, such as payroll and rent, from gross income (revenue less cost of goods sold). Section 280E, therefore, has a significant impact on the retail side of cannabis, but a lesser impact on cultivation and manufacturing operations.  Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (“IRS”) has subsequently applied Section 280E to state-legal cannabis businesses. The effective tax rate on a cannabis business depends on how large its ratio of non-deductible expenses is to its total revenues.  In the states that the Company operates in that align their tax codes with Section 280E, it is also unable to deduct normal business expenses for state tax purposes. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable and a higher effective tax rate than most industries.  Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses for state tax purposes.

 

20

 

SELECTED FINANCIAL INFORMATION

 

The Company reports results of operations of its affiliates from the date that control commences. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and is exposed to the variable returns from its activities. The following selected financial information includes only the results of operations after the Company established control of its affiliates. Accordingly, the information included below may not be representative of the results of operations if such affiliates had included their results of operations for the entire reporting period.

 

The following table sets forth selected financial information for the periods indicated that was derived from the Company’s condensed interim consolidated financial statements and the respective accompanying notes prepared in accordance with IFRS. The selected consolidated financial information set out below may not be indicative of Curaleaf’s future performance:

 

 

 

Three months ended

 

 

 

June 30, 

 

March 31,

 

June 30, 

 

 

 

2020

 

2020

 

2019

 

 

 

 

 

 

 

 

 

Revenue

 

$

117,480

 

$

96,496

 

$

48,489

 

Cost of goods sold

 

56,844

 

44,013

 

22,469

 

Gross profit before impact of biological assets

 

60,636

 

52,483

 

26,020

 

Net change in fair value of biological assets

 

20,591

 

15,556

 

1,392

 

Gross profit

 

81,227

 

68,039

 

27,412

 

Operating expenses

 

59,536

 

63,046

 

39,713

 

Other income (expense), net

 

(9,993

)

(7,196

)

(3,942

)

Net loss and comprehensive loss

 

(1,836

)

(15,452

)

(24,435

)

Loss per share attributable to Curaleaf Holdings, Inc. - basic and diluted

 

$

(0.00

)

$

(0.03

)

$

(0.05

)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

2019

 

 

 

 

 

 

 

Revenue

 

$

213,977

 

$

83,740

 

Cost of goods sold

 

100,856

 

39,614

 

Gross profit before impact of biological assets

 

113,121

 

44,126

 

Net change in fair value of biological assets

 

36,148

 

3,638

 

Gross profit

 

149,269

 

47,764

 

Operating expenses

 

122,582

 

69,659

 

Other income (expense), net

 

(17,191

)

(6,616

)

Net loss and comprehensive loss

 

(17,287

)

(35,264

)

Loss per share attributable to Curaleaf Holdings, Inc. - basic and diluted

 

$

(0.03

)

$

(0.08

)

 

 

 

June 30, 

 

December 31,

 

June 30, 

 

 

 

2020

 

2019

 

2019

 

Total assets

 

$

1,332,578

 

$

736,926

 

$

655,060

 

Long-term debt

 

273,559

 

87,953

 

84,928

 

 

21

 

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019 AND THE THREE MONTHS ENDED MARCH 31, 2020

 

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 and the three months ended March 31, 2020:

 

 

 

Three months ended

 

 

 

Q2 ‘20

 

Q1 ‘20

 

Q2 ‘20 vs

 

Q2 ‘20 vs

 

Q2 ‘19

 

Q2 ‘20 vs

 

Q2 ‘20 vs

 

 

 

June 30, 

 

March 31,

 

Q1 ‘20

 

Q1 ‘20

 

June 30, 

 

Q2 ‘19

 

Q2 ‘19

 

 

 

2020

 

2020

 

$ Change

 

% Change

 

2019

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail revenue

 

$

66,275

 

$

56,633

 

$

9,642

 

17

%

$

31,341

 

$

34,934

 

111

%

Wholesale revenue

 

33,304

 

20,422

 

12,882

 

63

%

6,385

 

26,919

 

422

%

Management fee income

 

17,901

 

19,441

 

(1,540

)

(8

)%

10,763

 

7,138

 

66

%

Total revenues

 

117,480

 

96,496

 

20,984

 

22

%

48,489

 

68,991

 

142

%

Cost of goods sold

 

56,844

 

44,013

 

12,831

 

29

%

22,469

 

34,375

 

153

%

Gross profit before impact of biological assets

 

60,636

 

52,483

 

8,153

 

16

%

26,020

 

34,616

 

133

%

Realized fair value amounts included in inventory sold

 

(22,423

)

(21,191

)

(1,232

)

6

%

(15,478

)

(6,945

)

45

%

Unrealized fair value gain on growth of biological assets

 

43,014

 

36,747

 

6,267

 

17

%

16,870

 

26,144

 

155

%

Gross profit

 

81,227

 

68,039

 

13,188

 

19

%

27,412

 

53,815

 

196

%

Operating expenses

 

59,536

 

63,046

 

(3,510

)

(6

)%

39,713

 

19,823

 

50

%

Income (Loss) from operations

 

21,691

 

4,993

 

16,698

 

334

%

(12,301

)

33,992

 

276

%

Other income (expense), net

 

(9,993

)

(7,196

)

(2,797

)

39

%

(3,942

)

(6,051

)

154

%

Income (Loss) before provision for income taxes

 

11,698

 

(2,203

)

13,901

 

631

%

(16,243

)

27,941

 

172

%

Income tax expense

 

(13,534

)

(13,249

)

(285

)

2

%

(8,192

)

(5,342

)

65

%

Net loss

 

(1,836

)

(15,452

)

13,616

 

(88

)%

(24,435

)

22,599

 

(92

)%

Less: Net loss attributable to redeemable non-controlling interest

 

193

 

(363

)

556

 

153

%

106

 

87

 

82

%

Net loss attributable to Curaleaf, Holdings Inc.

 

$

(2,029

)

$

(15,089

)

$

13,060

 

87

%

$

(24,541

)

$

22,512

 

92

%

 

 

 

Three months ended

 

 

 

Q2 ‘20

 

Q1 ‘20

 

Q2 ‘19

 

 

 

June 30, 

 

March 31,

 

June 30, 

 

 

 

2020

 

2020

 

2019

 

 

 

 

 

 

 

 

 

Retail revenue

 

$

66,275

 

$

56,633

 

$

31,341

 

Wholesale revenue

 

33,304

 

20,422

 

6,385

 

Management fee income

 

17,901

 

19,441

 

10,763

 

Total revenues

 

117,480

 

96,496

 

48,489

 

Cost of goods sold

 

56,844

 

44,013

 

22,469

 

Gross profit before impact of biological assets

 

60,636

 

52,483

 

26,020

 

Realized fair value amounts included in inventory sold

 

(22,423

)

(21,191

)

(15,478

)

Unrealized fair value gain on growth of biological assets

 

43,014

 

36,747

 

16,870

 

Gross profit

 

$

81,227

 

$

68,039

 

$

27,412

 

Gross margin

 

69

%

71

%

57

%

Gross profit before impact of management fee income and biological assets

 

$

42,735

 

$

33,042

 

$

15,257

 

Gross margin before impact of management fee income and biological assets

 

43

%

43

%

40

%

Gross profit before impact of management fee income and after net gain on biological assets

 

$

63,326

 

$

48,598

 

$

16,649

 

Gross margin before impact of management fee income and after net gain on biological assets

 

64

%

63

%

44

%

 

Comparison of the three months ended June 30, 2020 and June 30, 2019

 

Revenue

 

Revenue for the three months ended June 30, 2020 was $117,480, an increase of $68,991 or 142% compared to revenue of $48,489 for the three months ended June 30, 2019. The increase in revenue was driven by an increase of $61,853 in retail and wholesale revenue and a $7,138 increase in management fee income.

 

Retail and wholesale revenue for the three months ended June 30, 2020 was $99,579, an increase of $61,991 or 164% compared to $37,726 for the three months ended June 30, 2019. The increase in retail and wholesale revenue was primarily

 

22

 

due to organic growth and new store openings in in Florida, Massachusetts and New York, impact of the Select acquisition, as well as acquisition related growth in Arizona due to addition of three dispensaries in 2019, Nevada due to the addition of Blackjack and Acres, Maryland due to the addition of the HMS/MI businesses and Elevate Takoma. The growth in retail and wholesale revenue was partially offset by the negative impact of COVID-19 in Massachusetts and Nevada.

 

The increase in management fee income of $7,138 is primarily due to the growth of Curaleaf NJ, the managed not-for-profit in New Jersey and management fees generated from ATG.

 

Cost of Goods Sold & Change in Fair Value of Biological Assets

 

Cost of goods sold, excluding any adjustments to the fair value of biological assets, for the three months ended June 30, 2020 was $56,844, an increase of $34,375 or 153% compared to cost of goods sold for the three months ended June 30, 2019. The increase was primarily due to cultivation and processing costs directly related to the increase in cannabis revenue for the three months ended June 30, 2020, which were the result of opening new dispensaries and acquisitions made in 2019; and due to incremental costs resulting from the acquisition of Select in early 2020.

 

Biological asset transformation for the three months ended June 30, 2020 was $20,591, an increase of $19,199 or 1,379% compared to $1,392 for the three months ended June 30, 2019. The increase was primarily due to the increased cultivation operating capacity resulting from expansion projects in New York, Florida and Massachusetts, increased cultivation operating capacity resulting from acquisitions in Nevada and Maryland and the corresponding increase in the unrealized fair value gain on the growth of biological assets offset by the amounts realized and included in cost of goods sold.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2020 was $81,227, or 69%, compared to $27,412, or 57%, for the three months ended June 30, 2019.

 

Gross profit before management fee income and biological asset adjustments for the three months ended June 30, 2020 was $42,735 compared to $15,257 for the three months ended June 30, 2019. Gross margin for the three months ended June 30, 2020 was 43% compared to 40% for the three months ended June 30, 2019.  The increase was primarily due to the continued improvement in the operating capacity and efficiency of the Company’s cultivation and processing facilities.

 

Gross profit before management fee income and after net gains on biological assets for the three months ended June 30, 2020 was $63,326 or 64%, compared to $16,649, or 44%, for the three months ended June 30, 2019. The increase was primarily due to higher operating capacity of the Company’s cultivation and processing facilities and the net gain on biological assets described above.

 

23

 

Total Operating Expenses

 

 

 

Three months ended

 

Q2 ‘20 vs

 

Q2 ‘20 vs

 

 

 

June 30, 

 

March 31,

 

June 30, 

 

Q1 ‘20

 

Q2 ‘19

 

 

 

2020

 

2020

 

2019

 

$Change

 

$Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

$

22,131

 

$

18,769

 

$

12,637

 

$

3,362

 

$

9,494

 

Sales and marketing

 

5,010

 

3,608

 

2,433

 

1,402

 

2,577

 

Rent and occupancy

 

1,338

 

823

 

341

 

515

 

997

 

Travel

 

930

 

1,663

 

1,739

 

(733

)

(809

)

Professional fees

 

4,862

 

14,086

 

7,554

 

(9,224

)

(2,692

)

Office supplies and services

 

3,802

 

2,785

 

1,933

 

1,017

 

1,869

 

Other

 

2,393

 

4,123

 

1,392

 

(1,730

)

1,001

 

Total selling, general, and administrative

 

40,466

 

45,857

 

28,029

 

(5,391

)

12,437

 

Depreciation and amortization

 

14,237

 

12,688

 

7,195

 

1,549

 

7,042

 

Share-based compensation

 

4,833

 

4,501

 

4,489

 

332

 

344

 

Total operating expenses

 

$

59,536

 

$

63,046

 

$

39,713

 

$

(3,510

)

$

19,823

 

 

Total operating expenses represented 51% and 82% of total revenue for the three months ended June 30, 2020 and 2019, respectively.  Total for the three months ended June 30, 2020 were $59,536, an increase of $19,823 or 50%, compared to $39,713 for the three months ended June 30, 2019. The increase in operating expenses was primarily attributable to an increase in salaries and benefits, professional fees, as well as sales and marketing and other selling, general and administrative expenses as the Company expanded the number of retail dispensaries from 45 in June 30, 2019 to 57 in June 30, 2020, increased the level of support staff necessary to run the expanded operations; impact from inclusion of Select operating expenses after completion of the acquisition in the three months ended June 30, 2020; as well as incurred $4,192 and $5,278 in one-time expenses during the three months ended June 30, 2020 and 2019, respectively, largely associated with acquisitions and business development activities.

 

Salaries and benefits totaled $22,131 for the three months ended June 30, 2020, compared to $12,637 for the three months ended June 30, 2019, which represents an increase of $9,494. The increase was primarily due to an increase in Corporate headcount, inclusion of Select headcount expenses after completion of the acquisition in the three months ended June 30, 2020, as well as headcount from expanding operations in markets from both organic growth in Florida, Massachusetts, New York, and both organic and acquired growth in Arizona.

 

Sales and marketing expenses totaled $5,010 for the three months ended June 30, 2020, compared to $2,433 for the three months ended June 30, 2019, which represents an increase of $2,577. The increase was due primarily inclusion of Select marketing cost associated with branding, lobbying, and public relations after completion of the acquisition in the three months ended June 30, 2020, as well as increased sales and marketing expenses in Florida and Arizona.

 

Occupancy expenses totaled $1,338 for the three months ended June 30, 2020, compared $341 for the three months ended June 30, 2019. The increase of $997 was primarily attributable to the cost associated with an increased number of facilities and dispensaries.

 

Travel expenses totaled $930 for the three months ended June 30, 2020, compared to $1,739 for the three months ended June 30, 2019, which represents a decrease of $809. The decrease was primarily the result of travel restrictions during COVID-19 pandemic.

 

Professional fees totaled $4,862 for the three months ended June 30, 2020 compared to $7,554 for the three months ended June 30, 2019, which represents a decrease of $2,692. This decrease was primarily due to decreased legal and accounting fees associated with the completion of the Select acquisition and integration, costs associated with the Grassroots acquisition and the settlement of litigation cases.

 

24

 

Other selling, general and administrative expenses were $6,195 for the three months ended June 30, 2020 compared to $3,325 for the three months June 30, 2019, which represents an increase of $2,870. This increase was primarily due to increased expenditures in office supplies and monthly services such as computer and software, telecommunication, and bank and license fees at the corporate level, Florida, New York, and Arizona, increases in development of new products and business development activities and inclusion of Select expenses after completion of the acquisition in the three months ended June 30, 2020.

 

Depreciation and amortization was $14,237 for the three months ended June 30, 2020, compared to $7,195 for the three months ended June 30, 2019, which represents an increase of $7,042. The increase was primarily due to the Company’s completion of capital projects in Connecticut, New York, Florida, Massachusetts and Oregon as well as the inclusion of Select after the completion of the acquisition in February 2020, and inclusions of prior year acquisitions in Arizona, Nevada and Maryland.

 

Share-based compensation was $4,833 for the three months ended June 30, 2020, compared to $4,489 for the three months ended June 30, 2019 which represents an increase of $344. The increase was primarily due to the share-based cost associated with options and restricted stock units granted in 2019 and 2020.

 

Other Income (Expense)

 

 

 

Three Months Ended

 

Q2 ‘20 vs

 

Q2 ‘20 vs

 

 

 

June 30, 

 

March 31, 

 

June 30, 

 

Q1 ‘20

 

Q2 ‘19

 

 

 

2020

 

2020

 

2019

 

$Change

 

$Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

3,573

 

$

2,846

 

$

2,436

 

$

727

 

$

1,137

 

Interest expense

 

(11,357

)

(10,492

)

(3,983

)

(865

)

(7,374

)

Interest expense related to lease liabilities

 

(2,132

)

(2,158

)

(1,348

)

26

 

(784

)

Other income (expense)

 

(77

)

2,608

 

(1,047

)

(2,685

)

970

 

Total other income (expense), net

 

$

(9,993

)

$

(7,196

)

$

(3,942

)

$

(2,797

)

$

(6,051

)

 

Total other income, net for the three months ended June 30, 2020 was a loss of $9,993 compared to loss of $3,942 for the three months ended June 30, 2019. The increase was primarily due to additional interest expense related to the $300 million Senior Secured Term Loan Facility executed by the Company in January 2020.

 

Interest income for the three months ended June 30, 2020 and 2019 was $3,573 and $2,436, respectively. The increase of $1,137 was primarily due to an increase in notes receivable outstanding balances during the quarter.

 

Interest expense for the three months ended June 30, 2020 and 2019 was $11,357 and $3,983 respectively. The increase of $7,374 was primarily due to the $300 million Senior Secured Term Loan Facility entered into by the Company in January 2020.

 

Interest expense related to lease liabilities for the three months ended June 30, 2020 and 2019 was $2,132 and $1,348, respectively. The increase relates to additional leases in the second half of 2019 and the first half of 2020.

 

Provision for Income Taxes

 

The Company recorded total income tax expense of $13,534 for the three months ended June 30, 2020 compared to $8,192 for the three months ended June 30, 2019. The increase was the result of increased deferred tax expense associated with the increase in biological assets.

 

Net Loss

 

Net loss for the three months ended June 30, 2020 and 2019 was $1,836 compared to a net loss of $24,435, which represents a decrease of $22,599, or 92%. The increase was primarily driven by the increase in gross profit, partially offset by increased operating expenses as described above.

 

25

 

Comparison of the three months ended June 30, 2020 and March 31, 2020

 

Revenue

 

Revenue for the three months ended June 30, 2020 was $117,480, an increase of $20,984 or 22% compared to revenue of $96,496 for the three months ended March 31, 2020. The increase in revenue was driven by an increase of $22,524 in retail and wholesale revenue and partially offset by a decrease of $1,540 in management fee income. Increases in revenue was primarily due to the impact of new acquisitions, partially offset by the decreases resulting from the impact of COVID-19 limitations in Massachusetts and Nevada.

 

Retail and wholesale revenue for the three months ended June 30, 2020 was $99,579, an increase of $22,524 or 29% compared to $77,055 for the three months ended March 31, 2020. The increase in retail and wholesale revenue was primarily due to the acquisitions of Select and Arrow, organic growth in Florida, Arizona, and Maryland. The growth in retail and wholesale revenue was partially offset by the negative impact of COVID-19 in Massachusetts and Nevada.

 

The decrease in management fee revenue was primarily due to decreases in management fee income of $1,540. The decrease is primarily due to the decrease in revenue at ATG as a result of COVID-19 on adult use market in Massachusetts and decrease in extractions at Curaleaf NJ during the three months ended June 30, 2020.

 

Cost of Goods Sold & Change in Fair Value of Biological Assets

 

Cost of goods sold, excluding any adjustments to the fair value of biological assets, for the three months ended June 30, 2020 was $56,844, an increase of $12,831 or 29% compared to cost of goods sold for the three months ended March 31, 2020. The increase was primarily due to cultivation and processing costs directly related to the increase in cannabis revenue for the three months ended June 30, 2020, which were the result of opening new dispensaries and completion of the acquisitions in the first half of 2020.

 

Biological asset transformation for the three months ended June 30, 2020 was $20,591 compared to $15,556 for the three months ended March 31, 2020. The increase was primarily due to expanded cultivation capacity in New York,  Massachusetts and Connecticut, and the corresponding increase in the unrealized fair value gain on the growth of biological assets offset by the amounts realized and included in cost of goods sold.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2020 was $81,227, compared to $68,039 for three months ended March 31, 2020. Gross margin for the three months ended June 30, 2020 was 69% compared to 71% for the three months ended March 31, 2020.

 

Gross profit before management fee income and biological asset adjustments for the three months ended June 30, 2020 was $42,735 compared to $33,042 for the three months ended March 31, 2020. Gross margin for the three months ended June 30, 2020 was 43% compared to 43% for the three months ended March 31, 2020. The gross profit increase was primarily due to the reasons discussed above under retail and wholesale revenue.

 

Gross profit before management fee income and after net gains on biological assets for the three months ended June 30, 2020 was $63,326, compared to $48,598 for the three months ended March 31, 2020. Gross margin for the three months ended June 30, 2020 was 64% compared to 63% for the three months ended March 31, 2020. The increase is primarily due to higher operating capacity of the Company’s cultivation and processing facilities and the net gain on biological assets described above.

 

26

 

Total Operating Expenses

 

Comparison of the three months ended June 30, 2020 and March 31, 2020

 

Total operating expenses for the three months ended June 30, 2020 were $59,536, a decrease of $3,510 or 6%, compared to $63,046 for the three months ended March 31, 2020, which represents 51% and 65% of total revenue for the three months ended June 30, 2020 and March 31, 2020, respectively. The decrease in total operating expenses was primarily attributable to decrease in professional fees due to the completion of the Select acquisition. This decrease is partially offset by the increase in salaries and benefits, as well as sales and marketing expenses as the Company expanded the number of retail dispensaries from 54 in March 31, 2020 to 57 in June 30, 2020 and increased the level of support staff necessary to run the expanded operations. The Company incurred $4,192 and $11,162 in one-time expenses during the three months ended June 30, 2020 and March 31, 2020, respectively, largely associated with acquisition and business development activities.

 

Salaries and benefits totaled $22,131 for the three months ended June 30, 2020, compared to $18,769 for the three months ended March 31, 2020, which represents an increase of $3,362. The expense growth was primarily due to an increase in headcount at the corporate level, inclusion of Select headcount expenses after completion of the acquisition, as well as headcount additions to support operating market organic growth in Florida, Arizona, Massachusetts and New York.

 

Sales and marketing expenses totaled $5,010 for the three months ended June 30, 2020, compared to $3,608 for the three months ended March 31, 2020, which represents an increase of $1,402. The increase was largely due to marketing cost associated with the new Cannabis with Confidence campaign and other branding, lobbying, and public relations costs due to the inclusion of Select expenses after completion of the acquisition in February 2020.

 

Occupancy expenses totaled $1,338 for the three months ended June 30, 2020, compared to $823 for the three months ended March 31, 2020. The increase of $515 was primarily due to increase security expense during the three months ended June 30, 2020 due to COVID-19.

 

Travel expenses totaled $930 for the three months ended June 30, 2020, compared to $1,663 for the three months ended March 31, 2020, which represents a decrease of $733. The decrease was due primarily due to reduced travel as a result of COVID-19 impacts, offset by an increase due to inclusion of Select travel expenses after completion of the acquisition.

 

Professional fees totaled $4,862 for the three months ended June 30, 2020 compared to $14,086 for the three months ended March 31, 2020, which represents a decrease of $9,224. This decrease was primarily due to decreased legal and accounting fees associated with the completion of the Select integration.

 

Other general and administrative expenses totaled $6,195 for the three months ended June 30, 2020 compared to $6,908 for the three months ended March 31, 2020, which represents a decrease of $713. This decrease was primarily due to decreased expenditures in office supplies and monthly services such as computer and software, telecommunication, and bank and license fees.

 

Depreciation and amortization totaled $14,237 for the three months ended June 30, 2020, compared to $12,688 for the three months ended March 31, 2020, which represents an increase of $1,549. The increase was primarily due to additional depreciation and amortization expense associated with the Select and Arrow acquisition.

 

Share-based compensation totaled $4,833 for the three months ended June 30, 2020, compared to $4,501 for the three months ended March 31, 2020 which represents an increase of $332. The increase was primarily due to the share-based cost associated with new grants partially offset by a decline in weighted average cost of options and restricted stock units in the three months ended June 30, 2020.

 

27

 

Total Other Income (Expense)

 

Comparison of the three months ended June 30, 2020 and March 31, 2020

 

Total other income (expense), net for the three months ended June 30, 2020 was a net loss of $9,993 compared to net loss of $7,196 for the three months ended March 31, 2020.

 

Interest income for the three months ended June 30, 2020 and March 31, 2020 was $3,573 and $2,846, respectively. The increase of $727 was primarily due to an increase interest associated with higher notes receivable outstanding balances during the three months ended June 30, 2020.

 

Interest expense, excluding interest related to lease liabilities, for the three months ended June 30, 2020 and March 31, 2020 was $11,357 and $10,492, respectively. The increase of $865 was primarily due to the full quarter impact of new $300 million debt facility entered into by the Company in January 2020.

 

Interest expense related to lease liabilities was $2,132 and $2,158 for the three months ended June 30, 2020 and March 31, 2020, respectively.

 

Provision for Income Taxes

 

The Company recorded an income tax expense of $13,534 for the three months ended June 30, 2020, compared to an income tax expense of $13,249 for the three months ended March 31, 2020. The increase was primarily the result of increased deferred tax expense associated with the increase in biological assets.

 

Net Loss

 

Net loss for the three months ended June 30, 2020 was $1,836 compared to net loss of $15,452 for the three months ended March 31, 2020, which represents a decrease of $13,616, or 88%. The decrease was primarily driven by the increase in gross profit, partially offset by the increase in operating expense described above.

 

RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2020 AND 2019

 

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019.

 

 

 

Six months ended June 30, 

 

 

 

2020

 

2019

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail revenue

 

$

122,443

 

$

54,262

 

$

68,181

 

126

%

Wholesale revenue

 

54,192

 

$

11,232

 

42,960

 

382

%

Management fee income

 

37,342

 

18,246

 

19,096

 

105

%

Total revenues

 

213,977

 

83,740

 

130,237

 

156

%

Cost of goods sold

 

100,856

 

39,614

 

61,242

 

155

%

Gross profit before impact of biological assets

 

113,121

 

44,126

 

68,995

 

156

%

Realized fair value amounts included in inventory sold

 

(43,613

)

(25,833

)

(17,780

)

69

%

Unrealized fair value gain on growth of biological assets

 

79,761

 

29,471

 

50,290

 

171

%

Gross profit

 

149,269

 

47,764

 

101,505

 

213

%

Operating expenses

 

122,582

 

69,659

 

52,923

 

76

%

Income (Loss) from operations

 

26,687

 

(21,895

)

48,582

 

222

%

Other income (expense), net

 

(17,191

)

(6,616

)

(10,575

)

160

%

Income (Loss) before provision for income taxes

 

9,496

 

(28,511

)

38,007

 

133

%

Income tax expense

 

(26,783

)

(6,753

)

(20,030

)

297

%

Net loss

 

(17,287

)

(35,264

)

17,977

 

51

%

Less: Net loss attributable to redeemable non-controlling interest

 

(170

)

(513

)

343

 

67

%

Net loss attributable to Curaleaf, Holdings Inc.

 

$

(17,117

)

$

(34,751

)

$

17,634

 

51

%

 

28

 

 

 

Six months ended June 30, 

 

 

 

2020

 

2019

 

 

 

 

 

 

 

Retail revenue

 

$

122,443

 

$

54,262

 

Wholesale revenue

 

54,192

 

11,232

 

Management fee income

 

37,342

 

18,246

 

Total revenues

 

213,977

 

83,740

 

Cost of goods sold

 

100,856

 

39,614

 

Gross profit before impact of biological assets

 

113,121

 

44,126

 

Realized fair value amounts included in inventory sold

 

(43,613

)

(25,833

)

Unrealized fair value gain on growth of biological assets

 

79,761

 

29,471

 

Gross profit

 

$

149,269

 

$

47,764

 

Gross margin

 

70

%

57

%

Gross profit before impact of management fee income and biological assets

 

$

75,779

 

$

25,880

 

Gross margin before impact of management fee income and biological assets

 

43

%

40

%

Gross profit before impact of management fee income and after net gain on biological assets

 

$

111,927

 

$

29,518

 

Gross margin before impact of management fee income and after net gain on biological assets

 

63

%

45

%

 

Comparison of the six months ended June 30, 2020 and June 30, 2019

 

Revenue

 

Revenue for the six months ended June 30, 2020 was $213,977, an increase of $130,237 or 156% compared to revenue of $83,740 for the six months ended June 30, 2019. The increase in revenue was driven by an increase of $111,141 in retail and wholesale revenue, and an increase of $19,096 in management fee income.

 

Retail and wholesale revenue was $176,635 for the six months ended June 30, 2020 compared to $65,494 for the six months ended June 30, 2019, which represents an increase of $111,141 or 170%. The increase in retail and wholesale revenue was primarily due to organic growth in Florida, the opening of two additional dispensaries in New York, acquisitions in Arizona in May 2019, Select in February 2020, and Arrow in April 2020. Additionally, wholesale revenue increased in Maryland and New York as a result of increase cultivation and harvest.

 

Cost of Goods Sold & Net Change in Fair Value of Biological Assets

 

Cost of goods sold, excluding any adjustments to the fair value of biological assets, for the six months ended June 30, 2020 was $100,856, an increase of $61,242 or 155% compared to cost of goods sold for the six months ended June 30, 2019. The increase was primarily due to cultivation and processing costs directly related to the increase in cannabis revenue for the six months ended June 30, 2020, which was the result of opening additional dispensaries and completion of acquisitions made in the second half of 2019 and in the first half of 2020.

 

Biological asset transformation for the six months ended June 30, 2020 was $36,148, an increase of $32,510 or 894% compared to $3,638 for the six months ended June 30, 2019. The increase was primarily due to increased cultivation capacity in Arizona, Massachusetts and New York, higher operating capacity in the Company’s cultivation and processing facilities and the corresponding increase in the unrealized fair value gain on the growth of biological assets.

 

Gross Profit

 

Gross profit for the six months ended June 30, 2020 was $149,269, or 70%, compared to $47,764, or 57%, for the six months ended June 30, 2019.

 

Gross profit before management fee income and biological asset adjustments for the six months ended June 30, 2020 was $75,779 compared to $25,880 for the six months ended June 30, 2019. Gross margin for the six months ended June 30, 2020 was 43% compared to 40% for the six months ended June 30, 2019. The increase was primarily due to the increase in revenue as mentioned above and increased efficiencies in our cultivation and manufacturing processes.

 

29

 

Gross profit before management fee income and after net gains on biological assets for the six months ended June 30, 2020 was $111,927, or 63%, compared to $29,518 or 45%, for the six months ended June 30, 2019. The increase was primarily due to increased cultivation capacity in New York, Arizona, and Maryland and the timing of harvests.

 

Total Operating Expenses

 

 

 

Six months ended June 30, 

 

 

 

2020

 

2019

 

$Change

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

$

40,900

 

$

23,501

 

$

17,399

 

Sales and marketing

 

8,618

 

5,628

 

2,990

 

Rent and occupancy

 

2,162

 

2,015

 

147

 

Travel

 

2,593

 

2,703

 

(110

)

Professional fees

 

18,948

 

10,899

 

8,049

 

Office supplies and services

 

6,587

 

3,656

 

2,931

 

Other

 

6,516

 

2,896

 

3,620

 

Total selling, general, and administrative

 

86,324

 

51,298

 

35,026

 

Depreciation and amortization

 

26,924

 

12,091

 

14,833

 

Share-based compensation

 

9,334

 

6,270

 

3,064

 

Total operating expenses

 

$

122,582

 

$

69,659

 

$

52,923

 

 

Comparison of the six months ended June 30, 2020 and June 30, 2019

 

Total operating expenses for the six months ended June 30, 2020 were $122,582, an increase of $52,923 or 76%, compared to $69,659 for the six months ended June 30, 2019, which represents 57% and 83% of total revenue for the six months ended June 30, 2020 and June 30, 2019, respectively. The increase in total operating expenses was primarily attributable to an increase in salaries and benefits, as well as sales and marketing, professional fees and other selling, general and administrative expenses as the Company expanded the number of retail dispensaries from 45 in 2019 to 57 in 2020, and increased the level of staff necessary to conduct the expanded operations. The Company incurred $15,354 and $6,753 in one-time expenses during the six months ended June 30, 2020 and 2019, respectively, largely associated with acquisitions and business development.

 

Salaries and benefits totaled $40,900 for the six months ended June 30, 2020, compared to $23,501 for the six months ended June 30, 2019, which represents an increase of $17,399. The growth was primarily due to increased headcount to support expanding operations in markets from both organic growth in Florida, Massachusetts, New York, Maryland and both the organic and acquired growth in Arizona, Connecticut, and Select.

 

Sales and marketing expenses totaled $8,618 for the six months ended June 30, 2020, compared to $5,628 for the six months ended June 30, 2019, which represents an increase of $2,990. The increase was largely due to marketing cost associated with the new Cannabis with Confidence campaign and the inclusion of Select expenses after completion of the acquisition in February 2020.

 

Occupancy expenses totaled $2,162 for the six months ended June 30, 2020, compared to $2,015 for the six months ended June 30, 2019. The increase of $147 was primarily attributable to the increase in occupancy costs for the expansion of retail operations in Florida, New York, Arizona, Connecticut, and Maryland and the inclusion of Select expenses after the completion of the acquisition in February 2020.

 

Travel expenses totaled $2,593 for the six months ended June 30, 2020, compared to $2,703 for the six months ended June 30, 2019, which represents a decrease of $110. The decrease was primarily due to decreased travel resulting from COVID-19 travel restrictions in the last 3 months.

 

30

 

Professional fees totaled $18,948 for the six months ended June 30, 2020, compared to $10,899 for the six months ended June 30, 2019, which represents an increase of $8,049. This increase was primarily due to increased legal and accounting fees associated with the expansion to new operating markets and costs associated with multiple acquisitions.

 

Other selling, general and administrative expenses totaled $13,103 for the six months ended June 30, 2020 compared to $6,552 for the six months ended June 30, 2019, which represents an increase of $6,551. This increase was primarily due to increased expenditures in office supplies and monthly services in Florida, New York, and Arizona as well as the completion of the Select and Arrow acquisitions.

 

Depreciation and amortization totaled $26,924 for the six months ended June 30, 2020, compared to $12,091 for the six months ended June 30, 2019, which represents an increase of $14,833. The increase was primarily due to the Company’s expansion of capital projects in Florida, Connecticut, and Oregon, completion of acquisitions and operation of new businesses in Arizona, Nevada, Massachusetts, and Maryland, as well as completion of the acquisitions of Select and Arrow.

 

Share-based compensation totaled $9,334 for the six months ended June 30, 2020, compared to $6,270 for the six months ended June 30, 2019, representing an increase of $3,064. The increase was primarily due to the share-based cost associated with new options and restricted stock units granted in 2020.

 

Total Other Income (Expense)

 

 

 

Six months ended

 

 

 

 

 

June 30, 

 

 

 

 

 

2020

 

2019

 

$Change

 

 

 

 

 

 

 

 

 

Interest income

 

6,419

 

4,919

 

1,500

 

Interest expense

 

(21,849

)

(8,147

)

(13,702

)

Interest expense related to lease liabilities

 

(4,290

)

(2,315

)

(1,975

)

Other income (expense)

 

2,529

 

(1,073

)

3,602

 

Total other income (expense), net

 

$

(17,191

)

$

(6,616

)

$

(10,575

)

 

Comparison of the six months ended June 30, 2020 and June 30, 2019

 

Total other income (expense), net, for the six months ended June 30, 2020 was a net loss of $17,191 compared to net loss of $6,616 for the six months ended June 30, 2019. The increase is primarily due to an increase in interest expense due to the new borrowing entered into by the Company in January 2020.

 

Interest income for the six months ended June 30, 2020 and June 30, 2019 was $6,419 and $4,919, respectively. The increase of $1,500 was primarily due to an increase interest associated with the higher notes receivable outstanding balances during first half of 2020.

 

Interest expense, excluding interest expense related to lease liabilities for the six months ended June 30, 2020 and June 30, 2019 was $21,849 and $8,147 respectively. The increase of $13,702 is primarily due to the $300 million Senior Secured Term Loan Facility entered into by the Company in January 2020.

 

Interest expense related to lease liabilities was $4,290 and $2,315 for the six months ended June 30, 2020 and 2019, respectively.

 

Provision for Income Taxes

 

The Company recorded a total income tax expense of $26,783 for the six months ended June 30, 2020, compared to an income tax expense of $6,753 for the six months ended June 30, 2019. The increase was the result of increased gross profit in certain of the Company’s subsidiaries that are subjected to Section 280E and increased deferred tax expense associated with the increase in biological assets.

 

31

 

Net Loss

 

Net loss for the six months ended June 30, 2020 and June 30, 2019 was $17,287 and $35,264, respectively, which represents a decrease of $17,977, or 51%. The decrease was primarily driven by the increase in gross profit, partially offset by the increase in operating expense described above.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity, and Capital Resources

 

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, acquisitions, debt service, and for general corporate purposes. To date our primary source of liquidity has been from funds generated by financing activities, including the private placement completed in connection with the Company’s reverse takeover transaction, and the senior secured debt financing completed in January 2020. Our ability to fund our operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. See the “Financial Instruments and Financial Risk Management” and “Risk Factors” sections of this MD&A.

 

As of June 30, 2020, we had $122,763 of cash and working capital of $210,595 (current assets minus current liabilities), compared with $42,310 of cash and $43,275 of working capital as of December 31, 2019. The increase of $167,320 in our working capital was primarily due to a $80,453 increase in cash largely resulting from the Senior Secured Term Loan Facility entered into by the Company in January 2020 and increases in inventory resulting primarily from inclusion of Select inventories after completion of the acquisition during the three and six months ended June 30, 2020.

 

The Company is an early stage growth company. It is generating cash from sales and is investing its capital reserves in current operations and new acquisitions that are expected to generate additional earnings in the long term.

 

The Company expects that its cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet its capital requirements and operational needs for the next 12 months.

 

Recent Financing Transactions

 

In January 2020, the Company closed on a Senior Secured Term Loan Facility (“Facility”) from a syndicate of lenders totaling $300,000. The amounts owing under the Facility bear interest at a rate of 13.0% per annum, payable quarterly in arrears with a maturity on December 2023. A portion of the proceeds of the Facility were used to retire in full the previously outstanding 15% senior secured debt financing agreement of $85,000, which closed on August 27, 2018.  In August 2019, the Company completed a sale leaseback transaction with Freehold Properties that provided $25,245 of cash. The proceeds from this transaction were used for capital expenditures and acquisition purposes.

 

Cash Flows

 

The following table summarizes the sources and uses of cash or each of the periods presented:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2020

 

2019

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

23,449

 

$

(4,936

)

$

21,814

 

$

(21,542

)

Net cash used in investing activities

 

(72,013

)

(59,630

)

(116,799

)

(135,913

)

Net cash provided by (used in) financing activities

 

(5,028

)

(705

)

175,438

 

(1,815

)

Net increase (decrease) in cash and cash equivalents

 

$

(53,592

)

$

(65,271

)

$

80,453

 

$

(159,270

)

 

32

 

Operating Activities

 

During the three months ended June 30, 2020, operating activities provided $23,449 of cash, primarily resulting from a net loss of $1,836 and net non-cash gains of $16,226, partially offset by net cash provided by changes in our operating assets and liabilities of $9,058. Cash provided by changes in operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $4,320 and income tax payable of $8,554, partially offset by increases in biological assets, accounts receivable, and inventory of $19,161, $5,645, and $27,473, respectively.

 

During the three months ended June 30, 2019, operating activities used $4,936 of cash, primarily resulting from a net loss of $24,436 and net non-cash losses of $7,843, partially offset by net cash provided by changes in our operating assets and liabilities of $27,343. Cash provided by changes in operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $9,484 and income tax payable of $5,367, partially offset by increases in biological assets and inventory of $19,701 and $4,419, respectively.

 

During the six months ended June 30, 2020, operating activities provided $21,814 of cash, primarily resulting from a net loss of $17,287 and net non-cash gains of $21,823, partially offset by net cash provided by changes in our operating assets and liabilities of $17,278. Cash provided by changes in operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $6,441 and income tax payable of $21,803, partially offset by increases in biological assets, accounts receivable, and inventory of $26,852, $8,522, and $46,197, respectively.

 

During the six months ended June 30, 2019, operating activities used $21,542 of cash, primarily resulting from a net loss of $35,264 and net non-cash gains of $15,142, partially offset by net cash provided by changes in our operating assets and liabilities of $28,864. Cash provided by changes in operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $3,880, partially offset by increases in biological assets, accounts receivable, and inventory of $4,520, $3,998, and $10,376, respectively.

 

Investing Activities

 

During the three months ended June 30, 2020, investing activities used $72,013 of cash, consisting primarily of payments totaling $28,824 in purchases of property, plant and equipment, $43,688 in connection with acquisitions, and $499 in connection with the amounts received under notes receivable.

 

During the three months ended June 30, 2019, investing activities used $59,630 of cash, consisting primarily of payments totaling $24,620 in purchases of property, plant and equipment, $24,978 in connection with acquisitions, $25,757 as part of pending acquisitions, and $15,725 in connection with the amounts advanced under notes receivable.

 

During the six months ended June 30, 2020, investing activities used $116,799 of cash, consisting primarily of payments totaling $51,511 in purchases of property, plant and equipment, $51,188 in connection with acquisitions, and $14,100 in connection with the amounts advanced under notes receivable.

 

During the six months ended June 30, 2019, investing activities used $135,913 of cash, consisting primarily of payments totaling $43,015 in purchases of property, plant and equipment, $53,384 in connection with acquisitions, $25,757 as part of pending acquisitions, and $13,757 in connection with the amounts advanced under notes receivable.

 

Financing Activities

 

During the three months ended June 30, 2020, financing activities used $5,028 of cash, consisting primarily of $7,694 of lease liability payments.

 

During the three months ended June 30, 2019, financing activities used $705 of cash, consisting primarily of $1,251 of lease liability payments, partially offset by option exercise of $546.

 

33

 

During the six months ended June 30, 2020, financing activities provided $175,438 of cash, consisting primarily of $185,723 cash received from new debt borrowings and option exercise of $879, offset by $11,164 of lease liability payments.

 

During the six months ended June 30, 2019, financing activities used $1,815 of cash, consisting primarily of $2,282 of lease liability payments.

 

Contractual Obligations and Commitments

 

The Company leases space for its offices, cultivation centers, processing locations and retail dispensaries. Key payments related to the lease balances are presented below:

 

Period

 

Scheduled payments

 

2020 (remaining six months)

 

10,152

 

2021

 

19,302

 

2022

 

20,166

 

2023

 

17,570

 

2024 and thereafter

 

65,856

 

Total undiscounted lease liability

 

133,046

 

Impact of discount

 

(35,743

)

Lease liability at June 30, 2020

 

97,303

 

Less current portion of lease liability

 

(13,415

)

Less current lease liabilities transferred to liabilities associated with assets held for sale

 

(9

)

Less long-term lease liabilities transferred to liabilities associated with assets held for sale

 

(2,011

)

Long-term portion of lease liability

 

$

81,868

 

 

Real estate leases typically extend for a period of 1 to 10 years. Some leases for office space include extension options exercisable up to one year before the end of the cancellable lease term. Typically, the option to renew the lease is for an additional period of 5 years after the end of the initial contract term and are at the option of the Company as the lessee. Lease payments are in substance fixed, and most real estate leases include annual escalation clauses with reference to an index or contractual rate.

 

The Company leases machinery and equipment but does not purchase or guarantee the value of leased assets. The Company considers these assets to be of low-value or short-term in nature and therefore no right-of use assets and lease liabilities are recognized for these leases. Expenses recognized relating to short-term leases and leases of low value during the three and six months ended June 30, 2020 and 2019 were immaterial.

 

Amounts in the table below reflect the contractually required principal payments payable under promissory note agreements and other long-term debt. The various borrowings bear interest at rates between 7% and 13% per annum:

 

Period

 

Amount

 

2020 (remaining six months)

 

$

6,290

 

2021

 

—

 

2022

 

—

 

2023

 

300,000

 

2024

 

—

 

2025 and thereafter

 

1,696

 

 

 

$

307,986

 

 

34

 

SUMMARY OF QUARTERLY RESULTS

 

 

 

Q2 2020

 

Q1 2020

 

Q4 2019

 

Q3 2019

 

Q2 2019

 

Q1 2019

 

Q4 2018

 

Q3 2018

 

Revenue

 

$

117,480

 

$

96,496

 

$

75,457

 

$

61,820

 

$

48,489

 

$

35,251

 

$

31,961

 

$

21,370

 

Cost of goods sold

 

56,844

 

44,013

 

35,695

 

27,079

 

22,469

 

17,144

 

11,980

 

7,501

 

Net change in fair value of biological assets

 

20,591

 

15,556

 

5,533

 

13,810

 

1,392

 

2,246

 

(1,385

)

166

 

Gross profit

 

81,227

 

68,039

 

45,295

 

48,551

 

27,412

 

20,353

 

18,596

 

14,035

 

Operating expenses

 

59,536

 

63,046

 

52,563

 

47,108

 

39,713

 

29,945

 

30,498

 

20,852

 

Other income (expense), net

 

(9,993

)

(7,196

)

(7,858

)

(3,598

)

(3,942

)

(2,674

)

(2,643

)

(26,041

)

Net Loss

 

(1,836

)

(15,452

)

(27,152

)

(7,434

)

(24,435

)

(10,828

)

(16,471

)

(35,562

)

Less: Net loss attributable to redeemable non-controlling interest

 

193

 

(363

)

(591

)

(599

)

106

 

(619

)

(5,272

)

(1,889

)

Net loss attributable to Curaleaf Holdings, Inc.

 

(2,029

)

(15,089

)

(26,561

)

(6,835

)

(24,541

)

(10,209

)

(11,199

)

(33,673

)

Loss per share - basic and diluted

 

$

(0.00

)

$

(0.03

)

$

(0.06

)

$

(0.01

)

$

(0.05

)

$

(0.02

)

$

(0.03

)

$

(0.09

)

Weighted average common shares outstanding - basic and diluted

 

533,192,806

 

507,700,498

 

468,445,941

 

464,073,130

 

461,313,741

 

453,559,765

 

436,048,233

 

385,754,657

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of the date of this filing, the Company does not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company, including, and without limitation, such considerations as liquidity and capital resources.

 

RELATED PARTY TRANSACTIONS

 

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company incurred the following transactions with related parties during the three and six months ended June 30, 2020 and 2019:

 

 

 

Three Months Ended

 

Six Months Ended

 

Balances as of

 

 

 

June 30, 

 

June 30, 

 

June 30, 

 

December 31,

 

 

 

2020

 

2019

 

2020

 

2019

 

2020

 

2019

 

Transaction

 

Related Party Transactions

 

Related Party Transactions

 

Balance Receivable (Payable)

 

Processing fees (1)

 

$

535

 

$

—

 

$

1,194

 

$

—

 

$

—

 

$

—

 

Consulting fees (2)

 

—

 

3

 

—

 

313

 

—

 

—

 

Travel and reimbursement (2)

 

—

 

106

 

—

 

375

 

—

 

—

 

Rent expense (3)

 

(60

)

60

 

(120

)

120

 

—

 

—

 

Contingent liability (4)

 

—

 

—

 

—

 

—

 

(9,700

)

(18,000

)

Senior Unsecured Note - 2019 (5)

 

—

 

58

 

—

 

117

 

—

 

—

 

 

 

$

475

 

$

227

 

$

1,074

 

$

925

 

$

(9,700

)

$

(18,000

)

 

(1) For the three and six months ended June 30, 2020, the Company recognized direct expenses of $535 and 1,194, respectively for processing expenses with Sisu Extracts. Sisu Extracts, a state licensed processor in California, performed toll processing services for the Company during the quarter.  Cameron Forni, Select President, holds a passive investment in Sisu Extracts.

 

(2) For the three and six months ended June 30, 2019, the Company recognized consulting, travel and business development expenses related to the Company of $109 and $688, respectively as payment to Sputnik Group LTD, a company controlled by Boris Jordan, Executive Chairman as of June 30, 2019. As of June 30, 2020, the Sputnik Group LTD no longer meets the definition of a related party.

 

(3) For the three months ended June 30, 2020 and 2019, the Company recognized a rent expense credit of $60 and rent expense of $60, respectively, for a sublease between Curaleaf NY and Measure 8 Venture Partners, a company controlled

 

35

 

by Boris Jordan, Executive Chairman. For the six months ended June 30, 2020 and 2019, the Company recognized a rent expense credit of $120 and rent expense of $120, respectively for the sublease.

 

(4) As of June 30, 2020 and 2019, the Company had a contingent consideration liability of $9,700 and $18,000, respectively for the purchase of CLMA payable upon the achievement of certain milestones. The liability is payable to PT Mass Holdings, LLC, of which Joseph F. Lusardi, the Company’s Chief Executive Officer, is a member. In June 2020, the Company paid Mr. Lusardi $8,300 as partial payment of the contingent consideration liability.

 

(5) For the three and six months ended June 30, 2019, the Company recognized interest expense of $58 and $117, respectively, to Boris Jordan, Executive Chairman, and MedTech International Group, LLC, a company controlled by Boris Jordan for interest on the Senior Unsecured Notes — 2019. The Company satisfied its full obligations under the Senior Unsecured Notes in December 2019; thus no interest expense is recognized in 2020.

 

The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Key management personnel compensation and other related party expenses for the three and six months ended June 30, 2020 and 2019 are as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Key Management Personnel Compensation

 

2020

 

2019

 

2020

 

2019

 

Short-term employee benefits

 

$

1,251

 

$

588

 

$

2,287

 

$

1,026

 

Other long-term benefits

 

12

 

6

 

19

 

120

 

Share-based payments

 

4,598

 

3,586

 

8,152

 

4,962

 

 

 

$

5,861

 

$

4,180

 

$

10,458

 

$

6,108

 

 

PROPOSED TRANSACTIONS

 

The following acquisitions were signed, but were not completed prior to June 30, 2020 . The results of the following entities are not included in the consolidated results of the Company for the three and six months ended June 30, 2020:

 

Alternative Therapies Group, Inc, a Massachusetts corporation (“ATG”)

 

In August 2018, the Company entered into an agreement to acquire ATG, which includes a 53,600 square foot cultivation and processing facility in Amesbury, Massachusetts and intends to enter into supply agreements with ATG’s three dispensaries in Massachusetts.  Consideration for ATG is $50,000, $42,500 of which was prepaid in cash in December 2018 in order to solidify the Company’s intent to complete the purchase of ATG and was recorded as a non-current asset. The remaining $7,500 is due at the close of the transaction.  The closing of the transaction is subject to regulatory approval.

 

Ohio Grown Therapies, LLC, an Ohio limited liability company (“OGT”)

 

In May 2019, the Company entered into an agreement granting it an option to acquire OGT for $20,000. The Company paid $5,000 cash in May 2019 and $7,500 in July 2020. The remaining consideration will be paid upon completion of milestones, culminating with regulatory approval of the transfer of the final licenses and OGT facility to Curaleaf.  The closing of this transaction is currently pending regulatory approval.

 

Grassroots, a Delaware company

 

In July 2019, the Company entered into an agreement to acquire Grassroots (“Grassroots Acquisition”). On June 22, 2020, Curaleaf entered into an Amended and Restated Agreement and Plan of Merger (the “Grassroots Merger Agreement”) which amended and restated the original definitive agreement and amended certain terms of the Grassroots Acquisition. Closing of the Grassroots Acquisition occurred on July 23, 2020.

 

At closing, the Company issued (i) 103,455,816 SVS to the benefit of the former holders of common stock of Grassroots, and (ii) 12,851,005 SVS to be held in escrow in accordance with the terms of the Grassroots Merger Agreement. The total

 

36

 

consideration paid in connection with the Grassroots Transaction does not include a cash component. In addition, the parties have resolved that certain Grassroots affiliated assets in Illinois, Ohio and Maryland are designated for sale to comply with local limitations on license ownership. The transaction price remains subject to usual working capital and other adjustments. The Company incurred transaction costs of approximately $5,564.

 

Virginia’s Kitchen, LLC, a Colorado company d/b/a Blue Kudu (“Blue Kudu”)

 

In February 2020, the Company signed a definitive agreement to acquire 100% of Blue Kudu, a Colorado-licensed processor and producer of cannabis edibles, operating an 8,400 square foot facility in Denver, Colorado. The consideration consisted of 322,580 SVS, $1,384 cash at closing of the transaction and a 5% note of up to $500 due ten and a half months from closing. The transaction closed in July 2020.

 

Curaleaf, New Jersey, Inc. (“CLNJ”)

 

In February 2011, the Company entered into a Management Services Agreement (“NJ MSA”) with CLNJ (formerly Compassionate Sciences ATC Inc.) As required under state law, CLNJ was formed as a New Jersey nonprofit corporation without shareholders acting through its governing body, the Board of Trustees (“NJ Board”). CLNJ operated medical dispensary, processing, and cultivation facilities as permitted by the state of New Jersey. Under the NJ MSA, the Company acted as an independent contractor providing services in the areas of cultivation, extraction, and other consulting services. The Company recognized management fee income for services rendered under the NJ MSA. In addition to the NJ MSA, the Company entered into a Conditionally Convertible Promissory Note (“NJ Note”) (see Note 8). The NJ Note allowed the Company to acquire CLNJ when the regulations in New Jersey changed to allow nonprofit corporations to for-profit corporations.

 

In July 2019, New Jersey Governor Murphy signed an amendment to the New Jersey Compassionate Use Medical Marijuana Act (the “Act”) known as the Jake Honig Compassionate Use Medical Cannabis Act (“Jake Honig Act”). The Jake Honig Act authorized the New Jersey nonprofit corporations that hold Alternative Treatment Center Permits (“ATC Permits”) to sell or transfer their permits and other assets to for-profit entities Due to changes in New Jersey regulations, CLNJ received approval from the state of New Jersey for the transfer of the ATC Permit to a Curaleaf NJ II, Inc, a wholly owned subsidiary of the Company. In conjunction with the transfer of the ATC Permit, the Company entered into an Asset Purchase Agreement (“CLNJ APA”). As part of the CLNJ APA, CLNJ agreed to sell and transfer the ATC Permit and substantially all of its other assets to Curaleaf NJ II. The transaction closed in July 2020.  As a result of the close of the sale and transfer of the assets, the $82,233 balance of the NJ Note was applied to the purchase price.

 

Primary Organic Therapy, Inc. (d/b/a Maine Organic Therapy) (“MEOT”)

 

MEOT owns and operates a duly licensed registered medical marijuana and cultivation facility in the state of Maine. In January 2017, the Company entered into a Management Services Agreement with MEOT (“MEOT MSA”) under which the Company provided services in the areas of financial services, compliance consulting, and human resources management. Under the MEOT MSA, MEOT maintained exclusive control and possession, and was solely responsible for final decision-making regarding all aspects of the business and the Company acted solely in an advisory capacity. The Company recognized management fee income for services rendered under the MEOT MSA.

 

The MEOT MSA was terminated in July 2020 and MEOT entered into a new MSA agreement (“Verdure MSA”) with Verdure, Inc. (“Verdure”), an entity in which the Company’s CEO, Joseph Lusardi had an ownership interest. The Company acquired Verdure in July 2020 for $8,000 cash and a cash earn-out of $2,000 based on MEOT’s achievement of certain earnings targets. Current Maine regulations require that licensed medical marijuana dispensaries be owned by residents of Maine. However, under the Verdure MSA, the Company has acquired operational control and substantially all of the economic benefit of MEOT’s business.  The acquisition of Verdure resulted in the Company controlling MEOT in accordance with IFRS 10.

 

37

 

CHANGES IN OR ADOPTION OF ACCOUNTING PRACTICES

 

The following IFRS standards have been recently issued by the IASB. The Company is assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein.

 

Amendment to IFRS 3: Definition of a Business

 

In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020, however early application is permitted. The Company has elected early application of the amendment and elects whether to apply, or not apply, the test to each transaction separately.

 

IAS 1: Presentation of Financial Statements & IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors

 

In October 2018, the IASB issued “Definition of Material”, an amendment to IAS 1 — Presentation of Financial Statements and IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of material and to align the definition used in the Conceptual Framework and the standards themselves. Materiality is defined as “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” This amendment became effective for the annual period beginning January 1, 2020. The extent of the impact of application of the interpretation has not yet been determined.

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of the Company’s consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.

 

Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the audited consolidated financial statements are described below.  Significant judgments, estimates and assumptions made by management in preparing the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2020 and 2019 were the same as those that applied to the annual audited consolidated financial statements.

 

Biological assets

 

Biological assets are dependent upon estimates of future economic benefits as a result of past events to determine the fair value through an exercise of significant judgment by the Company. In estimating the fair value of an asset or a liability, the Company uses market observable data to the extent it is available. The Company uses the average selling price per gram in the market in which the biological assets are produced to determine fair value. The Company assess market prices on a quarterly basis in order to ensure biological assets are measured at the most relevant fair value.

 

38

 

Business combinations

 

In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 — Financial Instruments with the corresponding gain or loss being recognized in the consolidated statement of profits and losses. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied.

 

Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.

 

The Company utilizes the guidance prescribed by Amendments to IFRS 3 — Definition of a Business. The Amendment changes the definition of a business and allows entities to us a concentration test to determine if transactions should be accounted for as a business combination or an asset acquisition. Under the optional concentration test, where substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business and the transaction would be accounted for as an asset acquisition. Management performs a concentration test where appropriate and if the concentration of assets is 85% or above, the transaction is generally accounted for as an asset acquisition.

 

Share-based payment arrangements

 

The Company uses the Black-Scholes valuation model to determine the fair value of options granted to employees and directors under share-based payment arrangements, where appropriate. In instances where stock options have performance or market conditions, the Company utilized the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

 

Accounts receivable

 

Trade receivables are amounts due from customers for goods sold in the ordinary course of business. They are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are recognized initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognized at fair value. The Company holds the trade receivables with the objective to collect the contractual cash flows. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due.

 

The valuation of allowances for uncollectible trade receivables requires assumptions including estimated credit losses based on customer history, industry concentrations, and the Company’s knowledge of the financial conditions of its customers. Uncertainty relates to the actual collectability of customer balances that can vary based on management’s estimates and judgment.

 

Assets held for sale

 

The accounting policy for assets held for sale applied in these unaudited condensed interim consolidated financial statements is new in comparison to the audited consolidated financial statements as of and for the year ended December

 

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31, 2019. The Company classifies assets held for sale in accordance with IFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations”. When the Company makes the decision to sell an asset or to stop some part of its business, the Company assesses if such assets should be classified as an asset held for sale. To classify as an asset held for sale, the asset or disposal group must meet all of the following conditions: i) the asset is available for immediate sale in its present condition, ii) management is committed to a plan to sell, iii) an active program to locate a buyer and complete the plan has been initiated, iv) the asset is being actively marketed for sale at a sales price that is reasonable in relation to its fair value, v) the sale is highly probable within one year from the date of classification, and vi) actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. Assets held for sale are measured at the lower of its carrying amount or fair value less cost to sell (“FVLCTS”) unless the asset held for sale meets the exceptions as denoted by IFRS 5. FVLCTS is the amount obtainable from the sale of the asset in an arm’s length transaction, less the costs of disposal. Once classified as held for sale, any depreciation and amortization cease to be recorded (see Note 7).

 

Deferred taxes

 

Significant estimates are required in determining the current and deferred assets and liabilities for income taxes. Various internal and external factors may have favorable or unfavorable effects on the income tax assets and liabilities. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations and changes in overall levels of pre-tax earnings. Such changes could impact the assets and liabilities recognized in the balance sheet in future periods.

 

Discount rate for leases

 

IFRS 16 - Leases requires lessees to discount lease payments using the rate implicit in the lease, if that rate is readily available. If that rate cannot be readily determined, the lessee is required to use its incremental borrowing rate. The Company generally uses the incremental borrowing rate when initially recording real estate leases as the implicit rates are not readily available as information from the lessor regarding the fair value of underlying assets and initial direct costs incurred by the lessor related to the leased assets is not available. The Company determines the incremental borrowing rate as the interest rate the Company would pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

 

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

 

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, notes receivable, accounts payable, accrued expenses, long-term debt, and redeemable non-controlling contingency. The fair values of cash, restricted cash, notes receivable, accounts payable and accrued expenses approximate their carrying values due to the relatively short-term to maturity. The Company’s long-term notes payable carrying value at the effective interest rate approximate fair value. Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:

 

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2 — Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and

 

Level 3 — Inputs for the asset or liability that are not based on observable market data.

 

The Company’s assets measured at fair value on a nonrecurring basis include investments, long-lived assets and indefinite-lived intangible assets and goodwill. The Company reviews the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually as at December 31, for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to be Level 3 measurements.

 

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Financial Risk Management

 

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below:

 

Credit Risk

 

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at June 30, 2020 and December 31, 2019 is the carrying amount of cash and cash equivalents, accounts receivable and notes receivable. The Company does not have significant credit risk with respect to its customers. All cash and cash equivalents are placed with major U.S. financial institutions.

 

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk but has limited risk as the majority of its sales are transacted with cash.

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its cash flows necessary to fund operations and development and its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.

 

The Company has access to equity and debt financing from public and private markets in Canada as well as from current significant shareholders. If such financing were no longer available in the public markets in Canada due to changes in applicable law, then the Company expects that it would have to raise financing privately.

 

The Company is monitoring the impacts of COVID-19 closely, and although liquidity has not been materially affected by the COVID-19 outbreak to date, the ultimate severity of the outbreak and its impact on the economic environment is uncertain. Given the current uncertainty of the future economic environment, the Company has taken additional measures in monitoring and deploying its capital to minimize the negative impact on liquidity.

 

Market Risk

 

Currency Risk

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions have been and may be denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks.

 

As of June 30, 2020, and December 31, 2019, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.

 

Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cash and cash equivalents bear interest at market rates. The Company’s financial debts have fixed rates of interest and therefore expose the Company to a limited interest rate fair value risk.

 

REGULATORY ENVIRONMENT: ISSUERS WITH UNITED STATES CANNABIS-RELATED ASSETS

 

In accordance with Staff Notice 51-352, below is a discussion of the current federal and state-level U.S. regulatory regimes in those jurisdictions where the Company is currently directly and indirectly involved, through its subsidiaries and investments, in the cannabis industry.

 

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In accordance with Staff Notice 51-352, the Company evaluates, monitors and reassesses this disclosure, and any related risks, on an ongoing basis and the same will be supplemented, amended and communicated to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation.  Any non-compliance, citations or notices of violation which may have an impact on the Company’s license, business activities or operations will be promptly disclosed by the Company.

 

The Company derives its revenues from the cannabis industry in certain states of the U.S., and the industry is illegal under U.S. federal law.

 

The Company is involved (through its licensed subsidiaries) in the cannabis industry in the U.S. where local state laws permit such activities. Currently, its subsidiaries and managed entities are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and/or medicinal cannabis marketplace in the states of Arizona, Arkansas, California, Colorado, Connecticut, Florida, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Utah and Vermont; and have partnered with an accredited medical school and obtained a “clinical registrant” license in Pennsylvania.  In addition, the Company is indirectly involved (through management services which include the use of the “Curaleaf” brand and retail and cultivation and production operations, human resources, finance and accounting, marketing, sales, legal and compliance support services) in both the adult-use and medical cannabis industry in the States of Maine and Massachusetts.

 

The Company’s Statement of Financial Position and Operating Statement Exposure to U.S. marijuana Related Activities

 

As of the date of this MD&A, all of the Company’s business was directly derived from U.S. cannabis-related activities. As such, the Company’s statement of financial position and statement of profits and losses exposure to U.S. cannabis-related activities is 100%.

 

Readers are cautioned that the foregoing financial information, though extracted from the Company’s financial systems that supports its annual consolidated financial statements, has not been audited in its presentation format and accordingly is not in compliance with IFRS based on consolidation principles.

 

U.S. Federal Overview

 

The U.S. federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, in one of five different schedules. Cannabis is classified as a Schedule I drug. As a Schedule I drug, the Federal Drug Enforcement Agency (“DEA”) considers cannabis to have a high potential for abuse; no  currently accepted medical use in treatment in the U.S., and a lack of accepted safety for use of the drug under medical supervision. The classification of cannabis as a Schedule I drug is inconsistent with what the Company believes to be many valuable medical uses for marijuana accepted by physicians, researchers, patients, and others. As evidence of this, the federal Food and Drug Administration (“FDA”) on June 25, 2018 approved Epidiolex (cannabidiol) (“CBD”) oral solution with an active ingredient derived from the cannabis plant for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. This is the first FDA-approved drug that contains a purified drug substance derived from the cannabis plant. In this case, the substance is CBD, a chemical component of marijuana that does not contain the intoxication properties of tetrahydrocannabinol (“THC”), the primary psychoactive component of marijuana. The Company believes the CSA categorization as a Schedule I drug is not reflective of the medicinal properties of marijuana or the public perception thereof, and numerous studies show cannabis is not able to be abused in the same way as other Schedule I drugs, has medicinal properties, and can be safely administered.

 

The federal position is also not necessarily consistent with democratic approval of marijuana at the state government level in the United States. Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of marijuana under the Cannabis Act (Canada), cannabis is largely regulated at the state level in the United States. State laws regulating cannabis conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use cannabis production and

 

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distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts. Although the Company’s activities are compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law nor provide a defense to federal criminal charges that may be brought against the Company. The Supremacy Clause of the United States Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and State law, federal law shall apply.

 

Nonetheless, 33 states and the District of Columbia in the United States have legalized some form cannabis for medical use, while 11 states and the District of Columbia have legalized the adult use of cannabis for recreational purposes. As more and more states legalized medical and/or adult-use marijuana, the federal government attempted to provide clarity on the incongruity between federal prohibition under the CSA and these state-legal regulatory frameworks. Notwithstanding the foregoing, marijuana remains illegal under U.S. federal law, with marijuana listed as a Schedule I drug under the CSA. Until 2018, the federal government provided guidance to federal law enforcement agencies and banking institutions through a series of United States Department of Justice (“DOJ”) memoranda. The most recent such memorandum was drafted by former Deputy Attorney General James Cole on August 29, 2013 (the “Cole Memorandum”).

 

The Cole Memorandum offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states, and instructed federal law enforcement agencies not to prosecute violations of federal drug laws related to cannabis where the activity is permitted and regulated under cannabis laws of the relevant state.

 

The Cole Memorandum put forth eight prosecution priorities:

 

1.              Preventing the distribution of marijuana to minors;

 

2.              Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

 

3.              Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;

 

4.              Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

 

5.              Preventing the violence and the use of firearms in the cultivation and distribution of marijuana;

 

6.              Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

 

7.              Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

 

8.              Preventing marijuana possession or use on federal property.

 

The Cole Memorandum was seen by many state-legal marijuana companies as a safe harbor for their licensed operations that were conducted in full compliance with all applicable state and local regulations.

 

On January 4, 2018, former United States Attorney General Jeff Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United States Attorneys (the “Sessions Memorandum”). Rather than establish national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana activity was legal under state law, the Sessions Memorandum instructs that “in deciding which marijuana activities to prosecute... with the DOJ’s finite resources, prosecutors should follow the well established principles that govern all federal prosecutions.” Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.

 

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

 

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Former United States Attorney General Sessions resigned on November 7, 2018. He was replaced by William Barr on February 14, 2019. It is unclear what specific impact this development will have on U.S. federal government enforcement policy. However, in a written response to questions from U.S. Senator Cory Booker made as a nominee, Attorney General Barr stated, “I do not intend to go after parties who have complied with state law in reliance on the Cole Memorandum.” Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the U.S. Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law.

 

The Company believes it is too soon to determine if any prosecutorial effects will be undertaken by the rescission of the Cole Memorandum, or if Attorney General Barr will reinstitute the Cole Memorandum or a similar guidance document for United States attorneys. The sheer size of the cannabis industry, in addition to participation by State and local governments and investors, suggests that a largescale enforcement operation would possibly create unwanted political backlash for the Department of Justice and the Trump administration.

 

As an industry best practice, despite the recent rescission of the Cole Memorandum, the Company abides by the following standard operating policies and procedures to ensure compliance with the guidance provided by the Cole Memorandum:

 

1.              Ensure that its operations are compliant with all licensing requirements as established by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions;

 

2.              Ensure that its cannabis related activities adhere to the scope of the licensing obtained (for example: in the states where cannabis is permitted only for adult-use, the products are only sold to individuals who meet the requisite age requirements);

 

3.              Implement policies and procedures to ensure that cannabis products are not distributed to minors;

 

4.              Implement policies and procedures to ensure that funds are not distributed to criminal enterprises, gangs or cartels;

 

5.              Implement an inventory tracking system and necessary procedures to ensure that such compliance system is effective in tracking inventory and preventing diversion of cannabis or cannabis products into those states where cannabis is not permitted by state law, or across any state lines in general;

 

6.              Ensure that its state-authorized cannabis business activity is not used as a cover or pretense for trafficking of other illegal drugs, is engaged in any other illegal activity or any activities that are contrary to any applicable anti-money laundering statutes; and

 

7.              Ensure that its products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving.

 

In addition, the Company conducts background checks to ensure that the principals and management of its operating subsidiaries are of good character, have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in cultivation, manufacturing or distribution of cannabis. The Company will also conduct ongoing reviews of the activities of its cannabis businesses, the premises on which they operate and the policies and procedures that are related to possession of cannabis or cannabis products outside of the licensed premises, including the cases where such possession is permitted by regulation. See “Compliance and Monitoring”.

 

Although the Cole Memorandum has been rescinded, one legislative safeguard for the medical marijuana industry remains in place: Congress has passed a so-called “rider” provision in the FY 2015, 2016, 2017, 2018, 2019 and 2020. Consolidated Appropriations Acts to prevent the federal government from using congressionally appropriated funds to enforce federal marijuana laws against regulated medical marijuana actors operating in compliance with state and local law. The rider is known as the “Rohrbacher- Farr” Amendment after its original lead sponsors (it is also sometimes referred to as the “Rohrbacher- Blumenauer” or “Joyce-Leahy” Amendment, but it is referred to in this MD&A as “Rohrbacher-Farr”). Most recently, the Rohrbacher-Farr Amendment was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019. In signing the Act, President Trump issued a signing statement noting that the Act “provides that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various States and territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” While the signing statement can fairly be read to mean

 

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that the executive branch intends to enforce the CSA and other federal laws prohibiting the sale and possession of medical marijuana, the president did issue a similar signing statement in 2017 and no major federal enforcement actions followed. On September 27, 2019 the Rohrbacher-Farr Amendment was temporarily renewed through a stopgap spending bill and was similarly renewed again on November 21, 2019.  The FY 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrbacher-Farr Amendment effective through September 30, 2020.  In signing the spending bill, President Trump again released a statement similar to the ones he made May 2017 and February 2019 regarding the Rohrbacher-Farr Amendment.

 

There is a growing consensus among marijuana businesses and numerous congressmen and congresswomen that guidance is not law and temporary legislative riders, such as the Rohrbacher-Farr Amendment, are an inappropriate way to protect lawful medical marijuana businesses. Numerous bills have been introduced in Congress in recent years to decriminalize aspects of state-legal marijuana trades. For FY 2019, the strategy amongst the bipartisan Congressional Marijuana Working Group in Congress, has been to introduce numerous marijuana-related appropriations amendments in the Appropriations Committee in both the House and Senate, similar to the strategy employed in FY 2018. The amendments included protections for marijuana-related businesses in states with medical and adult-use marijuana laws, as well as protections for financial institutions that provide banking services to state-legal marijuana businesses. The Company also has observed that each year more congressmen and congresswomen sign on and cosponsor marijuana legalization bills. These include the CARERS Act, REFER Act and others. While there are different perspectives on the most effective route to end federal marijuana prohibition, Congressman Blumenauer and Senator Wyden have introduced the three-bill package, Path to Marijuana Reform, which would fix the so-called Internal Revenue Service 280E provision that provides tax burdens for marijuana businesses, eliminate civil asset forfeiture and federal criminal penalties for marijuana businesses complying with state law, reduce barriers to banking, de schedule marijuana from the federal list of controlled substances, and tax and regulate marijuana.

 

Senator Booker has also introduced the Marijuana Justice Act, which would de-schedule marijuana, and in 2018 Congresswoman Barbara Lee introduced the House companion. Colorado Republican Senator Cory Gardner has reportedly secured a probable assurance from President Trump that he would sign a bill to allow states to legalize and regulate marijuana without federal intervention.

 

In light of all of this, it was anticipated that the federal government will eventually repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit regulated cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco. Given current political trends, however, the Company considers these developments unlikely in the near-term. For the time being, marijuana remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor its rescission nor the continued passage of the Rohrbacher-Farr Amendment has altered that fact. The federal government of the United States has always reserved the right to enforce federal law regarding the sale and disbursement of medical or adult-use marijuana, even if state law sanctions such sale and disbursement. If the United States begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects could be materially adversely affected.

 

Additionally, under United States federal law, it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of any Schedule I controlled substance. Due to the CSA categorization of marijuana as a Schedule I drug, federal law makes it illegal for financial institutions that depend on the Federal Reserve’s money transfer system to take any proceeds from marijuana sales as deposits. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses under the United States Currency and Foreign Transactions Reporting Act of 1970 (the “Bank Secrecy Act”). Therefore, under the Bank Secrecy Act, 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 charged with money laundering or conspiracy.

 

On September 26, 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (commonly known as the “SAFE Banking Act”), which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass

 

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the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

While there has been no change in U.S. federal banking laws to accommodate businesses in the large and increasing number of U.S. states that have legalized medical and/or adult-use marijuana, in 2014, the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) issued guidance to prosecutors of money laundering and other financial crimes (the “FinCEN Guidance”) and notified banks that it would not seek enforcement of money laundering laws against banks that service cannabis companies operating under state law, provided that strict due diligence and reporting standards are met. The FinCEN Guidance advised prosecutors not to focus their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses so long as that business is legal in their state and none of the federal enforcement priorities referenced in the Cole Memorandum are being violated (such as keeping marijuana away from children and out of the hands of organized crime). The FinCEN Guidance also clarifies how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, including thorough customer due diligence, but makes it clear that they are doing so at their own risk. The customer due diligence steps include:

 

1.              Verifying with the appropriate state authorities whether the business is duly licensed and registered;

 

2.              Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;

 

3.              Requesting from state licensing and enforcement authorities available information about the business and related parties;

 

4.              Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus adult use customers);

 

5.              Ongoing monitoring of publicly available sources for adverse information about the business and related parties;

 

6.              Ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and

 

7.              Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

 

With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

 

Because most banks and other financial institutions are unwilling to provide any banking or financial services to marijuana businesses, these businesses can be forced into becoming “cash-only” businesses. While the FinCEN Guidance decreased some risk for banks and financial institutions considering serving the industry, in practice it has not increased banks’ willingness to provide services to marijuana businesses, and most banks continue to decline to operate under the strict requirements provided under the FinCEN guidance. This is because, as described above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions to undertake time-consuming and costly due diligence on each marijuana business they accept as a customer.

 

The few state-chartered banks and/or credit unions that have agreed to work with marijuana businesses are limiting those accounts to small percentages of their total deposits to avoid creating a liquidity risk. Since, theoretically, the federal government could change the banking laws as it relates to marijuana businesses at any time and without notice, these credit unions must keep sufficient cash on hand to be able to return the full value of all deposits from marijuana businesses in a single day, while also keeping sufficient liquid capital on hand to serve their other customers. Those state-chartered banks and credit unions that do have customers in the marijuana industry charge marijuana businesses high fees to pass on the added cost of ensuring compliance with the FinCEN Guidance. Unlike the Cole Memorandum, however, the FinCEN Guidance from 2014 has not been rescinded.

 

The Secretary of the U.S. Department of the Treasury, Stephen Mnuchin, has publicly stated that the Department was not informed of any plans to rescind the Cole Memorandum. Secretary Mnuchin stated that he does not have a desire to rescind the FinCEN Guidance. As an industry best practice and consistent with its standard operating procedures, the Company adheres to all customer due diligence steps in the FinCEN Guidance.

 

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In the United States, a bill has been tabled in Congress to grant banks and other financial institutions immunity from federal criminal prosecution for servicing marijuana-related businesses if the underlying marijuana business follows state law. This bill has not been passed and there can be no assurance with that it will be passed in its current form or at all. In both Canada and the United States, transactions involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Legislative changes could help to reduce or eliminate these challenges for companies in the cannabis space and would improve the efficiency of both significant and minor financial transactions.

 

An additional challenge to marijuana-related businesses is that the provisions of Internal Revenue Code Section 280E are being applied by the IRS to businesses operating in the medical and adult-use marijuana industry. Section 280E prohibits marijuana businesses from deducting 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 marijuana 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.

 

CBD is a product that often is derived from hemp, which contains only trace amounts of THC, the psychoactive substance found in marijuana. On December 20, 2018, President Trump signed the Agriculture Improvement Act of 2018 (popularly known as the “2018 Farm Bill”) into law.  Until the 2018 Farm Bill became law, hemp and products derived from it, such as CBD, fell within the definition of “marijuana” under the CSA and the DEA classified hemp as a Schedule I controlled substance because hemp is part of the cannabis plant.

 

The 2018 Farm Bill defines hemp as the plant Cannabis sativa L. and any part of the plant with a delta-9 THC concentration of not more than 0.3% by dry weight and removes hemp from the CSA. The 2018 Farm Bill also allows states to create regulatory programs allowing for the licensed cultivation of hemp and production of hemp derived products. Hemp and products derived from it, such as CBD, may then be sold into commerce and transported across state lines provided that the hemp from which any product is derived was cultivated under a license issued by an authorized state program approved by the U.S. Department of Agriculture and otherwise meets the definition of hemp removed from the CSA. The introduction of hemp and products derived from it, such as CBD, in foods, beverages, and dietary supplements has not — been approved by the FDA. The FDA expects to engage in rulemaking on this subject.

 

Service Providers

 

As a result of any adverse change to the approach in enforcement of U.S. cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse change in public perception in respect of the consumption of marijuana or otherwise, third party service providers to the Company could suspend or withdraw their services, which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.

 

Ability to Access Capital

 

Given the current laws regarding cannabis at the federal law level in the United States, traditional bank financing is typically not available to United States cannabis companies. Specifically, the federal illegality of marijuana in the United States means that financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under money laundering statutes, the unlicensed money transmitter statute and the Bank Secrecy Act. As a result, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. Banks who do accept deposits from cannabis-related businesses in the United states must do so in compliance with the Cole Memorandum and the FinCEN guidance, both discussed above.

 

The Company requires equity and/or debt financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There can be no assurance that additional financing will be available to the Company when needed or on terms which are acceptable. The Company’s inability to raise financing through traditional banking to fund on-going operations, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

 

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If additional funds are raised through further issuances of equity or convertible debt securities, existing Company Shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to existing holders of SVS.

 

Restricted Access to Banking

 

As discussed above, the FinCEN Memorandum remains effective to this day, in spite of the fact that the 2014 Cole Memorandum was rescinded and replaced by the Sessions Memorandum. The FinCen Memorandum does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the Department of Justice, FinCEN or other federal regulators, though. Thus, most banks and other financial institutions in the U.S. do not appear to be comfortable providing banking services to cannabis-related businesses, or relying on this guidance, which can be amended or revoked at any time by the Trump administration. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company may have limited or no access to banking or other financial services in the U.S. The inability or limitation in the Company’s ability to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

On September 26, 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (commonly known as the “SAFE Banking Act”), which aims to provide safe harbor and guidance to financial institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act is currently being reviewed by the U.S. Senate Banking Committee. While the Senate is contemplating the SAFE Banking Act, the passage of which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, if Congress fails to pass the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

 

Anti-Money Laundering Laws and Regulations

 

The Company is subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Sections 1956 and 1957 of U.S.C. Title 18 (the Money Laundering Control Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada. Further, 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, aiding and abetting, or conspiracy.

 

In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the U.S. were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while there are no current intentions to declare or pay dividends on the SVS in the foreseeable future, in the event that a determination was made that the Company’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

 

Heightened Scrutiny by Regulatory Authorities

 

For the reasons set forth above, the Company’s existing operations in the U.S., and any future operations or investments of the Company, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There

 

48

 

can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to operate or invest in any other jurisdictions, in addition to those described herein.

 

Change to government policy or public opinion may also result in a significant influence on the regulation of the cannabis industry in Canada, the United States, or elsewhere. A negative shift in the public’s perception of medical or adult-use cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation, or enforcement. Such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adult-use cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s business strategy in the states in which the Company currently operates or in the Company’s ability to expand its business into new states, may have a material adverse effect on the Company’s business, financial condition, and results of operations. See “Risk Factors” section of this MD&A.

 

Further, violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions, or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. Any enforcement action against the Company or any of its licensed operating facilities could have a material adverse effect on (1) the Company’s reputation, (2) the Company’s ability to conduct business, (3) the Company’s holdings (directly or indirectly) of medical or adult-use cannabis licenses in the United States, (4) the listing or quoting of the Company’s securities on various stock exchanges, (5) the Company’s financial position, (6) the Company’s operating results, profitability, or liquidity, or (7) the market price of the Company’s publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution because the time and resources that may be necessary depend on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial. See “Risk Factors” section of this MD&A. The Company’s business activities, and the business activities of its subsidiaries, while believed to be compliant with applicable U.S. state and local laws, currently are illegal under U.S. federal law.

 

Further to the indication by CDS Clearing and Depository Services Inc. (“CDS”), Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets that it would refuse to settle trades for cannabis issuers that have investments in the U.S., the TMX Group, the owner and operator of CDS, subsequently issued a statement in August 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S., despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.

 

In February 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“MOU”) with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the U.S. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented at a time when the SVS are listed on a stock exchange, it would have a material adverse effect on the ability of holders of SVS to make and settle trades. In particular, the SVS would become highly illiquid as until an alternative was implemented, investors would have no ability to affect a trade of securities through the facilities of the applicable stock exchange. Curaleaf has obtained eligibility with DTC for its SVS quotation on the OTCQX® Best Market and such eligibility provides another possible avenue to clear the SVS in the event of a CDS ban. Revocation of DTC eligibility or implementation by DTC of a ban on the clearing of securities of issuers with cannabis-related activities in the United States would similarly have a material adverse effect on the ability of holders of the SVS to make and settle trades.

 

Compliance and Monitoring

 

As of the date of this MD&A, the Company believes that each of its licensed operating entities (a) holds all applicable licenses to cultivate, manufacture, possess, and/or distribute cannabis in its respective state, and (b) is in good standing and in material compliance with its respective state’s cannabis regulatory program. The Company is in material compliance

 

49

 

with its obligations under state law related to its cannabis cultivation, processing and dispensary licenses, other than minor violations that would not result in a material fine, suspension or revocation of any relevant license.

 

The Company uses reasonable commercial efforts to ensure that its business is in compliance with laws and applicable licensing requirements and engages in the regulatory and legislative process nationally and in every state we operate through our compliance department, government relations department, outside government relations consultants, cannabis industry groups and legal counsel.

 

The compliance department consists of our Chief Compliance Officer (“CCO”), James Shorris and Vice President, Keisha Brice and local compliance officers in our subsidiaries. Compliance officers in each operating subsidiary are charged with knowing the local regulatory process and monitoring developments and ongoing developments with their governing bodies. Each compliance officer regularly reports regulatory developments to the Company’s CCO and VP of Compliance through written and oral communications and are charged with the creation and implementation of plans regarding all regulatory developments. The Company’s CCO and VP of Compliance work with external legal advisors in the states in which the Company operates to ensure that the Company is in on-going compliance with applicable state laws.

 

The government relations department, consisting of Senior Vice President, Ed Conklin, and Vice President, Matt Harrell, work closely with Curaleaf management to develop relationships with local and state regulators, industry groups, and elected officials in order to effectively monitor and engage in the regulatory and legislative processes. The Company’s Government Relations Department develops strategies, engages legislative consultant’s, directly lobbies and works with third party groups to protect the Company’s right to operate and to advocate for legislation, regulations and oversight under which it can be successful.

 

Although the Company believes that its business activities are materially compliant with applicable and state and local laws of the United States, strict compliance with State and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law nor provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may result in a material adverse effect on the Company. The Company derives 100% of its revenues from the cannabis industry in certain States, which industry is illegal under United States federal law. Even where the Company’s cannabis-related activities are compliant with applicable State and local law, such activities remain illegal under United States federal law. The enforcement of relevant federal laws is a significant risk.

 

United States Customs and Border Protection (“CBP”) enforces the laws of the United States. Crossing the border while in violation of the CSA and other related United States federal laws may result in denied admission, seizures, fines, and apprehension. CBP officers administer the United States Immigration and Nationality Act to determine the admissibility of travelers who are non-U.S. citizens into the United States. An investment in the Company, if it became known to CBP, could have an impact on a non-U.S. citizen’s admissibility into the United States and could lead to a lifetime ban on admission. Medical cannabis has been protected against enforcement by enacted legislation from the United States Congress in the form of the Rohrabacher-Farr Amendment, which prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to the United States Congress restoring such funding. This amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. Subsequent to the issuance of Sessions Memorandum, the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the fourth consecutive year contained the Rohrabacher-Farr Amendment language (referred to in 2018 as the Leahy Amendment) and continued the protections for the medical cannabis marketplace and its lawful participants from interference by the Department of Justice. The Rohrabacher-Farr Amendment again was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019 and was similarly renewed again on November 21, 2019.  The FY 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrbacher-Farr Amendment effective through September 30, 2020. Notably, such Amendments have always applied only to medical cannabis programs and have no effect on pursuit of recreational cannabis activities.

 

In addition to the above disclosure, please see “Risk Factors” for further risk factors associated with the operations of the Company and the Company.

 

50

 

RISK FACTORS

 

The Company’s results of operations, business prospects, financial position and achievement of strategic plans are subject to a number of risks and uncertainties and are affected by a number of factors which could have a material adverse effect on the Company’s business, financial condition or future prospects. These risks should be considered when evaluating an investment in the Company and may, among other things, cause a decline in the price of the shares. Other than as stated herein, the Company’s risks and uncertainties have not materially changed from those described in the ‘Risk Factors’ section of the Company’s Annual MD&A for the year ended December 31, 2019 filed on SEDAR on March 26, 2020.

 

Risks Related to the COVID-19 Pandemic

 

The novel coronavirus commonly referred to as “COVID-19” was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

 

The rapid development of the COVID-19 pandemic and the measures being taken by governments and private parties to respond to it are extremely fluid. While the Company has continuously sought to assess the potential impact of the pandemic on its financial and operating results, any assessment is subject to extreme uncertainty as to probability, severity and duration. The Company has attempted to assess the impact of the pandemic by identifying risks in the following principle areas.

 

·                        Mandatory Closure. In response to the pandemic, many states and localities implemented mandatory closure of businesses to prevent spread of COVID-19. In most of the states the Company operates in, the Company’s business was deemed an “essential service”, permitting us to stay open despite the mandatory closure of non-essential businesses. While the Company continues to work closely with state and local regulators to remain operational, there is no guarantee further measures may nevertheless require us to shut operations in some or all states. Effective March 20, 2020, Nevada Governor Steve Sisolak ordered the closure of all dispensary storefronts thereby requiring all cannabis sales in Nevada to be made via delivery. On May 1, 2020, Governor Sisolak permitted cannabis dispensaries to offer curbside pickup, in addition to delivery. The Company’s dispensary locations in Nevada continued operations during the mandatory shut down by conducting delivery and, once permitted, curbside services. On May 9, 2020, Governor Sisolak permitted the resumption of in-store sales, and the Company’s Nevada dispensary locations opened for in-store sales immediately after. Effective March 24, 2020, Massachusetts Governor Charlie Baker ordered the closure of all adult-use dispensaries. Although medical dispensary sales were permitted, all adult-use sales were prohibited through the duration of the order. The Company’s medical dispensary locations in Oxford and Hanover Massachusetts continued to serve medical patients during this time, though the Company’s adult-use dispensaries in Provincetown and Ware were forced to close, and adult-use sales at the Company’s Oxford location were prohibited. On May 25, 2020, Governor Charlie Baker permitted the resumption of adult-use sales, and all of the Company’s Massachusetts dispensaries resumed sales immediately after. The Company’s ability to generate revenue would be materially impacted by any future shut down of its operations.  The Company estimates the total impact of COVID-19, including governor mandated restrictions on operations in Nevada and Massachusetts, resulted in approximately $25,600 revenue impact during the second quarter ended June 30, 2020.  Additionally, during the last three months period ended June 30, 2020 the Company incurred higher operating costs of approximately $1,800 associated with efforts to manage through the impacts of COVID-19.

 

·                        Customer Impact. While the Company has not experienced an overall downturn in demand for its products in connection with the pandemic, if its customers become ill with COVID-19, are forced to quarantine, decide to self-quarantine or not to visit its stores or distribution points to observe “social distancing”, it may have material negative impact on demand for its products while the pandemic continues. While the Company has implemented measures, where permitted, such as “curb side” sales and delivery, to reduce infection risk to our customers, regulators may not permit such measures, or such measures may not prevent a reduction in demand.

 

51

 

·                        Supply Chain Disruption. The Company relies on third party suppliers for equipment and services to produce its products and keep its operations going. If its suppliers are unable to continue operating due to mandatory closures or other effects of the pandemic, it may negatively impact its own ability to continue operating. At this time, the Company has not experienced any failure to secure critical supplies or services. However, disruptions in our supply chain may affect our ability to continue certain aspects of the Company’s operations or may significantly increase the cost of operating its business and significantly reduce its margins.

 

·                        Staffing Disruption. The Company is, for the time being, implementing among its staff where feasible “social distancing” measures recommended by such bodies as the Center of Disease Control, the Presidential Administration, as well as state and local governments. The Company has cancelled nonessential travel by employees, implemented remote meetings where possible, and permitted all staff who can work remotely to do so. For those whose duties require them to work on-site, measures have been implemented to reduce infection risk, such as reducing contact with customers, mandating additional cleaning of workspaces and hand disinfection, providing masks and gloves to certain personnel. Nevertheless, despite such measures, the Company may find it difficult to ensure that its operations remain staffed due to employees falling ill with COVID-19, becoming subject to quarantine, or deciding not to come to come to work on their own volition to avoid infection. At certain locations, the Company has experienced increased absenteeism due to the pandemic. If such absenteeism increases, the Company may not be able, including through replacement and temporary staff, to continue to operate in some or all locations.

 

·                        Regulatory Backlog. Regulatory authorities, including those that oversee the cannabis industry on the state level, are heavily occupied with their response to the pandemic. These regulators as well as other executive and legislative bodies in the states in which we operate may not be able to provide the level of support and attention to day-to-day regulatory functions as well as to needed regulatory development and reform that they would otherwise have provided. Such regulatory backlog may materially hinder the development of the Company’s business by delaying such activities as product launches, facility openings and approval of business acquisitions, thus materially impeding development of its business.

 

The Company is actively addressing the risk to business continuity represented by each of the above factors through the implementation of a broad range of measures throughout its structure and is re-assessing its response to the COVID-19 pandemic on an ongoing basis. The above risks individually or collectively may have a material impact on the Company’s ability to generate revenue. Implementing measures to remediate the risks identified above may materially increase our costs of doing business, reduce our margins and potentially result in losses. While the Company is not currently in financial distress, if the Company’s financial situation materially deteriorates as a result of the impact of the pandemic, the Company could eventually be unable to meet its obligations to third parties, including observing financial covenants under the Facility, which in turn could lead to insolvency and bankruptcy of the Company.

 

52



Exhibit 4.6

 

 

CURALEAF HOLDINGS, INC.

 

NOTICE OF ANNUAL MEETING TO BE HELD ON NOVEMBER 21, 2019

 

AND

 

MANAGEMENT INFORMATION CIRCULAR

 

October 10, 2019

 

 

CURALEAF HOLDINGS, INC.

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS (the “Notice”)

 

NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the “Meeting”) of Curaleaf Holdings, Inc. (the “Company”) will be held at the Four Seasons Hotel located at 1440 de la Montagne Street, Montreal, Quebec, Canada, H3G 1Z5 on November 21, 2019 at 2:00 p.m. EST to:

 

(a)                                 receive and consider the financial statements of the Company for the financial year ended December 31, 2018 together with the auditors’ report thereon;

 

(b)                                 fix the number of directors of the Company to a number between five and seven, to be determined at the discretion of the board of directors of the Company (the “Board”), and elect as directors for the forthcoming year the nominees proposed by the management of the Company (see page 1 of the management information circular (the “Information Circular”));

 

(c)                                  re-appoint Personal Finance Consulting Professional Company, Chartered Professional Accountants, as auditors of the Company and authorize the Board to fix the auditors’ remuneration and terms of engagement (see page 5 of the Information Circular); and

 

(d)                                 transact such other business as may properly come before the Meeting or any adjournment(s) thereof.

 

This Notice is accompanied by the Information Circular and a form of proxy (the “Proxy Instrument”).

 

The record date for the determination of shareholders of the Company (the “Shareholders”) entitled to receive notice of and to vote at the Meeting or any adjournment(s) thereof is October 7, 2019 (the “Record Date”). Shareholders whose names have been entered in the register of Shareholders at the close of business on the Record Date will be entitled to receive notice of and to vote at the Meeting or any adjournment(s) thereof.

 

A Shareholder may attend the Meeting in person or may be represented by proxy. Registered Shareholders who are unable to attend the Meeting or any adjournment(s) thereof in person are requested to complete, date, sign and return the accompanying Proxy Instrument for use at the Meeting or any adjournment(s) thereof.

 

To be effective, the enclosed Proxy Instrument must be returned to the Company’s transfer agent, Odyssey Trust Company (“Odyssey”) by: (i) mail using the enclosed return envelope; or (ii) hand delivery to Odyssey at Odyssey Trust Company, 323-409 Granville Street, Vancouver BC V6C 1T2. Alternatively, you may vote by Internet at http://odysseytrust.com/Transfer-Agent/Login and by clicking “Vote”. All instructions are listed on the Proxy Instrument. Your proxy or voting instructions must be received in each case no later than 2:00 p.m. EST on November 19, 2019 or, if the Meeting is adjourned, at least 48 hours (excluding Saturdays, Sundays and statutory holidays in the Province of British Columbia) before the beginning of any adjournment(s) to the Meeting.

 

If you are a non-registered Shareholder, a voting instruction form, instead of the Proxy Instrument, will be enclosed. You must follow the instructions provided by your intermediary in order to vote your shares. Non-registered Shareholders are shareholders that do not hold their shares of the Company in their own name and whose shares are held through an intermediary.

 

NOTICE-AND-ACCESS

 

Notice is also hereby given that the Company has decided to use the notice-and-access method of delivery of meeting materials for the Meeting for both non-registered and registered Shareholders. The notice-and-access mechanism allows the Company to deliver the meeting materials over the Internet in

 

1

 

accordance with the notice-and-access rules adopted by the Canadian Securities Administrators under National Instrument 54-101 - Communication with Beneficial Owners of Securities of a Reporting Issuer. Under the notice-and-access system, registered Shareholders will receive a form of proxy and non-registered Shareholders will receive a voting instruction form enabling them to vote at the Meeting. However, instead of a paper copy of this Notice, the Information Circular, the Proxy Instrument or voting instruction form, the annual financial statements and related management’s discussion and analysis, and other meeting materials (collectively the “Meeting Materials”), Shareholders will receive a notification with information on how they may access such materials electronically. The use of this alternative means of delivery is more environmentally friendly as it will help reduce paper use and will also reduce the printing and mailing costs. Shareholders are reminded to review carefully the Meeting Materials prior to voting.

 

Websites Where Meeting Materials Are Posted

 

Meeting Materials can be viewed online under the Company’s profile on SEDAR at www.sedar.com or at https://odysseytrust.com/Transfer-Agent/Meeting-Documents-CuraleafHoldingsInc, the website for the Meeting Materials maintained by the Company’s transfer agent and registrar, Odyssey. The Meeting Materials will remain posted on Odyssey’s website at least until the date that is one year after the date the Meeting Materials were posted.

 

How to Obtain Paper Copies of the Meeting Materials

 

Shareholders may request paper copies of the Meeting Materials be sent to them by postal delivery at no cost to them. Requests may be made up to one year from the date the Meeting Materials are posted on Odyssey’s website. In order to receive a paper copy of the Meeting Materials, or if you have questions concerning notice-and-access, please call Odyssey, at 1-888-290-1175 (toll-free in North America) or at 1-587-885-0960 (direct from outside of North America). A request for the Meeting Materials can be made at any time prior to the Meeting, and should be fulfilled within 3 business days.

 

DATED at Wakefield, Massachusetts this 10th day of October 2019.

 

BY ORDER OF THE BOARD

 

 

 

(signed) “Boris Jordan”

 

 

 

Boris Jordan, Executive Chairman of the Board

 

 

2

 

TABLE OF CONTENTS

 

PARTICULARS OF MATTERS TO BE ACTED UPON

1

1.

Number of Directors and Election of Directors

1

2.

Appointment of Auditors

5

3.

Consideration of Other Business

5

GENERAL STATUTORY INFORMATION

5

Solicitation of Proxies

5

Notice-and-Access

6

Revocation of Proxy

6

Voting of Proxies and Discretion Thereof

6

Non-Registered Shareholders

7

Voting Securities and Principal Holders Thereof

7

Take-Over Bid Protection

11

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

12

SECURITY BASED COMPENSATION ARRANGEMENTS

13

Equity Compensation Plan Information

13

Summary of the LTIP

14

STATEMENT OF EXECUTIVE COMPENSATION

17

Compensation Discussion and Analysis

17

Summary Compensation Table

19

Stock Options and Other Compensation Securities

22

STATEMENT OF CORPORATE GOVERNANCE

25

Board of Directors

25

Directorships

25

Orientation and Continuing Education

25

Ethical Business Conduct

25

Nomination of Directors

26

Compensation Committee

26

Audit Committee

27

Assessments

29

INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

29

ADDITIONAL INFORMATION

31

SCHEDULE “A” Articles

32

SCHEDULE “B” Audit Committee Charter

33

 

i

 

 

CURALEAF HOLDINGS, INC.
(“Curaleaf” or the “Company”)

 

MANAGEMENT INFORMATION CIRCULAR

 

This management information circular (the “Information Circular”) is dated October 10, 2019 and is furnished in connection with the solicitation of proxies by and on behalf of the management of the Company (“Management”) for use at the annual meeting (the “Meeting”) of holders of subordinate voting shares and holders of multiple voting shares (collectively, the “Shareholders”) of the Company to be held at the Four Seasons Hotel located at 1440 de la Montagne Street, Montreal, Quebec, Canada, H3G 1Z5  on November 21, 2019 at 2:00 p.m. for the purposes set out in the notice of Meeting (the “Notice”) accompanying this Information Circular.

 

All dollar amounts herein are expressed in United States dollars, unless otherwise indicated.

 

PARTICULARS OF MATTERS TO BE ACTED UPON

 

1.                                      Number of Directors and Election of Directors

 

The articles of the Company require a minimum of three directors of the Company. There are currently five directors of the Company. At the Meeting, it is proposed (i) to authorize the board of directors of the Company (the “Board”) to set the number of directors of the Company to a number between five and seven, to be determined at the Board’s discretion, and (ii) that five directors be elected at the Meeting. The present term of office of each current director of the Company will expire at the Meeting.

 

Management proposes to nominate at the Meeting the persons whose names are set forth in the following table, each to serve as a director of the Company until the next meeting of Shareholders at which the election of directors is considered, or until his/her successor is duly elected or appointed, unless he/she resigns, is removed or becomes disqualified in accordance with the articles of the Company or the Business Corporations Act (British Columbia) (the “Act”). The persons named in the accompanying form of proxy (the “Proxy Instrument”) or voting instruction form (“VIF”), as applicable, intend to vote for the election of such persons at the Meeting, unless otherwise directed. Management does not contemplate that any of the nominees will be unable to serve as a director of the Company.

 

The following table and the notes thereto set out the name of each person proposed by Management to be nominated for election as a director of the Company at the Meeting, the period during which he/she has been a director of the Company, his/her principal occupation within the five preceding years, all offices of the Company now held by such person, and his/her shareholdings, which includes the number of voting securities of the Company beneficially owned, or over which control or direction is exercised, directly or indirectly, to the knowledge of the Company, based on publicly available filings.

 

1

 

Name of Proposed
Nominee,
Province/State and
Country of Residence

 

Year First
Elected
as
Director

 

Principal Occupation(s) for
the Past Five Years

 

Position(s)
with the
Company

 

Shares Owned,
Controlled or
Directed, Directly
or Indirectly(1)(2)

Boris Jordan(3)(4)
Florida, U.S.

 

2018

 

Curaleaf, Executive Chairman; The Sputnik Group, President, CEO, and Founder; Renaissance Insurance, Chairman and Founder

 

Executive Chairman

 

110,670,705 Multiple Voting Shares


31,659,210 Subordinate Voting Shares

Joseph Lusardi
Massachusetts, U.S.

 

2018

 

Curaleaf, President and CEO; Massapoag Advisors, Principal and Founder

 

President, CEO, and Director

 

1,492,255 Subordinate Voting Shares

Dr. Steven Patierno
North Carolina, U.S.

 

2018

 

Duke Cancer Institute, Deputy Director

 

Director

 

668,134 Subordinate Voting Shares

Karl Johansson(3)(4)
Minnesota, U.S.

 

2018

 

Ernst & Young, Managing Partner

 

Director

 

Nil

Peter Derby(3)(4)
New York, U.S.

 

2018

 

Concinnity Advisors, LP, Founder

 

Director

 

228,824 Subordinate Voting Shares

 

Notes:

(1)                     No director beneficially owns, or controls or directs, directly or indirectly, any of the voting securities of the subsidiaries of the Company.

(2)                     These figures do not include Options and RSUs (as each such term is defined herein) which are disclosed elsewhere in this Information Circular.

(3)                     Member of the Audit Committee (as defined herein).

(4)                     Member of the Compensation Committee (as defined herein).

 

Nomination Rights under Recent Merger Agreements

 

On May 1, 2019, the Company announced it had signed a definitive agreement to acquire the state-regulated cannabis business of Cura Partners, Inc. (“Cura”), owners of the Select brand, in an all-stock transaction valued at approximately $948.8 million (the “Cura Acquisition”) to shareholders of Cura. Under the definitive agreement in respect of the Cura Acquisition, certain securityholders of Cura will have the right to appoint one individual to serve on the Board. Cameron Forni, CEO of Cura, is expected to fill the allotted board seat. Please refer to the section titled “Interest of Informed Persons in Material Transactions” in this Information Circular for additional information on the Cura Acquisition.

 

On July 17, 2019, the Company announced it had signed a definitive agreement to acquire GR Companies, Inc. (“Grassroots”) for a total consideration of approximately $875 million (the “Grassroots Acquisition”). Under the definitive agreement in respect of the Grassroots Acquisition, the core securityholders of Grassroots will have, as a group, the right to appoint one person to serve on the Board. Mitch Kahn, co-founder and CEO of Grassroots, is expected to fill the allotted board seat. For additional information, please refer to the material change report filed on SEDAR by the Company in respect of the

 

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Grassroots Acquisition, a copy of which is available under the Company’s profile at www.sedar.com. Upon request, the Company will promptly provide a copy of such material change report free of charge to a Shareholder.

 

The biographies of the proposed nominees for directors are set out below.

 

Boris Jordan | Executive Chairman of the Board. Mr. Jordan is an American businessman, co-founder of Renaissance Capital Group and President and Chief Executive Officer of The Sputnik Group, two international investment and advisory firms. In the early 1990’s, Mr. Jordan was considered a key player in the development of the Russian stock market and was a leader in the privatization of Russian state assets. Mr. Jordan is a longstanding Member of the Council on Foreign Relations and a member of The Board of Trustees of New York University. After founding The Sputnik Group in 1999, Mr. Jordan has led the company in its investments in emerging industries, including investments in Renaissance Insurance, a company where Mr. Jordan is also the Chairman and founder. Mr. Jordan built Renaissance Insurance into one of the leading insurance groups in the Russian market. Since acquiring majority control of Curaleaf in 2014, Mr. Jordan has been impactful in the Company’s emergence as an industry leader. Mr. Jordan serves as a member of the Audit Committee of the Company, as well as a member of the Compensation Committee. Mr. Jordan holds a B.A. from New York University.

 

Joseph Lusardi | President & CEO. Mr. Lusardi is a pioneer in the U.S. cannabis industry and is credited with opening one of the first medical cannabis operations on the East Coast. Mr. Lusardi has almost a decade of cannabis experience through which he has cultivated bottom-up expertise in cannabis company implementation and management, as well as 20 years’ experience in finance, private equity and entrepreneurship. He previously held executive positions at financial services companies including Liberty Mutual Group, Fidelity Investments, and Affiliated Managers Group. At Curaleaf, Mr. Lusardi has been instrumental in developing an organizational strategy focused on bringing the Company’s commitment to the advancement of cannabis science to all Curaleaf subsidiaries, and, ultimately, patients in need of medical cannabis. To support this effort, he raised over $500 million dollars to invest into the Company’s infrastructure, research and development, and staff. Mr. Lusardi continues to guide corporate strategy with a focused view on the continual improvement of best practices. Mr. Lusardi has a B.B.A. from The Catholic University of America and an M.B.A. from Boston College.

 

Dr. Steven Patierno, PhD | Chairman of the Medical Advisory Board. Dr. Steven Patierno is the Deputy Director Duke Cancer Institute and Curaleaf board member. Dr. Patierno holds titles in the scientific community including Deputy Director, Duke Cancer Institute, Professor of Medicine, Professor of Pharmacology and Cancer Biology, and Professor of Family Medicine and Community Health, Duke University School of Medicine. As Deputy Director of the Duke Cancer Institute, Dr. Patierno helps lead an NCI-designated Comprehensive Cancer Center dedicated to providing compassionate care from diagnosis to treatment to survivorship, advancing multi- and transdisciplinary cancer research and engaging in prevention and community health programming. One of the original eight NCI-designated comprehensive cancer centers, the Duke Cancer Institute is one of only 46 such centers in the U.S., with more than 175,000 patient visits and 7,500 new cancer diagnoses annually and nearly 1,000 active clinical trials. The Duke Cancer Institute includes more than 300 investigators with more than $200 million in annual cancer research funding. Prior to joining the Duke Cancer Institute, Dr. Patierno served as Executive Director of the George Washington University Cancer Center, Vivian Gill Distinguished Professor of Oncology, and Professor of Pharmacology and Physiology, Genetics and Urology in the GWU School of Medicine and Health Sciences. Dr. Patierno has a B.S. from The University of Connecticut and a PhD from The University of Texas Health Science Center in Houston.

 

Karl Johansson | Director. Mr. Johansson has broad experience in multinational accounting and the co-ordination of international tax engagements, mergers and acquisitions, and due diligence projects in key global markets. From 1995 to 2000, Mr. Johansson was a Managing Partner of Ernst & Young CIS, after which he was a Regional Partner for Eastern Europe countries, including CIS (Vienna, Austria). From 2006 to 2014 he worked as a Managing Partner of Ernst & Young CIS in Moscow. While in Russia, he was a coordinator of the Foreign Investment Advisory Council (FIAC). Mr. Johansson has been a member of the Emerging Europe Business Council and Corporate Governance Task Force of the World Economic

 

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Forum, as well as the Foreign Investment Advisory Councils of Kazakhstan, Ukraine and Latvia. Mr. Johansson serves as the Chair of the Audit Committee of the Company, as well as a member of the Compensation Committee. Mr. Johansson received a Bachelor’s degree from the University of Minnesota and a Juris Doctor degree from the University of Pennsylvania.

 

Peter Derby | Director. Peter Derby is a founding partner of Concinnity Advisors, LP, the sub-advisor with investment discretion for the Capital Stewardship Strategy, which was formed in 2011. From 2008 to 2011, Mr. Derby was a portfolio manager at Diamondback Advisors NY, LLC. From 2007 to 2008, he was a founding member of The Concinnity Group, LLC. During William H. Donaldson’s tenure as Chairman of the Securities Exchange Commission, from 2003 to 2005, Mr. Derby served as the Securities Exchange Commission’s Managing Executive for Operations and Management. In 1989, he participated in the founding of DialogBank, the first private Russian bank to receive an international banking license. At DialogBank, Mr. Derby served as Chairman of the board of directors from 1997 to 1998, as President and Chief Executive Officer from 1991 to 1997 and as Chief Financial Officer from 1990 to 1991. Mr. Derby also founded the first Russian investment firm in 1991, Troika Dialog, where he served as Chairman of the board of directors from 1996 to 1997 and as President and Chief Executive Officer from 1991 to 1996. Prior to his tenure in Russia, he was a Corporate Finance Officer at National Westminster Bank USA from 1985 to 1990 and an Auditor at Chase Manhattan Bank from 1983 to 1985. Mr. Derby serves as the Chair of the Compensation Committee of the Company, as well as a member of the Audit Committee. Mr. Derby earned a B.S. in accounting, finance and international finance from New York University in 1983.

 

The persons named in the accompanying Proxy Instrument or VIF, as applicable, (absent contrary directions) intend to vote the shares represented thereby FOR authorizing the Board to set the number of directors of the Company to a number between five and seven, to be determined at the Board’s discretion, and FOR the election or re-election, as applicable, of each of the aforementioned named nominees unless otherwise instructed on a properly executed and validly deposited proxy. Management does not contemplate that any aforementioned named nominees will be unable to serve as a director but, if that should occur for any reason prior to the Meeting, the persons named in the enclosed form of proxy reserve the right to vote for another nominee at their discretion.

 

Cease Trade Orders, Bankruptcy/Insolvency Proceedings, Penalties and Sanctions

 

None of the Company’s directors or executive officers has, within the ten years prior to the date of this Information Circular, been a director or officer of any company (including the Company) that, while such person was acting in that capacity (or after such person ceased to act in that capacity but resulting from an event that occurred while that person was acting in such capacity) was the subject of a cease trade order, an order similar to a cease trade order, or an order that denied the company access to any exemption under securities legislation, in each case for a period of more than 30 consecutive days.

 

None of the Company’s directors or executive officers has, within the ten years prior to the date of this Information Circular, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of such director or executive officer, been a director or executive officer of any company, that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

 

No director or executive officer of the Company has: (i) been subject to any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

 

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Conflicts of Interest

 

Conflicts of interest may arise as a result of the directors and officers of the Company also holding positions as directors or officers of other companies. They also invest and may invest in businesses, including in the cannabis sector, that compete directly or indirectly with the Company or act as customers or suppliers of the Company. Some of the individuals that are directors and officers of the Company have been and will continue to be engaged in the identification and evaluation of assets, businesses and companies on their own behalf and on behalf of other companies, and situations may arise where the directors and officers of the Company will be in direct competition with the Company. Conflicts, if any, will be subject to the procedures and remedies provided under the Act.

 

To the best of the Company’s knowledge, other than as disclosed below and elsewhere in this Information Circular, there are no known existing or potential material conflicts of interest among the Company or a subsidiary of the Company and a director or officer of the Company or a subsidiary of the Company as a result of their outside business interests, except that: (i) certain of the Company’s or its subsidiaries’ directors and officers serve as directors and officers of other companies, and therefore it is possible that a conflict may arise between their duties to the Company and their duties as a director or officer of such other companies, and (ii) certain of the Company’s or its subsidiaries’ directors and officers have portfolio investments consisting of minority stakes in businesses that may compete directly or indirectly with the Company or act as a customer of, or supplier to, the Company.

 

2.                                     Appointment of Auditors

 

Shareholders will be requested to re-appoint Personal Finance Consulting Professional Company, Chartered Professional Accountants (“PFC”), as auditors of the Company to hold office until the next annual meeting of Shareholders, and to authorize the directors of the Company to fix the auditors’ remuneration and the terms of their engagement. PFC was first appointed as auditors of the Company on February 4, 2019.

 

The persons named in the accompanying Proxy Instrument or VIF, as applicable, (absent contrary directions) intend to vote the shares represented thereby FOR the resolution appointing PFC as auditors of the Company for the ensuing year and authorizing the directors to fix PFC’s remuneration.

 

3.                                     Consideration of Other Business

 

Following the conclusion of the former business to be conducted at the Meeting, we will consider such other business, if any, that may properly come before the Meeting or any adjournment(s) thereof.

 

GENERAL STATUTORY INFORMATION

 

Solicitation of Proxies

 

The solicitation of proxies by this Information Circular is being made by and on behalf of Management. Although it is expected that the solicitation of proxies will be primarily by mail and by Internet, proxies may also be solicited in person. The Company is sending the Meeting Materials (as defined herein) to the Shareholders using notice-and-access in accordance with National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (“NI 54-101”), and the costs of the solicitation of proxies will be borne by the Company. The Meeting Materials are being sent by the Company to non-objecting beneficial owners and objecting beneficial owners indirectly through intermediaries and the Company assumes the delivery costs thereof. The Company may also retain, and pay a fee to, one or more professional proxy firms to solicit proxies from the Shareholders in favour of the matters set forth in the Notice.

 

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Notice-and-Access

 

Under the notice-and-access system, registered Shareholders will receive the Proxy Instrument and non-registered Shareholders will receive a VIF enabling them to vote at the Meeting. However, instead of a paper copy of this Notice, the Information Circular, the Proxy Instrument or VIF, as applicable, the annual financial statements and related management’s discussion and analysis, and other meeting materials (collectively the “Meeting Materials”), Shareholders will receive a notification with information on how they may access such materials electronically.

 

The use of this alternative means of delivery is more environmentally friendly as it will help reduce paper use and will also reduce the printing and mailing costs. Shareholders are reminded to review carefully the Meeting Materials prior to voting.

 

Meeting Materials can be viewed online under the Company’s profile on SEDAR at www.sedar.com or at https://odysseytrust.com/Transfer-Agent/Meeting-Documents-CuraleafHoldingsInc, the website for the Meeting Materials maintained by the Company’s transfer agent and registrar, Odyssey Trust Company (“Odyssey”). The Meeting Materials will remain posted on Odyssey’s website at least until the date that is one year after the date the Meeting Materials were posted.

 

Shareholders may request paper copies of the Meeting Materials be sent to them by postal delivery at no cost to them. Requests may be made up to one year from the date the Meeting Materials are posted on Odyssey’s website. In order to receive a paper copy of the Meeting Materials, or if you have questions concerning notice-and-access, please call Odyssey, at 1-888-290-1175 (toll-free in North America) or at 1-587-885-0960 (direct from outside of North America). A request for the Meeting Materials can be made at any time prior to the Meeting, and should be fulfilled within 3 business days.

 

Appointment of Proxy

 

The persons named in the enclosed Proxy Instrument are directors and/or officers of the Company. Shareholders have the right to appoint a person to represent him, her or it at the meeting other than the persons designated in the Proxy Instrument either by striking out the names of the persons designated in the Proxy Instrument and by inserting the name of the person or company to be appointed in the space provided in the Proxy Instrument or by completing another proper form of proxy and by, in either case, delivering the completed proxy to Odyssey by: (i) mail using the enclosed return envelope; or (ii) hand delivery to Odyssey at 323-409 Granville Street, Vancouver BC V6C 1T2. Alternatively, you may vote by Internet at http://odysseytrust.com/Transfer-Agent/Login and by clicking “Vote”. All instructions are listed on the enclosed Proxy Instrument. Your proxy or voting instructions must be received in each case no later than 2:00 p.m. EST on November 19, 2019 or, if the Meeting is adjourned, at least 48 hours (excluding Saturdays, Sundays and statutory holidays in the Province of Ontario) before the beginning of any adjournment(s) to the Meeting.

 

Revocation of Proxy

 

In addition to revocation in any other manner permitted by law, a Shareholder who has given a proxy pursuant to this solicitation may revoke it at any time up to and including the last business day preceding the day of the Meeting or any adjournment(s) thereof at which the proxy is to be used by an instrument in writing executed by the Shareholder or by his, her or its attorney authorized in writing and either delivered to the attention of the Corporate Secretary of the Company c/o Odyssey Trust Company, 323-409 Granville Street, Vancouver BC V6C 1T2, or by delivering written notice of such revocation to the chairman of the Meeting prior to the commencement of the Meeting on the day of the Meeting or any adjournment(s) thereof.

 

Voting of Proxies and Discretion Thereof

 

The shares represented by the Proxy Instrument will be voted or withheld from voting in accordance with

 

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the instructions of the Shareholder on any ballot that may be called for and, if the Shareholder specifies a choice with respect to any matter to be acted upon, the shares will be voted accordingly. When Shareholders have properly executed proxies in favour of persons designated in the printed portion of the enclosed Proxy Instrument, and have not specified in the Proxy Instrument the manner in which the named proxies are required to vote the shares represented thereby, such shares will be voted in favour of each item scheduled to come before the Meeting. The enclosed Proxy Instrument confers discretionary authority on the persons named therein with respect to amendments or variations to matters identified in the Notice or other matters which may properly come before the Meeting. At the date of this Information Circular, Management knows of no such amendments, variations or other matters to come before the Meeting. However, if other matters properly come before the Meeting, it is the intention of the persons named in the enclosed Proxy Instrument to vote such proxy according to their best judgment.

 

Non-Registered Shareholders

 

You are a non-registered Shareholder if your shares are registered in the name of an intermediary, such as a bank, a trust company, a securities dealer or broker, or an administrator of a self-administered RRSP, RRIF, RESP or similar plan, that, in turn, holds those shares through a central depository such as the Canadian Depository for Securities Limited (CDS) (each an “Intermediary”).

 

Pursuant to NI 54-101, Intermediaries are required to request voting instructions from non-registered shareholders prior to shareholders’ meetings. Without specific instructions from non-registered shareholders, Intermediaries are prohibited from voting the shares registered in their name. Non-registered Shareholders should ensure that instructions respecting the voting of their shares are communicated to their respective Intermediary.

 

If you are a non-registered Shareholder and wish to vote in person at the Meeting, you should carefully follow the instructions provided by your Intermediary, including those regarding when and where the proxy authorization form is to be delivered, in order to appoint yourself as proxyholder. Although non-registered Shareholders will not be recognized at the Meeting for the purpose of directly exercising the voting rights carried by the shares registered in the name of their Intermediary, they may attend the Meeting as proxy for the registered Shareholder and, in such capacity, exercise the voting rights carried by such shares by following the instructions to such effect provided by the Intermediary.

 

Voting Securities and Principal Holders Thereof

 

The authorized share capital of the Company consists of an unlimited number of multiple voting shares without par value (the “Multiple Voting Shares”) and an unlimited number of subordinate voting shares without par value (the “Subordinate Voting Shares”). As of the Record Date (as defined herein), there were 355,443,160 Subordinate Voting Shares issued and outstanding, representing approximately 17.6% of voting rights attached to outstanding securities of the Company, and 110,670,705 Multiple Voting Shares issued and outstanding, representing approximately 82.4% of voting rights attached to outstanding securities of the Company.

 

The following is a summary of the rights, privileges, restrictions and conditions attached to the Subordinate Voting Shares and the Multiple Voting Shares:

 

Subordinate Voting Shares

 

Restricted Shares

 

The Subordinated Voting Shares are “restricted securities” within the meaning of such term under applicable Canadian Securities Laws.

 

 

 

Right to Notice and Vote

 

Holders of Subordinate Voting Shares are entitled to notice of and to attend any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company have the right to vote. At each such meeting,

 

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holders of Subordinate Voting Shares are entitled to one vote in respect of each Subordinate Voting Share held.

 

 

 

Class Rights

 

As long as any Subordinate Voting Shares remain outstanding, the Company may not, without the consent of the holders of the Subordinate Voting Shares by separate special resolution, prejudice or interfere with any right attached to the Subordinate Voting Shares. Holders of Subordinate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company.

 

 

 

Dividends

 

Holders of Subordinate Voting Shares are entitled to receive as and when declared by the directors of the Company, dividends in cash or property of the Company. No dividend may be declared or paid on the Subordinate Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Multiple Voting Shares. In the event of the payment of a dividend in the form of shares, holders of Subordinate Voting Shares shall receive Subordinate Voting Shares, unless otherwise determined by the Board.

 

 

 

Participation

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Subordinate Voting Shares are, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Subordinate Voting Shares, entitled to participate rateably along with all other holders of Subordinate Voting Shares and Multiple Voting Shares (on an as-converted to Subordinate Voting Share basis).

 

 

 

Changes

 

No subdivision or consolidation of the Subordinate Voting Shares or Multiple Voting Shares shall occur unless, simultaneously, the Subordinate Voting Shares and Multiple Voting Shares are subdivided or consolidated in the same manner, so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Except as described below, the Subordinate Voting Shares cannot be converted into any other class of shares.

 

 

 

Conversion Upon an Offer

 

In the event that an offer is made to purchase Multiple Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules of the Toronto Stock Exchange if the stock exchange on which the shares of the Company are listed has not implemented any rules with respect to “coattail” protections, or if the Multiple Voting Shares are not then listed, to be made to all or substantially all the holders of Multiple Voting Shares in a given province or territory of Canada to which these requirements apply, each Subordinate Voting Share shall become convertible at the option of the holder into Multiple Voting Shares at the inverse of the Conversion Ratio then in effect at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Multiple Voting Shares pursuant to the offer, and for no other

 

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reason. In such event, the Company shall deposit or cause the Company’s transfer agent to deposit the resulting Multiple Voting Shares on behalf of the holder. Should the Multiple Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by shareholders or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Multiple Voting Shares resulting from the conversion shall be automatically reconverted, without further intervention on the part of the Company or on the part of the holder, into Subordinate Voting Shares at the Conversion Ratio then in effect.

 

Multiple Voting Shares

 

Right to Notice and Vote

 

Holders of Multiple Voting Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company have the right to vote. At each such meeting, holders of Multiple Voting Shares are entitled to 15 votes per Multiple Voting Share.

 

 

 

Class Rights

 

As long as any Multiple Voting Shares remain outstanding, the Company may not, without the consent of the holders of the Multiple Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Multiple Voting Shares. Additionally, consent of the holders of a majority of the outstanding Multiple Voting Shares are required for any action that authorizes or creates shares of any class having preferences superior to or on a parity with the Multiple Voting Shares. In connection with the exercise of the voting rights in respect of any such approvals, each holder of Multiple Voting Shares has one vote in respect of each Multiple Voting Share held. The holders of Multiple Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, bonds, debentures or other securities of the Company not convertible into Multiple Voting Shares.

 

 

 

Dividends

 

The holders of the Multiple Voting Shares are entitled to receive such dividends as may be declared and paid to holders of the Subordinate Voting Shares in any financial year as the Board may by resolution determine, on an as-converted to Subordinate Voting Share basis, assuming conversion of all Multiple Voting Shares into Subordinate Voting Shares at the Conversion Ratio. No dividend may be declared or paid on the Multiple Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Multiple Voting Shares and Subordinate Voting Shares. In the event of the payment of a dividend in the form of shares, holders of Multiple Voting Shares shall receive Multiple Voting Shares, unless otherwise determined by the Board.

 

 

 

Participation

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Multiple Voting Shares will, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Multiple Voting Shares, be entitled to participate rateably along with all other holders of Multiple Voting

 

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Shares (on an as-converted to Subordinate Voting Shares basis) and Subordinate Voting Shares.

 

 

 

Changes

 

No subdivision or consolidation of the Subordinate Voting Shares or Multiple Voting Shares may occur unless, simultaneously, the Subordinate Voting Shares and Multiple Voting Shares are subdivided or consolidated in the same manner, so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

 

 

 

Conversion

 

The Multiple Voting Shares are convertible into Subordinate Voting Shares on a one-for-one basis (the “Conversion Ratio”) at any time at the option of the holder.

 

 

 

Automatic Conversion

 

The Multiple Voting Shares structure will terminate automatically on October 25, 2021. It will also terminate automatically upon the occurrence of the following events: (i) transfer or disposition of the Multiple Voting Shares by Mr. Jordan to one or more third parties (which are not Permitted Holders (as defined in the articles of the Company attached as Schedule A)) and (ii) Mr. Jordan or his Permitted Holders no longer beneficially owning, directly or indirectly and in the aggregate, at least 5% of the issued and outstanding Subordinate Voting Shares and Multiple Voting Shares. Upon termination, the Multiple Voting Shares will automatically convert into Subordinate Voting Shares pursuant to the Conversion Ratio.

 

 

 

Conversion Upon an Offer

 

In the event that an offer is made to purchase Subordinate Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules of the Toronto Stock Exchange if the stock exchange on which the Subordinate Voting Shares are listed has not implemented any rules with respect to “coattail” protections, to be made to all or substantially all the holders of Subordinate Voting Shares in a given province or territory of Canada to which these requirements apply, each Multiple Voting Share shall become convertible at the option of the holder into Subordinate Voting Shares pursuant to the Conversion Ratio at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Multiple Voting Shares for the purpose of depositing the resulting Subordinate Voting Shares pursuant to the offer, and or no other reason. In such event, the Company shall deposit or cause the Company’s transfer agent to deposit the resulting Subordinate Voting Shares on behalf of the holder. Should the Subordinate Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by shareholders or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Subordinate Voting Shares resulting from the conversion shall be automatically reconverted, without further intervention on the part of the Company or on the part of the holder, into Multiple Voting Shares at the inverse of the Conversion Ratio then in effect.

 

The close of business on October 7, 2019 has been fixed as the record date (the “Record Date”) for the determination of Shareholders entitled to receive notice of the Meeting and any adjournment(s) thereof. Accordingly, only Shareholders of record on the Record Date are entitled to vote at the Meeting or any adjournment(s) thereof.

 

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The holders of Subordinate Voting Shares and holders of Multiple Voting Shares are shown as registered in his, her or its name on the list of Shareholders which is available for inspection during usual business hours at 666 Burrard Street, Suite 1700, Vancouver, BC, V6C 2X8 and at the Meeting. The list of Shareholders will be prepared not later than ten days after the Record Date.

 

If a person has acquired ownership of shares since that date, he, she or it may establish such ownership and demand, not later than ten days before the Meeting, that his, her or its name be included in the list of Shareholders.

 

Except as set out below, to the knowledge of the directors and officers of the Company, based on publicly available filings, as of the Record Date, no person beneficially owns or exercises control over, directly or indirectly, more than 10% of the outstanding voting securities of the Company:

 

Name of
Shareholder

 

Number of
Subordinate
Voting Shares
Owned,
Controlled or
Directed

 

Percentage of
Outstanding
Subordinate
Voting Shares
Owned,
Controlled or
Directed

 

Number of
Multiple Voting
Shares Owned,
Controlled or
Directed

 

Percentage of
Outstanding
Multiple Voting
Shares Owned,
Controlled or
Directed

 

Percentage of
Votes
Attaching to all
Outstanding
Shares Owned,
Controlled or
Directed

 

Boris Jordan

 

31,659,210

(1)

8.91

%

110,670,705

(2)

100.0

%

83.94

%

Andrei Blokh

 

127,173,634

 

35.78

%

—

 

—

 

6.37

%

 

Notes:

(1)                                 Boris Jordan is the beneficial owner of 50% of the shares of Bellmawr Investors, LLC, which is the holder of record of 11,222,670 Subordinate Voting Shares and is the beneficial owner of the shares of PT Share Participation 1, LLC and Gociter Holdings Ltd., which are the holders of record of 12,547,032 Subordinate Voting Shares and 13,500,843 Subordinate Voting Shares, respectively.

(2)                                 Boris Jordan is the beneficial owner of the shares of Gociter Holdings Ltd., which is the holder of record of the 110,670,705 Multiple Voting Shares.

 

Take-Over Bid Protection

 

Under applicable Canadian law, an offer to purchase Multiple Voting Shares would not necessarily require that an offer be made to purchase Subordinate Voting Shares. In accordance with the rules applicable to most senior issuers in Canada, in the event of a take-over bid, the holders of Subordinate Voting Shares will be entitled to participate on an equal footing with holders of Multiple Voting Shares. Mr. Boris Jordan, as the owner of all the outstanding Multiple Voting Shares, entered into a customary coattail agreement dated October 25, 2018 with the Company and a trustee (the “Coattail Agreement”). The Coattail Agreement contains provisions customary for dual class, listed corporations designed to prevent transactions that otherwise would deprive the holders of Subordinate Voting Shares of rights under applicable provincial take-over bid legislation to which they would have been entitled if the Multiple Voting Shares had been Subordinate Voting Shares.

 

The undertakings in the Coattail Agreement do not apply to prevent a sale by Mr. Boris Jordan of Multiple Voting Shares if concurrently an offer is made to purchase Subordinate Voting Shares that:

 

11

 

(a)         offers a price per Subordinate Voting Share at least as high as the highest price per share paid pursuant to the take-over bid for the Multiple Voting Shares (on an as converted to Subordinate Voting Share basis);

 

(b)         provides that the percentage of outstanding Subordinate Voting Shares to be taken up (exclusive of shares owned immediately prior to the offer by the offeror or persons acting jointly or in concert with the offeror) is at least as high as the percentage of Multiple Voting Shares to be sold (exclusive of Multiple Voting Shares owned immediately prior to the offer by the offeror and persons acting jointly or in concert with the offeror);

 

(c)          has no condition attached other than the right not to take up and pay for Subordinate Voting Shares tendered if no shares are purchased pursuant to the offer for Multiple Voting Shares; and

 

(d)         is in all other material respects identical to the offer for Multiple Voting Shares.

 

In addition, the restrictions contained in the Coattail Agreement do not prevent the transfer or sale of Multiple Voting Shares by a person or company who beneficially owns, directly or indirectly, or exercises control or direction over, directly or indirectly, 10% or more of the voting rights attached to any class of voting securities of the Company (each, a “Principal Shareholder”) to a Permitted Holder, provided such transfer or sale is not or would not have been subject to the requirements to make a take-over bid or constitute or would constitute an exempt take-over bid (as defined under applicable securities laws). The conversion of Multiple Voting Shares into Subordinate Voting Shares, whether or not such Subordinate Voting Shares are subsequently sold, does not constitute a disposition of Multiple Voting Shares for the purposes of the Coattail Agreement.

 

Under the Coattail Agreement, any disposition of Multiple Voting Shares (including a transfer to a pledgee as security) by a holder of Multiple Voting Shares party to the agreement is conditional upon the transferee or pledgee becoming a party to the Coattail Agreement, to the extent such transferred Multiple Voting Shares are not automatically converted into Subordinate Voting Shares in accordance with the articles of the Company.

 

The Coattail Agreement contains provisions for authorizing action by the trustee to enforce the rights under the Coattail Agreement on behalf of the holders of the Subordinate Voting Shares. The obligation of the trustee to take such action is conditional on the Company or holders of the Subordinate Voting Shares providing such funds and indemnity as the trustee may require. No holder of Subordinate Voting Shares has the right, other than through the trustee, to institute any action or proceeding or to exercise any other remedy to enforce any rights arising under the Coattail Agreement unless the trustee fails to act on a request authorized by holders of not less than 10% of the outstanding Subordinate Voting Shares and reasonable funds and indemnity have been provided to the trustee. The Company agreed to pay the reasonable costs of any action that may be taken in good faith by holders of Subordinate Voting Shares pursuant to the Coattail Agreement.

 

The Coattail Agreement provides that it may not be amended, and no provision thereof may be waived, unless, prior to giving effect to such amendment or waiver, the following have been obtained: (a) the consent of any applicable securities regulatory authority in Canada and (b) the approval of at least 66 2/3% of the votes cast by holders of Subordinate Voting Shares excluding votes attached to Subordinate Voting Shares held by Mr. Boris Jordan and his Permitted Holders on terms which would constitute a sale or disposition for purposes of the Coattail Agreement other than as permitted thereby.

 

No provision of the Coattail Agreement limits the rights of any holders of Subordinate Voting Shares under applicable law.

 

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

 

No individual is, or at any time during the most recently completed financial year of the Company was, a

 

12

 

director or executive officer of the Company, and no proposed nominee for election as a director of the Company, or any associate of any such director, executive officer or proposed nominee: (i) is or at any time since the beginning of the most recently completed financial year of the Company has been, indebted to the Company or any of its subsidiaries; or (ii) whose indebtedness to another entity is, or at any time since the beginning of the most recently completed financial year of the Company has been, the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Company or any of its subsidiaries.

 

SECURITY BASED COMPENSATION ARRANGEMENTS

 

Equity Compensation Plan Information

 

On October 12, 2018, shareholders of the Company approved an equity incentive plan for the Company, which the Company adopted (the “LTIP”). The LTIP permits the grant of (i) nonqualified stock options (“NQSOs”) and incentive stock options (“ISOs” and, collectively with NQSOs, “Options”), (ii) restricted stock awards, (iii) restricted stock units (“RSUs”), (iv) stock appreciation rights (“SARs”), and (v) performance compensation awards, which are referred to herein collectively as “Awards”, as more fully described below.

 

Prior to its business combination with Lead Ventures Inc. on October 26, 2018 (the “Business Combination”), the Company had in place a long-term incentive plan under which it could grant stock options to its directors, officers, employees and consultants or any affiliate thereof (the “Legacy LTIP”). As of the date of the Business Combination, a total of 30,729,247 options under the LTIP were issued, representing the number of stock options following competition of the reorganization share exchange that occurred at the time of the merger between the Company and Curaleaf MergerCo, Inc. All of the stock options granted under the Legacy LTIP were rolled into and became subject to the LTIP. Please refer to the section titled “Interest of Informed Persons in Material Transactions” in this Information Circular for additional information on the Business Combination.

 

Under the LTIP, the aggregate number of Subordinate Voting Shares that may be issued under all awards under the LTIP is equal to 10% of the number of Subordinate Voting Shares outstanding at any time, including the number of Subordinate Voting Shares issuable on conversion of the Multiple Voting Shares, the whole subject to certain adjustments provided under the LTIP.

 

The following table sets out information as of December 31, 2018 with respect to the LTIP.

 

13

 

Plan Category

 

(a)
Number of securities to be
issued upon exercise of
outstanding Options,
warrants and rights

 

(b)
Weighted-average exercise
price of outstanding
Options, warrants and
rights

 

(c)
Number of
securities remaining
available for future
issuance under
equity
compensation plans
(excluding
securities reflected
in column (a))

 

Equity compensation plans approved by Shareholders(1)

 

31,453,663

 

$

0.94

 

14,143,701

(2)

Equity compensation plans not approved by Shareholders

 

Nil

 

Not applicable

 

Not applicable

 

TOTAL

 

31,453,663

 

 

 

14,143,701

 

 

Notes:

(1)         The maximum number of Subordinate Voting Shares issuable upon the exercise of the Options currently outstanding under the LTIP of the Company as of December 31, 2018 was 31,453,663, representing approximately 6.87% of the number of then issued and outstanding Subordinate Voting Shares (including, for these purposes, the number of Subordinate Voting Shares underlying the Multiple Voting Shares on an “as if converted” basis) then outstanding, on a fully-diluted basis.

(2)         Under the LTIP, the aggregate number of Subordinate Voting Shares that may be issued under all awards under the LTIP is equal to 10% of the number of Subordinate Voting Shares outstanding at any time, including the number of Subordinate Voting Shares issuable on conversion of the Multiple Voting Shares, the whole subject to certain adjustments provided under the LTIP.

 

As at December 31, 2018, the following Awards were outstanding under the LTIP: (i) 31,435,663 Options, with the underlying Subordinate Voting Shares representing approximately 6.87% of the number of then issued and outstanding Subordinate Voting Shares (including, for these purposes, the number of Subordinate Voting Shares underlying the Multiple Voting Shares on an “as if converted” basis) (the “Outstanding Share Number”), and (ii) 166,215 RSUs, with the underlying Subordinate Voting Shares representing approximately 0.04% of the Outstanding Share Number. As at December 31, 2018, an aggregate of 14,143,701 Subordinate Voting Shares remained available for issuance under the LTIP, representing approximately 3.09% of the Outstanding Share Number.

 

Summary of the LTIP

 

Purpose

 

The purpose of the LTIP is to promote the interests of the Company and its shareholders by aiding the Company in attracting and retaining employees, officers, consultants, advisors and non-employee directors capable of assuring the future success of the Company, to offer such persons incentives to put forth maximum efforts for the success of the Company’s business and to compensate such persons through various stock and cash-based arrangements and provide them with opportunities for stock ownership in the Company, thereby aligning the interests of such persons with the Company’s shareholders.

 

14

 

Eligibility

 

Any of the Company’s employees, officers, directors, or consultants (who are natural persons) are eligible to participate in the LTIP if selected by the Board (the “Participants”). The basis of participation of an individual under the LTIP, and the type and amount of any Award that an individual will be entitled to receive under the LTIP, will be determined by the Board based on its judgment as to the best interests of the Company and its shareholders, and therefore cannot be determined in advance.

 

The maximum number of Subordinate Voting Shares that may be issued under the LTIP shall be set by the Board to be an aggregate of 10% of the number of Subordinate Voting Shares (including the number of Subordinate Voting Shares underlying the Multiple Voting Shares on an “as if converted” basis) then outstanding, on a fully-diluted basis. Notwithstanding the foregoing, a maximum of 10% of the issued and outstanding Subordinated Voting Shares (including the number of Subordinate Voting Shares underlying the Multiple Voting Shares on an “as if converted” basis), on a fully-diluted basis, as of the completion of the Business Combination may be issued as ISOs, subject to adjustment in the LTIP. Any shares subject to an Award under the LTIP that are forfeited, cancelled, expire unexercised, are settled in cash, or are used or withheld to satisfy tax withholding obligations of a Participant shall again be available for Awards under the LTIP. No financial assistance or support agreements may be provided by the Company in connection with grants under the LTIP.

 

In the event of any dividend, recapitalization, forward or reverse stock split, reorganization, merger, amalgamation, consolidation, split-up, split-off, combination, repurchase or exchange of Subordinate Voting Shares or other securities of the Company, issuance of warrants or other rights to acquire Subordinate Voting Shares or other securities of the Company, or other similar corporate transaction or event, which affects the Subordinate Voting Shares, or unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange or inter-dealer quotation system, accounting principles or law, the Board may make such adjustment, which it deems appropriate in its discretion in order to prevent dilution or enlargement of the rights of Participants under the LTIP, to (i) the number and kind of shares which may thereafter be issued in connection with Awards, (ii) the number and kind of shares issuable in respect of outstanding Awards, (iii) the purchase price or exercise price relating to any Award or, if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, and (iv) any share limit set forth in the LTIP.

 

Awards

 

Options

 

The Board is authorized to grant Options to purchase Subordinate Voting Shares that are either ISOs meaning they are intended to satisfy the requirements of Section 422 of the Code, or NQSOs, meaning they are not intended to satisfy the requirements of Section 422 of the Code. Options granted under the LTIP are subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the Board and specified in the applicable award agreement. The maximum term of an option granted under the LTIP is ten years from the date of grant (or five years in the case of an ISO granted to a 10% shareholder). Payment in respect of the exercise of an Option may be made in cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise) or by such other method as the Board may determine to be appropriate.

 

Restricted Stock

 

A restricted stock award is a grant of Subordinate Voting Shares, which are subject to forfeiture restrictions during a restriction period. The Board will determine the price, if any, to be paid by the Participant for each Subordinate Voting Shares subject to a restricted stock award. The Board may condition the expiration of the restriction period, if any, upon: (i) the Participant’s continued service over a period of time with the Company or its affiliates; (ii) the achievement by the Participant, the Company or its affiliates of any other performance goals set by the Board; or (iii) any combination of the above

 

15

 

conditions as specified in the applicable award agreement. If the specified conditions are not attained, the Participant will forfeit the portion of the restricted stock award with respect to which those conditions are not attained, and the underlying Subordinate Voting Shares will be forfeited. At the end of the restriction period, if the conditions, if any, have been satisfied, the restrictions imposed will lapse with respect to the applicable number of Subordinate Voting Shares. During the restriction period, unless otherwise provided in the applicable award agreement, a Participant will have the right to vote the shares underlying the restricted stock; however, all dividends will remain subject to restriction until the stock with respect to which the dividend was issued lapses. The Board may, in its discretion, accelerate the vesting and delivery of shares of restricted stock. Unless otherwise provided in the applicable award agreement or as may be determined by the Board upon a Participant’s termination of service with the Company, the unvested portion of a restricted stock award will be forfeited.

 

RSUs

 

RSUs are granted in reference to a specified number of Subordinate Voting Shares and entitle the holder to receive, on achievement of specific performance goals established by the Board after a period of continued service with the Company or its affiliates or any combination of the above as set forth in the applicable award agreement, one Subordinate Voting Share for each such Subordinate Voting Share covered by the RSU; provided, that the Board may elect to pay cash, or part cash and part Subordinate Voting Shares in lieu of delivering only Subordinate Voting Shares. The Board may, in its discretion, accelerate the vesting of RSUs. Unless otherwise provided in the applicable award agreement or as may be determined by the Board upon a Participant’s termination of service with the Company, the unvested portion of the RSUs will be forfeited.

 

Stock Appreciation Rights

 

A SAR entitles the recipient to receive, upon exercise of the SAR, the increase in the fair market value of a specified number of Subordinate Voting Shares from the date of the grant of the SAR and the date of exercise payable in Subordinate Voting Shares. Any grant may specify a vesting period or periods before the SAR may become exercisable and permissible dates or periods on or during which the SAR shall be exercisable. No SAR may be exercised more than ten years from the grant date. Upon a Participant’s termination of service, the same general conditions applicable to Options as described above would be applicable to the SAR.

 

General

 

The maximum term of the ISOs to be granted/awarded under the LTIP is ten years.

 

The Board may impose restrictions on the grant, exercise or payment of an Award as it determines appropriate. Generally, Awards granted under the LTIP shall be non-transferable except by will or by the laws of descent and distribution. No Participant shall have any rights as a shareholder with respect to Subordinate Voting Shares covered by Options, SARs or RSUs, unless and until such Awards are settled in Subordinate Voting Shares.

 

No Option (or, if applicable, SARs) shall be exercisable, no Subordinate Voting Shares shall be issued, no certificates for Subordinate Voting Shares shall be delivered and no payment shall be made under the LTIP except in compliance with all applicable laws.

 

The Board may amend, alter, suspend, discontinue or terminate the LTIP and the Board may amend any outstanding Award at any time; provided that (i) such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Company’s shareholders if such approval is necessary to comply with any tax or regulatory requirement applicable to the LTIP (including, without limitation, as necessary to comply with any rules or requirements of applicable securities exchange), (ii) no such amendment or termination may adversely affect Awards then outstanding without the Award

 

16

 

holder’s permission, and (iii) such amendment, alteration, suspension, discontinuation, or termination is in compliance with Canadian Securities Exchange policies.

 

In the event of any reorganization, merger, consolidation, split-up, spin-off, combination, plan of arrangement, takeover bid or tender offer, repurchase or exchange of Subordinate Voting Shares or other securities of the Company or any other similar corporate transaction or event involving the change of control of the Company (or the Company shall enter into a written agreement to undergo such a transaction or event), the Board may, in its sole discretion, take such measures or make such adjustments in regards to any securities granted pursuant to the LTIP, as it deems appropriate.

 

Tax Withholding

 

The Company may take such action as it deems appropriate to ensure that all applicable federal, State, provincial, local and/or foreign payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant.

 

STATEMENT OF EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Compensation Governance

 

The Board has not adopted any formal policies or procedures to determine the compensation of the Company’s directors or executive officers. The compensation of the directors and executive officers is determined by the Board, on an annual basis, based on the recommendations of the compensation committee of the Board (the “Compensation Committee”). Recommendations of the Compensation Committee are made giving consideration to the objectives discussed below and, if applicable, considering applicable industry data.

 

The Compensation Committee currently consists of three directors: Peter Derby (Chair), Boris Jordan and Karl Johansson, all of whom have direct and indirect experience relevant to their roles as members of the Compensation Committee. Peter Derby and Karl Johansson are independent director members of the Compensation Committee. For details regarding the experience of the members of the Compensation Committee, see the biographies of each member set out in the section “Election of Directors”.

 

The role and responsibility of the Compensation Committee is to assist the Board in fulfilling its responsibilities for the appointment, performance, evaluation and compensation of its executive officers in addition to the recruitment, development and retention of its executive officers. The Compensation Committee is also charged with maintaining talent management and succession planning systems and processes relating to its senior management and developing compensation structure for our executive officers including salaries, annual and long-term incentive plans including plans involving share issuances and other share-based awards. The Compensation Committee is also charged with reviewing the LTIP and proposing changes thereto, approving any awards of securities under the equity incentive plan and establishing policies and procedures designed to identify and mitigate risks associated with its compensation policies and practices.

 

The Company’s compensation practices are designed to retain, motivate and reward its executive officers for their performance and contribution to the Company’s long-term success. The Board seeks to compensate the Company’s executive officers by combining short and long-term cash and equity incentives. It also seeks to reward the achievement of corporate and individual performance objectives, and to align executive officers’ incentives with shareholder value creation. The Board intends to seek to tie individual goals to the area of the executive officer’s primary responsibility. These goals may include the achievement of specific financial or business development goals. The Board also seeks to set company performance goals that reach across all business areas and include achievements in

 

17

 

finance/business development and corporate development. There is no pre-determined specific weight or approximate weight assigned to each such performance criterion or goal.

 

Elements of Compensation

 

The compensation of the directors and named executive officers (“NEOs”), as defined under Form 51-102F6V — Statement of Executive Compensation — Venture Issuers, is comprised of the following major elements: (a) base salary; (b) an annual, discretionary cash bonus; and (c) long-term equity incentives, consisting of stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance compensation awards and other applicable awards granted under the LTIP and any other equity plan that may be approved by the Board from time to time.

 

Each such element of the executive compensation program has been designed to meet one or more objectives of the overall compensation program of the Company. The salary of each NEO, combined with any discretionary cash bonuses and granting of long-term incentives, has been designed to provide total compensation which the Board believes is competitive. Overall compensation is not evaluated against a formal “peer group”.

 

The Company is not aware of any significant event that has occurred during the most recently completed financial year that has significantly affected compensation, and the Company has not waived or changed any performance criterion or goal. The Company determines the value of the annual cash bonus based on objective, identifiable measures, as further described below.

 

1.                                     Base Salary

 

Base salaries are intended to provide an appropriate level of fixed compensation that will assist in employee retention and recruitment. Base salaries will be determined on an individual basis, taking into consideration the past, current and potential contribution to the Company’s success, the NEO’s experience and expertise, the position and responsibilities of the NEO, and competitive industry pay practices for other high growth, premium brand companies of similar size and revenue growth potential.

 

2.                                     Annual Cash Bonus

 

An annual cash bonus is a short-term incentive that is intended to reward each executive officer for his or her individual contribution and performance of personal objectives in the context of overall corporate performance. Cash bonuses are designed to motivate executive officers to achieve personal business objectives, to be accountable for their relative contribution to the Company’s performance, as well as to attract and retain executives. In determining compensation and, in particular, bonuses, the Compensation Committee considers factors over which the executive officer can exercise control, such as their role in identifying and completing acquisitions and integrating such acquisitions into the Company’s business, meeting any budget targets established by controlling costs, taking successful advantage of business opportunities and enhancing the competitive and business prospects of the Company.

 

3.                                     LTIP

 

The Company has approved and adopted the LTIP. For a summary of the material terms, please refer to the Section “Security Based Compensation Arrangements — Summary of the LTIP”.

 

4.                                     Pension Plan Benefits

 

The Company did not implement any deferred compensation plan, pension plan or other forms of funded or unfunded retirement compensation for its employees that provides for payments or benefits at, following or in connection with retirement.

 

18

 

5.                                     Termination and Change of Control Benefits

 

Other than as described in this Information Circular, there are no compensatory plan(s) or arrangements(s), with respect to the NEOs resulting from the resignation, retirement or any other termination of employment of the officer’s employment or from a change of NEOs’ responsibilities following a change of control benefits. In case of termination of NEOs, common law and statutory law applies.

 

6.                                     Director Compensation

 

The Company pays compensation to its directors, which is comprised of cash and awards granted in accordance with the terms of the LTIP and the Canadian Securities Exchange policies, or a combination of both. The Company grants RSUs and/or Options to certain of its newly appointed non-executive directors from time to time, as determined by the Board. The directors are reimbursed for any out-of-pocket travel expenses incurred in order to attend meetings of the Board, committees of the Board or meetings of the shareholders of the Company. The Company obtained customary insurance for the benefit of its directors and enter into indemnification agreements with its directors pursuant to which the Company will agree to indemnify its directors to the extent permitted by applicable law.

 

Summary Compensation Table

 

The following table summarizes, for the periods indicated, the compensation (expressed in United States dollars, unless otherwise indicated) paid, payable, awarded, granted, given or otherwise provided, directly or indirectly, by the Company to each director and NEO of the Company, in each case excluding compensation securities.

 

Name and
position

 

Year ended
December
31

 

Salary,
consulting
fee, retainer
or
commission
($)

 

Bonus
($)

 

Committee
or meeting
fees
($)

 

Value of
perquisites
($)

 

Value of all
other
compensation
($)

 

Total
compensation
($)

 

Named Executive Officers (Pre-Business Combination)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rana Vig, Former President, CEO and Director(1)

 

2018

 

C$

120,000

 

—

 

—

 

—

 

—

 

C$

120,000

 

 

 

2017

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David Goertz, Former CFO(2)

 

2018

 

C$

120,000

 

—

 

—

 

—

 

—

 

C$

120,000

 

 

 

2017

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Simon Yang, Former Chief Executive Officer, Chief Financial Officer, Secretary and Director(3)

 

2018

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

2017

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Executive Directors (Pre-Business Combination)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ryan Coe, Former

 

2018

 

—

 

—

 

—

 

—

 

—

 

—

 

 

19

 

Name and
position

 

Year ended
December
31

 

Salary,
consulting
fee, retainer
or
commission
($)

 

Bonus
($)

 

Committee
or meeting
fees
($)

 

Value of
perquisites
($)

 

Value of all
other
compensation
($)

 

Total
compensation
($)

 

Director(4)

 

2017

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Philip Kwan, Former Director(5)

 

2018

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

2017

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilson Fung, Former Director(6)

 

2018

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

2017

 

18,000

 

—

 

—

 

—

 

—

 

18,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Richard Penn, Former Director(7)

 

2018

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

2017

 

18,000

 

—

 

—

 

—

 

—

 

18,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Named Executive Officers (Post-Business Combination)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph Lusardi, President, CEO and Director(8)(9)

 

2018

 

500,000

 

1,425,000

 

—

 

6,000

(10)

300,000

(11)

2,231,000

 

 

 

2017(11)

 

599,038

 

250,000

 

—

 

6,000

(10)

—

 

855,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stuart Wilcox, COO(13)

 

2018

 

350,000

 

170,000

 

—

 

—

 

—

 

520,000

 

 

 

2017(14)

 

132,428

 

133,333

 

—

 

—

 

20,000

(15)

285,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jonathan Faucher, Chief Financial Officer, EVP of Finance, Treasurer & Corporate Secretary(16)(17)

 

2018

 

200,000

 

218,000

 

—

 

—

 

—

 

418,000

 

 

 

2017(18)

 

175,962

 

33,750

 

—

 

—

 

—

 

209,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boris Jordan, Executive Chairman(19)

 

2018

 

500,000

 

1,000,000

 

—

 

—

 

—

 

1,500,000

 

 

 

2017(20)

 

—

 

—

 

—

 

94,331

(21)

—

 

94,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Executive Directors (Post-Business Combination)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steven Patierno, Director(22)

 

2018

 

—

 

—

 

81,950

 

—

 

—

 

81,950

 

 

 

2017

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Karl Johansson,

 

2018

 

12,500

 

—

 

—

 

—

 

—

 

12,500

 

 

20

 

Name and
position

 

Year ended
December
31

 

Salary,
consulting
fee, retainer
or
commission
($)

 

Bonus
($)

 

Committee
or meeting
fees
($)

 

Value of
perquisites
($)

 

Value of all
other
compensation
($)

 

Total
compensation
($)

 

Director(23)

 

2017

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peter Derby, Director(24)

 

2018

 

12,500

 

—

 

—

 

—

 

—

 

12,500

 

 

 

2017

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

Notes:

(1)                     Mr. Vig was appointed as President, Chief Executive Officer and director of LVI on February 2, 2018 and he resigned from such functions on October 25, 2018 upon completion of the Business Combination.

(2)                     Mr. Goertz was appointed as Chief Financial Officer and director of LVI on March 9, 2018 and he resigned from such functions on October 25, 2018 upon completion of the Business Combination.

(3)                     Simon Yang was appointed a director of Lead Ventures Inc., the predecessor of the Company (“LVI”) on August 17, 2016. He was appointed Chief Executive Officer, Chief Financial Officer and Secretary of LVI on November 15, 2016. Mr. Yang resigned as the Chief Executive Officer of LVI on February 2, 2018, the Chief Financial Officer and Secretary of LVI on March 9, 2018 and a director of LVI on June 29, 2018. He has therefore served in his capacity as Chief Executive Officer of LVI for a period of approximately 1 month in 2018, in his capacity as Chief Financial Officer and Secretary of LVI for a period of approximately 2 months in 2018, and in his capacity as director of LVI for a period of approximately 6 months in 2018.

(4)                     Mr. Coe was appointed as director of LVI on June 29, 2018 and he resigned from such functions on October 25, 2018 upon completion of the Business Combination.

(5)                     Philip Kwan was a director of LVI from August 14, 2017 to June 29, 2018. He has therefore served in his capacity as director of LVI for approximately 6 months in 2018.

(6)                     Wilson Fung was a director of LVI from January 20, 2016 to February 2, 2018. He has therefore served in his capacity as director of LVI for approximately 1 month in 2018.

(7)                     Richard Penn was a director of LVI from November 2014 to June 16, 2017. He has therefore served in his capacity as director of LVI for approximately 7 months in 2017.

(8)                     Joseph Lusardi did not receive compensation in his capacity as director. He received compensation only in his capacity as President & CEO.

(9)                     Joseph Lusardi was appointed as an officer and director of the Company on October 25, 2018. He has therefore served in such capacities for approximately 2 months in 2018.

(10)              Reflects an allocation of 500$ per month for the lease of a company car.

(11)              Prior to the completion of the Business Combination, Mr. Lusardi was entitled to a share of the profits of Maine Organic Therapy, an entity with which the Company has entered into a management services agreement whereby PalliaTech Maine, LLC, a subsidiary of the Company, is entitled to receive certain management fees from the entity. In connection with such management services agreement, in December 2018, Mr. Lusardi received $300,000 as a distribution.

(12)              Reflects compensation earned from certain subsidiaries of the Company during the 12 months ended December 31, 2017 and prior to completion of the Business Combination.

(13)              Stuart Wilcox was appointed as an officer of the Company on October 25, 2018. He has therefore served in his capacity as officer of the Company for approximately 2 months in 2018.

(14)              Reflects compensation earned from certain subsidiaries of the Company during the 12 months ended December 31, 2017 and prior to completion of the Business Combination.

(15)              Reflects a relocation allocation granted to Mr. Wilcox upon entering into employment with PalliaTech, Inc., the successor of the Company.

(16)              Mr. Neil Davidson replaced Mr. Jonathan Faucher as Chief Financial Officer in January 2019.

(17)              Jonathan Faucher was appointed as officer of the Company on October 25, 2018. He has therefore served in his capacity as officer of the Company for approximately 2 months in 2018.

(18)              Reflects compensation earned from certain subsidiaries of the Company during the 12 months ended December 31, 2017 and prior to completion of the Business Combination.

(19)              Boris Jordan was appointed as director of the Company on October 25, 2018. He has therefore served in his capacity as director of the Company for approximately 2 months in 2018.

(20)              Reflects compensation earned from certain subsidiaries of the Company during the 12 months ended December 31, 2017 and prior to completion of the Business Combination.

(21)              This amount corresponds to expense reimbursements.

 

21

 

(22)              Steven Patierno was appointed as director of the Company on October 25, 2018. He has therefore served in his capacity as director of the Company for approximately 2 months in 2018.

(23)              Karl Johansson was appointed as director of the Company on October 25, 2018. He has therefore served in his capacity as director of the Company for approximately 2 months in 2018.

(24)              Peter Derby was appointed as director of the Company on October 25, 2018. He has therefore served in his capacity as director of the Company for approximately 2 months in 2018.

 

Stock Options and Other Compensation Securities

 

The following table summarizes all compensation securities granted or issued to each director and NEO by the Company or one of its subsidiaries in the twelve months ended December 31, 2018.

 

Name and
position

 

Type of
compensation
security

 

Number of
compensation
securities,
number of
underlying
securities
and
percentage of
class(1)

 

Date of
issue or
grant

 

Issue,
conversion or
exercise price
($)

 

Closing price
of security or
underlying
security on
date of grant
($)

 

Closing price
of security or
underlying
security at
year end
($)

 

Expiry Date

 

Joseph Lusardi(2), President & CEO and Director

 

Option

 

2,288,164

(3)

10/28/2018

 

CAD$

11.45

 

N/A

 

N/A

 

10/28/2028

 

Boris Jordan(4), Executive Chairman

 

RSU

 

114,729

 

10/28/2018

 

N/A

 

N/A

 

N/A

 

N/A

 

Steven Patierno(5), Director

 

RSU

 

17,162

 

10/28/2018

 

N/A

 

N/A

 

N/A

 

N/A

 

Karl Johansson(6), Director

 

RSU

 

17,162

 

10/28/2018

 

N/A

 

N/A

 

N/A

 

N/A

 

Peter Derby(7), Director

 

RSU

 

17,162

 

10/28/2018

 

N/A

 

N/A

 

N/A

 

N/A

 

 

Notes:

(1)         Percentage of class is calculated on a partially diluted basis assuming: (i) the exercise of Options and RSUs granted to directors and NEOs of the Company as at December 31, 2018; and (ii) an aggregate of 335,465,083 Subordinate Voting Shares outstanding on December 31, 2018.

(2)         As of December 31, 2018, Mr. Lusardi had ownership, direction or control over a total of 11,277,656 Options.

(3)         The Options granted to Mr. Lusardi on October 28, 2018 will vest in three equal amounts on each of October 29, 2019, October 27, 2020 and October 27, 2021.

(4)         As of December 31, 2018, Mr. Jordan had ownership, direction or control over a total of 114,729 RSUs.

(5)         As of December 31, 2018, Mr. Patierno had ownership, direction or control over a total of 17,162 RSUs and 1,063,075 Options.

(6)         As of December 31, 2018, Mr. Johansson had ownership, direction or control over a total of 17,162 RSUs.

 

22

 

(7)         As of December 31, 2018, Mr. Derby had ownership, direction or control over a total of 17,162 RSUs.

 

Exercise of Compensation Securities

 

Name and
position(1)

 

Type of
compensation
security

 

Number of
underlying
securities
exercised

 

Exercise
price per
security

 

Date of
exercise

 

Closing price
of security on
date of
exercise
($)

 

Difference
between
exercise price
and closing
price on date
of exercise
($)

 

Total value on
exercise date
($)

 

Joseph Lusardi,
President & CEO and Director

 

Option

 

—

 

—

 

—

 

—

 

—

 

—

 

Stuart Wilcox, COO

 

Option

 

—

 

—

 

—

 

—

 

—

 

—

 

Jonathan Faucher,
Chief Financial Officer, EVP of Finance, Treasurer & Corporate Secretary(2)

 

Option

 

—

 

—

 

—

 

—

 

—

 

—

 

Boris Jordan,
Executive Chairman

 

Option

 

—

 

—

 

—

 

—

 

—

 

—

 

Steven Patierno,
Director

 

Option

 

—

 

—

 

—

 

—

 

—

 

—

 

Karl Johansson,
Director

 

Option

 

—

 

—

 

—

 

—

 

—

 

—

 

Peter Derby,
Director

 

Option

 

—

 

—

 

—

 

—

 

—

 

—

 

 

Notes:

(1)                     Only reflects exercises following completion of the Business Combination. All outstanding options granted prior to the Business Combination were rolled into the LTIP upon completion of the Business Combination.

(2)                     Mr. Neil Davidson replaced Mr. Jonathan Faucher as Chief Financial Officer in January 2019.

 

Employment, Consulting and Management Agreements

 

Joseph Lusardi

 

PalliaTech, Inc. (the successor of the Company) entered into an employment agreement with Mr. Lusardi in March 2016, for his role as President and CEO. Under the terms of the agreement, Mr. Lusardi is entitled to a base annual salary of $250,000, which was thereafter increased to $500,000, and is eligible for bonus payments based on the achievement of performance objectives established from time to time by the Board. Mr. Lusardi was granted three different sets of options exchangeable into an aggregate of

 

23

 

274,824 common shares of PalliaTech, Inc., which options were then exchanged into options to purchase Subordinate Voting Shares pursuant to the Business Combination. In addition, Mr. Lusardi is entitled to the reimbursement of his reasonable expenses, to a leased company car (for a maximum of $500 per month), to a participation in all incentive, savings and retirement plans applicable to the other key executives of PalliaTech, Inc., and to the payment of the cost of medical and dental insurance premiums for himself and his dependents. In the event that the employment agreement is terminated by PalliaTech, Inc. without cause or by Mr. Lusardi for good reason, in addition to accrued amounts, Mr. Lusardi is entitled to an amount equal to 25% of his base salary.

 

Stuart Wilcox

 

PalliaTech, Inc. (the successor of the Company) entered into an employment agreement with Mr. Wilcox on July 10, 2017. Under the terms of this agreement, Mr. Wilcox is entitled to a base annual salary of $350,000, and is eligible for a discretionary year-end performance bonus of $200,000. In addition, subject to approval of the Board, Mr. Wilcox was entitled to receive a relocation allocation of $20,000 as well as a stock option grant to purchase a total of 60,000 common shares of PalliaTech, Inc., which options vested in equal amounts over three years and which were then exchanged into options to purchase Subordinate Voting Shares pursuant to the Business Combination. In addition, Mr. Wilcox is entitled to certain advantages relating to benefit plans.

 

Jonathan Faucher

 

PalliaTech, Inc. (the successor of the Company) entered into an employment agreement with Mr. Faucher on December 19, 2016. Under the terms of this agreement, Mr. Faucher is entitled to a base annual salary of $180,000 and is eligible for a discretionary year-end performance bonus representing up to 20% of such base salary. In addition, Mr. Faucher was entitled to receive a stock option grant to purchase a total of 50,000 common shares of PalliaTech, Inc., which options vest in equal amounts over three years. In addition, Mr. Faucher is entitled to certain advantages relating to benefit plans.

 

Rana Vig and David Goertz (Pre-Business Combination)

 

LVI entered into a services agreement made effective June 1, 2018 with its Chief Executive Officer, Mr. Rana Vig. Under the terms of the agreement, Mr. Vig agreed to perform certain functions including the overseeing of LVI’s day-to-day operations. In consideration of his services, LVI agreed to pay Mr.  Vig an annual fee of C$120,000 plus taxes and to grant Mr. Vig a certain number of LVI stock options pursuant to the terms of his services agreement. LVI also entered into a services agreement made effective June 1, 2018 with its Chief Financial Officer, Mr. David Goertz. Under the terms of the agreement, Mr.  Goertz agreed to act as Chief Financial Officer of LVI. In consideration of his services, LVI agreed to pay Mr. Goertz an annual fee of C$120,000 plus taxes and to grant Mr. Goertz a certain number of LVI stock options pursuant to the terms of his services agreement. Each of the services agreement provides that prior to a Change of Control (as such term is defined in the respective services agreement), either LVI or Mr. Vig or Mr. Goertz, as applicable, may terminate the agreement without cause at any time by giving thirty (30) days prior written notice, and from and after a Change of Control, upon the termination of the agreement, unless such termination was as a result of Mr. Vig’s or Mr. Goertz’s death, respectively, or by LVI for cause, or as otherwise specified in the agreement, Mr. Vig or Mr. Goertz, as applicable, would be entitled to the following compensation: (i) the full fee in the amount of C$120,000 through the date of termination at the rate in effect at the time the notice of termination is given, plus all other amounts to which he would respectively be entitled under any compensation or benefit plan of LVI at the time such payments are due under the terms of such plans; (ii) in lieu of any payments of the fee in the amount of C$120,000 for periods subsequent to the date of termination, LVI shall pay to Mr. Vig or Mr. Goertz, as applicable, not later than the fifth day following the date of termination, a lump sum payment equal to one (1) time the annual fee; (iii) Mr. Vig or Mr. Goertz, as applicable, shall be entitled to receive all benefits payable to him under any other plan or agreement relating to retirement benefits in accordance with the terms of such plan or agreement. Each of the services agreements was terminated on July 25, 2018, in consideration for the payment of C$120,000, payable within five (5) days of such date.

 

24

 

Management Agreements

 

No management functions of the Company are performed by a person or company other than the directors and executive officers of the Company.

 

STATEMENT OF CORPORATE GOVERNANCE

 

Under the Canadian Securities Administrators’ National Instrument 58-101 — Disclosure of Corporate Governance Practices (“NI 58-101”), the Company is required to disclose certain information relating to its corporate governance practices. This information is set forth below.

 

Board of Directors

 

The Company currently has three non-executive directors who the Company believes to be independent within the meaning of NI 58-101. The three independent directors of the Company are Dr. Steven Patierno, Karl Johansson and Peter Derby. Each of Boris Jordan, who serves as Executive Chairman and founder of the Company, and Joseph Lusardi, who serves as the President and Chief Executive Officer of the Company, are not considered to be independent.

 

Directorships

 

None of the directors of the Company currently serve on the board of directors of other issuers that are reporting issuers (or the equivalent).

 

Orientation and Continuing Education

 

Immediately following appointment, new directors of the Company are provided with historic information, current strategic plans for the Company and materials summarizing issues relating to the Company. New directors are also briefed by the Chief Executive Officer of the Company, by the Chief Financial Officer of the Company, by the General Counsel of the Company and by the Chair of the committees of the Board to which they are appointed, if any. In addition, the Company will make available any documents or personnel as may be requested by a new director in order to assist with the orientation and onboarding to the Board.

 

Although the Company has not adopted formal policies respecting continuing education for Board members, new directors are encouraged to communicate with the Company’s management, legal counsel, auditors and consultants, to keep themselves current with industry trends and developments and changes in legislation with management’s assistance, and to attend related industry seminars and visit the Company’s operations. In addition, the Board and its committees receive periodic reports from management and external advisors as to new developments in regard to corporate governance, industry trends, changes in legislation and other issues affecting the Company.

 

Ethical Business Conduct

 

The Board has adopted a Code of Business Conduct for directors, officers and employees (the “Code of Conduct”). The Company will, upon request, provide a copy of the Code of Conduct to any Shareholder. Further, the Board has approved the hiring of dedicated compliance personnel and has adopted an Ethics and Compliance Hotline and other critical business ethics policies and training to encourage and promote a culture of ethical business conduct.

 

The Board expects its directors, officers and employees to act ethically at all times and to acknowledge their adherence to corporate policies and the Code of Conduct. Any material issues regarding compliance with our policies and Code of Conduct are required to be brought forward to the SVP of

 

25

 

Compliance for review and investigation and referred to the executive officers of the company or the Audit committee of the Board, as may be appropriate under the circumstances. The Board and/or appropriate committee or executive officers determine what remedial steps, if any, are required. Any waivers from the Code of Conduct that are granted for the benefit of a director or executive officer may be granted only by the Audit Committee of the Board. No waiver has ever been granted under the Code of Conduct.

 

Each director of the Company must disclose all actual or potential conflicts of interest and refrain from voting on matters in which such director has a conflict of interest. In addition, the director must excuse himself or herself from any discussion or decision on any matter in which the director is precluded from voting as a result of a conflict of interest.

 

Nomination of Directors

 

The Board is responsible for identifying new candidates for nomination of directors to the Board. In particular, the Board considers, in addition to any other factors it deems relevant: (i) the competencies and skills that the Board considers to be necessary for the Board, as a whole, to possess; (ii) the competencies and skills that the Board considers each existing director to possess; (iii) the competencies, skills and background each nominee will bring to the Board; (iv) the time that each nominee will have available to devote to the Company’s business; and (v) whether the nominee will be an independent director. Directors are encouraged to identify potential candidates. The Company also encourages its executive to identify potential candidates to be considered for a Board position. An invitation to stand as a nominee for election to the Board will normally be made to a candidate by the Board through the Chairman of the Company or his delegate.

 

The Company is committed to diversity in all aspects of its business and activities, including with respect to its Board of Directors. The Company and the Board believe that diversity and inclusion foster a wide array of perspectives and help build cultures of trust, candor and respect. The Company and the Board will continue to support and encourage the recruitment and appointment of diverse candidates to Board positions. In addition to recruiting and considering director candidates, the Board annually reviews the competencies, skills and personal qualities applicable to candidates to be considered for nomination to the Board. The objective of this review is to maintain the composition of the Board in a way that provides, in the judgment of the Board, the best mix of competencies, skills and experience to provide for the overall stewardship of the Company.

 

Compensation Committee

 

The Compensation Committee currently consists of three directors: Peter Derby (Chair), Boris Jordan and Karl Johansson, all of whom have direct and indirect experience relevant to their roles as members of the Compensation Committee. For details regarding the experience of the members of the Compensation Committee, see the biographies of each member set out in the section “Election of Directors”.

 

The role and responsibility of the Compensation Committee is to assist the Board in fulfilling its responsibilities for the appointment, performance, evaluation and compensation of its executive officers in addition to the recruitment, development and retention of its executive officers. The Compensation Committee is also charged with maintaining talent management and succession planning systems and processes relating to its senior management and developing compensation structure for our executive officers including salaries, annual and long-term incentive plans including plans involving share issuances and other share-based awards. The Compensation Committee is also charged with reviewing the Company’s equity incentive plan and proposing changes thereto, approving any awards of securities under the equity incentive plan and establishing policies and procedures designed to identify and mitigate risks associated with its compensation policies and practices. See also “Statement of Executive Compensation — Corporate Governance”.

 

26

 

Audit Committee

 

Composition of the Audit Committee

 

The Audit Committee of the Board (the “Audit Committee”) assists the Board in fulfilling its responsibilities for oversight of accounting policies and internal controls, financial reporting practices and legal and regulatory compliance, including, among other things: monitoring the integrity of the Company’s financial statements and corporate accounting, monitoring systems and procedures for financial reporting and internal control; reviewing certain public disclosure documents and financial information that will be provided to shareholders and other, including the Company’s annual audited financial statements and unaudited quarterly financial statements; reviewing the Company’s compliance with certain legal and regulatory requirements; evaluating the independent auditors’ qualifications and independence; monitoring the performance of the Company’s internal audit function and the company’s independent auditors as well as any other public accounting firm engaged to perform other audit, review or attest services; and providing an open avenue of communication among independent auditors, financial and senior management and the Board.

 

The Audit Committee is responsible for reviewing with management the Company’s risk management policies, the timeliness and accuracy of the Company’s regulatory filings and all related party transactions as well as the development of policies and procedures related to such transactions.

 

The Audit Committee also has the authority to approve all non-audit services to be provided to the Company or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities.

 

As at the date of this Information Circular, the following are the members of the Audit Committee:

 

Name of Member

 

Independent(1)

 

Financially Literate(2)

 

 

 

 

 

Boris Jordan

 

No(3)

 

Yes

 

 

 

 

 

Peter Derby

 

Yes

 

Yes

 

 

 

 

 

Karl Johansson(4)

 

Yes

 

Yes

 

Notes:

(1)                     A member of the Audit Committee is independent if he or she has no direct or indirect “material relationship” with the Company. A material relationship is a relationship which could, in the view of the Board, reasonably interfere with the exercise of a member’s independent judgment. An executive officer of the Company, such as the President or Secretary, is deemed to have a material relationship with the Company.

(2)                     A member of the Audit Committee is financially literate if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements.

(3)                     Boris Jordan is not an independent member of the Audit Committee, as he, directly or indirectly, owns more than 10% of the issued and outstanding subordinate voting shares of the Company.

(4)                     Chair of the Audit Committee.

 

Relevant Education and Experience

 

Each member of the Audit Committee has experience relevant to his or her responsibilities as an Audit Committee member. See “Number of Directors and Election of Directors” for a description of the education and experience of each Audit Committee member.

 

27

 

Audit Committee Oversight

 

At no time since the commencement of the Company’s most recently completed financial year was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted by the Board.

 

Reliance on Certain Exemptions

 

At no time since the commencement of the Company’s most recently completely financial year has the Company relied on an exemption from National Instrument 52-110 — Audit Committees (“NI 52-110”), in whole or in part, granted under Part 8 of NI 52-110.

 

Audit Committee’s Charter

 

The Audit Committee operates under a written charter, adopted on and effective as of December 17, 2018 setting forth the purpose, composition, authority and responsibility of the Audit Committee, a copy of which is attached hereto as Schedule “B”.

 

Pre-Approval Policies and Procedures

 

The Audit Committee has adopted specific policies and procedures for the engagement of non-audit services as described in the Audit Committee’s charter attached hereto as Schedule “B”.

 

External Auditor Service Fees

 

The following table sets forth the aggregate fees billed by Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional Accountants, the former external auditors for the Company, for services rendered for the fiscal years ended December 31, 2018 and December 31, 2017.

 

 

 

2018(5)
($’000)

 

2017(6)
(C$’000)

 

Audit Fees(1)

 

539

 

7.5

 

Audit-related fees(2)

 

95

 

—

 

Tax fees(3) 

 

291

 

—

 

All other fees(4) 

 

151

 

—

 

Total

 

924

 

7.5

 

 

Notes:

(1)                     “Audit fees” include the aggregate fees billed for the audit of the annual consolidated financial statements, the review of interim unaudited consolidated financial statements and other regulatory audits and filings.

(2)                     “Audit related fees” include the aggregate fees billed for the provision of technical, accounting and financial reporting advice services and include certain preparatory audit related work undertaken in connection with the Business Combination.

(3)                     “Tax fees” include the aggregate fees billed for the provision of corporate tax compliance, tax planning and other tax related services.

(4)                     “All other fees” include the aggregate fees billed for products and services provided by the external auditor, other than services reports under (1), (2), or (3).

(5)                     The fees set out in the 2018 column include the fees incurred by the Company in connection with the Business Combination.

(6)                     The fees set out in the 2017 column represent the fees incurred by Lead Ventures Inc., the predecessor of the Company prior to the Business Combination.

 

28

 

Assessments

 

Based upon the Company’s size, its current state of development and the number of individuals on the Board, the Board considers a formal process for accessing the effectiveness and contribution of the Board as a whole, its committees or individual directors to be unnecessary at this time. In light of the fact that the Board and its committees meet on several occasions each year, each director has regular opportunity to assess the Board as a whole, its committees and other directors in relation to the Board’s and such director’s assessment of the competencies and skills that the Board and its committees should possess. The Board plans to continue to evaluate its own effectiveness and the effectiveness of its committees and individual directors in such manner.

 

INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

 

Other than as described herein, to the knowledge of the Company, no “informed person”, proposed director, or any associate or affiliate of any of these persons, has any material interest, direct or indirect, in any transaction since January 1, 2018 or in any proposed transaction that has materially affected or would materially affect the Company or any of its subsidiaries. An “informed person” means, among others, (i) a director or executive officer of the Company or of a subsidiary of the Company, (ii) any person or company who beneficially owns, or controls or directs, directly or indirectly, voting securities of the Company or a combination of both carrying more than 10% of the voting rights attached to all outstanding voting securities of the Company other than voting securities held by the person or company as underwriter in the course of a distribution; and (iii) a reporting issuer that has purchased, redeemed, or otherwise acquired any of its securities, for so long as it holds any of its securities.

 

Cura Partners Inc, an Oregon corporation (“Cura”)

 

In May 2019, the Company entered into an agreement to acquire the state-regulated cannabis business of Cura, owners of the Select brand, in an all-stock transaction (the “Cura Transaction”). Based in Portland, Oregon, Select is one of the most well-known cannabis wholesale brand in the U.S. With its THC products sold in more than 900 retailers, it is the leading cannabis brand in key Western states, including California, Arizona, Oregon and Nevada. The acquisition includes Select’s manufacturing, processing, distribution, marketing and retailing operations and all adult-use cannabis products marketed under the Select brand name, including all intellectual property, but excluding Cura’s CBD product line.

 

Mr. Boris Jordan, the Executive Chairman of the Board, controls Measure 8 Venture Partners LP (“Measure 8”), an alternative investment vehicle created to capitalize on the emergence of the U.S. and global cannabis industry which has invested in several business ventures in the U.S. and global cannabis industry. Measure 8 currently owns approximately 2% of Cura’s shares of common stock and Measure 8 is also the holder of convertible promissory notes issued by Cura (the “Convertible Notes”) in May 2018 and in November 2018. The Convertible Notes may be converted, at the option of Measure 8, in certain circumstances including upon a sale or merger of Cura such as the Proposed Transaction. Measure 8 also holds an option to acquire 223,029 shares of common stock of Cura from current Cura shareholders representing approximately 1% of Cura’s outstanding shares of common stock (the “Secondary Option”). Upon conversion of the Convertible Notes and exercise of the Secondary Option, Measure 8 would own approximately 12% of Cura’s shares of common stock. Mr. Jordan does not otherwise own or control, whether directly or indirectly, any interest in Cura, other than the 2% interest and the Convertible Notes held through Measure 8. In addition, Mr. Jordan currently serves as a director of Cura.

 

For the foregoing reasons, Curaleaf has determined that the Cura Transaction constitutes a “related party transaction” within the meaning of Multilateral Instrument 61-101 — Protection of Minority Securityholders in Special Transactions (“MI 61-101”).

 

The Cura Transaction will be completed by way of a merger under the Business Corporation Act of the State of Oregon of a wholly-owned subsidiary of Curaleaf (“Merger Sub”) into Cura pursuant to a merger agreement (the “Merger Agreement”), as a result of which the separate corporate existence of Merger

 

29

 

Sub will cease, and Cura will continue as the surviving corporation and a wholly owned subsidiary of Curaleaf after the merger.

 

At closing, Curaleaf will acquire all outstanding equity securities of Cura through the issuance of 95,555,556 Subordinate Voting Shares (subject to certain adjustments), which based on Curaleaf’s closing price of C$13.30 on April 30, 2019, the last trading day prior to announcement of the Cura Transaction, represents a total purchase price of C$1.27 billion or approximately $948.8 million. Post-transaction, the current shareholders of Cura will have approximately 16% pro forma ownership of Curaleaf on a fully-diluted basis. Additionally, the current shareholders of Cura will be eligible to receive an earn-out of up to $200 million (the “Earn-Out Payment”) which will be settled through the issuance of Subordinate Voting Shares (the “Earn-Out Shares”), contingent upon Curaleaf exceeding certain 2020 fiscal year revenue targets for its combined wholesale extracts business and Select-branded retail extract sales. For the purposes of paying the Earn-Out Payment, the Earn-Out Shares will be valued according to a formula based on market value at the time they are issued. The Cura Transaction is expected to close in 2019, subject to customary closing conditions, regulatory approvals, Cura shareholder approval, and the receipt of an agreement from the holders of Cura’s convertible debentures (including the Convertible Note held by Measure 8) with respect to the conversion of such debentures into equity. The Cura Transaction has been unanimously approved by independent special committees of the Boards of Directors at both companies, and Mr. Jordan abstained from voting on the Cura Transaction in his capacity as director of each of Curaleaf and Cura.

 

The Cura Transaction is exempt from the formal valuation and minority shareholder approval requirements of MI 61-101 by virtue of the exemptions contained in section 5.5(a) and 5.7(1)(a) of MI 61-101, since neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the Cura Transaction, insofar as it involves interested parties, exceeds 25% of Curaleaf’s market capitalization. In addition, the Cura Transaction is exempt from the formal valuation requirements of MI 61-101 by virtue of the exemption contained in section 5.5(b) of MI 61-101, since no securities of Curaleaf are listed or quoted on the Toronto Stock Exchange, Aequitas NEO Exchange Inc., the New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market, or a stock exchange outside of Canada and the U.S. other than the Alternative Investment Market of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc.

 

For additional information, please refer to the material change report filed on SEDAR by the Company in respect of the Cura Transaction on May 10, 2019, a copy of which is available under the Company’s profile at www.sedar.com. Upon request, the Company will promptly provide a copy of the material change report free of charge to a shareholder of the company.

 

Business Combination

 

On October 26, 2018, the Company and Curaleaf, Inc. (formerly PalliaTech, Inc.) completed the Business Combination that resulted in the reverse take-over of the Company by the securityholders of Curaleaf, Inc. The Business Combination was structured as a series of transactions, including a Canadian three-cornered amalgamation transaction and a series of U.S. merger and reorganization steps (further described below). At the Company’s annual general and special meeting of shareholders held on October 12, 2018, the shareholders of the Company approved all of the resolutions in connection with the Business Combination. As part of the Business Combination, the Company changed its name from “Lead Ventures Inc.” to “Curaleaf Holdings, Inc.”, and restructured its existing share capital to, among other things, reclassify its existing common shares as the Subordinate Voting Shares, create the Multiple Voting Shares, eliminate the class of preferred shares and add certain provisions, including a redemption right in favour of the Company to ensure that the Company complies with applicable licensing regulations.

 

Immediately prior to the Business Combination, 1177687 B.C. Ltd. (“Curaleaf FinCo”), a special purpose corporation, completed a brokered and a non-brokered subscription receipt financing at a price of C$11.45 per subscription receipt for aggregate gross proceeds of approximately C$520 million (the “Private Placement”).

 

30

 

As part of the Business Combination, the Company, Curaleaf FinCo and 1177679 B.C. Ltd., a wholly-owned subsidiary of the Company, were parties to a three-cornered amalgamation (the “Amalgamation”) pursuant to which the shareholders of Curaleaf FinCo (being the investors in the Private Placement after automatic conversion of their subscription receipts into common shares of Curaleaf FinCo (the “Curaleaf FinCo Shares”)) received Subordinate Voting Shares in exchange for their Curaleaf FinCo Shares. Concurrently with the Amalgamation, Curaleaf MergerCo Inc., a wholly-owned subsidiary of the Company, merged with and into Curaleaf, Inc., with Curaleaf, Inc. continuing as the surviving corporation and becoming a wholly-owned subsidiary of the Company.

 

In connection with the Business Combination, Gociter Holdings Ltd., a corporation of which Mr. Boris Jordan, the Executive Chairman of the Company, is the beneficial owner, made a contribution of 3,734,965 shares of common stock of Curaleaf, Inc. and cash to the Company in exchange for 122,170,705 Multiple Voting Shares, representing 100% of the issued and outstanding Multiple Voting Shares as of closing of the Business Combination.

 

The Company has entered into the Merger Agreement for the acquisition of Cura Partners, a corporation in which Mr. Boris Jordan, a Principal Shareholder and Executive Chairman of the Company, holds an indirect interest. Please refer to “Particular Matters to be Acted Upon — Conflicts of Interest — Cura Partners, Inc.”.

 

For additional information, please refer to the material change report filed on SEDAR by the Company in respect of the Business Combination on November 2, 2018, a copy of which is available under the Company’s profile at www.sedar.com. Upon request, the Company will promptly provide a copy of the material change report free of charge to a shareholder of the company.

 

Curaleaf Massachusetts

 

In March 2018, the Company acquired a 50% stake, plus one share, in Curaleaf Massachusetts, Inc., a subsidiary of the Company, (“Curaleaf MA”), for a consideration of $36,000, in accordance with a plan of conversion of Curaleaf MA’s predecessor, Mass Organic Therapy, Inc. to a for-profit entity. PT Mass Holdings, LLC, of which Joseph F. Lusardi, Curaleaf, Inc.’s President and Chief Executive Officer, is a member, acquired the remaining shares of Curaleaf MA at the time of conversion for a consideration of $36,000. In August 2018, the Company acquired PT Mass Holdings, LLC’s stake in Curaleaf MA for $46.2 million, of which $28.2 million was satisfied by the issuance of 3,212,337 Subordinate Voting Shares and $18 million which is expected to be paid in cash subject to Curaleaf MA commencing adult use cultivation and dispensing at three locations under the appropriate licenses in the State of Massachusetts. This transaction was completed immediately following completion of the Business Combination.

 

ADDITIONAL INFORMATION

 

Financial information is provided in the financial statements and related management’s discussion and analysis of the results for the period ended December 31, 2018. Shareholders wishing to receive a copy of such materials should mail a request to the Company at 666 Burrard Street, Suite 1700, Vancouver, BC, V6C 2X8.

 

Additional information relating to the Company is also available free of charge on SEDAR at www.sedar.com.

 

31

 

SCHEDULE “A”
Articles

 

(See attached)

 

 

SCHEDULE “B”
Audit Committee Charter

 

 

CURALEAF HOLDINGS, INC.

 

AUDIT COMMITTEE CHARTER

 

CURALEAF HOLDINGS, INC.

 

 

AUDIT COMMITTEE CHARTER

 

1.              PURPOSE

 

The Audit Committee (the “Committee”) shall be established by resolution of the Board of Directors (the “Board”) of Curaleaf Holdings, Inc., a corporation existing under the laws of British Columbia (the “Company”).

 

The Committee is responsible for:

 

a)             Assisting the Board in fulfilling its oversight responsibilities as they relate to the Company’s accounting policies and internal controls, financial reporting practices and legal and regulatory compliance, including, among other things:

 

·                  Monitoring the integrity of the Company’s financial statements, corporate accounting and financial reporting processes and financial information that will be provided to shareholders and others;

 

·                  Reviewing the Company’s compliance with certain legal and regulatory requirements;

 

·                  Evaluating the independent auditors’ qualifications and independence; and

 

·                  Monitoring the performance of the Company’s internal audit function and the Company’s independent auditors as well as any other public accounting firm engaged to perform other audit, review or attest services.

 

b)             Providing an open avenue of communication among the independent auditors, financial and senior management and the Board.

 

c)              Annually evaluating the performance of the Committee.

 

While the Committee has the duties and responsibilities set forth in this Charter, the role of the Committee is oversight. The Committee is not responsible for planning or conducting the audit or determining whether the Company’s financial statements are complete and accurate and in accordance with applicable accounting rules. Such activities are the responsibility of the Company’s independent auditors and management. The Committee has direct responsibility for the appointment, compensation, oversight and replacement, if necessary, of the independent auditors, including the resolution of disagreements between management and the independent auditors regarding financial reporting, and any other registered public accounting firm with respect to which the Committee is required to have such responsibility.

 

The Committee and each of its members shall be entitled to rely on:

 

a)             The integrity of those persons and organizations within and outside of the Company from which it receives information;

 

b)             The accuracy of the financial and other information provided to the Committee by such persons or organizations absent actual knowledge to the contrary (which shall be promptly reported to the Board); and

 

c)              Representations made by management as to any audit and non-audit services provided by the independent auditors to the Company.

 

34

 

2.              COMPOSITION AND QUALIFICATIONS

 

The Committee shall be appointed by the Board and shall be comprised of at least three Directors (as determined from time to time by the Board), one of whom shall be appointed by the Board as Chairman of the Committee. If a Chairman is not so appointed, the members of the Committee may elect a Chairman by majority vote. Committee members may be removed by the Board in its discretion.

 

Unless otherwise permitted by applicable phase-in rules and exemptions, each member of the Committee shall meet the ‘independence’ requirements of National Instrument 52-110 Audit Committees of the Canadian Securities Administrators (“NI 52-110”) and all other applicable laws and regulations. The Committee may avail itself of any phase-in compliance periods available to the Company that are afforded by applicable rules of the Canadian Securities Exchange, and all other applicable laws and regulations. The Committee may also avail itself of exemptions available to U.S. listed issuers under NI 52-110.

 

All members of the Committee must (except to the extent permitted by NI 52-110) be “financially literate” (as defined by NI 52-110).

 

A Committee member invited to sit on another public company’s audit committee must notify the Board. If a Committee member or proposed Committee member simultaneously serves on the audit committees of two other public companies, the Board must determine whether or not such simultaneous service would impair the ability of such member to effectively serve on the Committee.

 

No member of the Committee shall receive from the Company or any of its affiliates any compensation other than the fees to which he or she is entitled as a Director of the Company or a member of a committee of the Board. Such fees may be paid in cash and/or shares, options or other in-kind consideration ordinarily available to Directors.

 

3.              MEETINGS

 

The Committee shall meet as frequently as the Chairman of the Committee deems appropriate subject to the provisions of this Charter. The Committee may meet with the independent auditors, internal auditors, and management separately, to the extent the Committee deems necessary and appropriate.

 

A.            Frequency

 

The Committee shall hold regularly scheduled meetings at least quarterly and such special meetings as circumstances dictate. The Chair of the Committee, any member of the Committee, the independent auditors, the Chairman of the Board, the Chief Executive Officer (“CEO”) or the Chief Financial Officer (“CFO”) may call a meeting of the Committee by notifying the Company’s Corporate secretary, who will notify the members of the Committee.

 

B.            Agenda and Notice

 

The Chairman of the Committee shall establish the meeting dates and the meeting agenda. The Chairman of the Committee or the Company Secretary shall send proper notice of each Committee meeting and information concerning the business to be conducted at the meeting, to the extent practical, to each member prior to each meeting.

 

Any written material provided to the Committee shall be appropriately balanced (i.e. relevant and concise) and shall be distributed in advance of the respective meeting with sufficient time to allow Committee members to review and understand the information.

 

35

 

C.            Holding and Recording Meetings

 

Committee meetings may be held in person or telephonically. The Committee shall keep written minutes of its meetings and submit such minutes to the Board.

 

D.            Quorum

 

A majority of the members of the Committee shall constitute a quorum.

 

E.            Executive Sessions

 

The Committee will meet periodically (not less than annually) in separate executive sessions with each of the Chief Financial Officer or any other executive officer, the principal accounting officer and/or the senior internal auditing executive (or any other personnel responsible for the internal audit function), and the independent auditors.

 

4.              COMPENSATION

 

The compensation of Committee members shall be determined by the Board.

 

5.              RESPONSIBILITIES OF THE COMMITTEE

 

A.            System of Financial Controls

 

The Committee shall oversee the process by which management shall design, implement, amend, maintain, and enforce a comprehensive system of financial controls (including the right internal and external people and resources, policies, processes and enforcement) aimed at ensuring the integrity and compliance of the Company’s books and records with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, and sound business practices, as well as protecting the value of the Company’s assets and safeguarding the credibility of its brand, employees, management team, Board, and shareholders.

 

The system of financial controls will embody the adoption of best practices in financial controls and foster honesty, integrity, accuracy, and transparency in all aspects of the Company. Best practices include but are not limited to: setting the right tone at the top; active review of business performance by executive management, with regular reporting to and oversight by the Board; an accurate, stable and reliable general ledger; a robust internal audit function; unambiguous compliance with IFRS; and full transparency and ongoing dialogue with the Board, management and external auditors. Such system shall also incorporate the principles contained within the Code of Business Conduct and Ethics for the Chief Executive Officer and Chief Financial Officer as adopted by the Board.

 

B.            Annual Audit Review

 

The Committee shall review and discuss the annual audited financial statements including the independent auditors’ audit and audit report thereon, and the annual Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company with management and the independent auditors. In connection with such review, the Committee will:

 

·                  Review the scope of the audit, the audit plan and the audit procedures utilized.

 

·                  Review with the independent auditors any audit problems or difficulties encountered during their audit, including any change in the scope of the planned audit, any restrictions placed on the scope of the audit or access to requested information, and any significant disagreements with management, and management’s response to such problems or difficulties.

 

36

 

·                  Resolve any differences in financial reporting between management and the independent auditors.

 

·                  Review with management, internal auditors, and the independent auditors, the adequacy of the Company’s internal controls, including information systems controls and security and bookkeeping controls and any significant findings and recommendations with respect to such controls.

 

·                  Review reports required to be submitted by the independent auditors concerning:

 

·                  All critical accounting policies and practices used in the preparation of the Company’s financial statements.

 

·                  All alternative treatments of financial information within IFRS that have been discussed with management, ramifications of such alternatives, and the accounting treatment preferred by the independent auditors.

 

·                  Any other material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.

 

·                  Review and discuss the integrity of the annual audited Company financial statements and quarterly financial statements with management and the independent auditors, including the notes thereto and all matters required by applicable auditing standards, and the written disclosures required by applicable auditing standards regarding the independent auditors’ independence.

 

·                  Review and discuss:

 

·                  Major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies.

 

·                  Analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analysis of the effects of alternative IFRS methods on the financial statements and the effects of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company.

 

·                  Inquire about and review with management and the independent auditors any significant risks or exposures faced by the Company and discuss with management the steps taken to minimize such risk or exposure. Such risks and exposures include, but are not limited to, threatened and pending litigation, claims against the Company, tax matters, regulatory compliance and correspondence from regulatory authorities, and environmental exposure.

 

·                  Discuss policies and procedures concerning earnings press releases and review the type and presentation of information to be included in earnings press releases (paying particular attention to any use of “pro forma” and “adjusted” or other non-IFRS information), as well as financial information and earnings guidance provided to analysts and rating agencies.

 

C.            Quarterly Reviews

 

Review and discuss the quarterly financial statements and the quarterly Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company with management and the internal auditors, and the independent auditors, together with the independent auditors’ review

 

37

 

thereof pursuant to professional standards and procedures for conducting such reviews, as established by IFRS and applicable securities laws. In connection with the quarterly reviews, the Committee shall inquire about and review with management and the independent auditors any significant risks or exposures faced by the Company and discuss with management the steps taken to minimize such risk or exposure.

 

D.            Other Financial Information

 

Review and discuss with management, where appropriate, financial information contained in any prospectuses, annual information forms, annual reports to shareholders, management proxy circulars, material change disclosure of a financial nature and similar disclosure and other documents prior to the filing or public disclosure of such documents or information.

 

E.            Oversight of Independent Auditors

 

The Company’s independent auditors shall report directly to and are ultimately accountable to the Committee. In connection with its oversight of the performance and independence of the independent auditors, the Committee will:

 

·                  Have the sole authority and direct responsibility to appoint, retain, compensate, oversee and replace (subject to shareholder approval, if deemed advisable by the Board or if required under applicable law) the independent auditors.

 

·                  Have authority to approve the engagement letter and all audit, audit-related, tax and other permissible non-audit services proposed to be performed by the independent auditors and the related fees for such services in accordance with the Audit and Non-Audit Services Pre-Approval Policy.

 

·                  Obtain confirmation and assurance as to the independent auditors’ independence, including ensuring that they submit on a periodic basis (not less than annually) to the Committee a formal written statement delineating all relationships between the independent auditors and the Company. The Committee shall actively engage in a dialogue with the independent auditors with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditors and shall take appropriate action in response to the independent auditors’ report to satisfy itself of their independence.

 

·                  At least annually, obtain and review a report by the independent auditors describing the firm’s internal quality-control procedures, any material issues raised by the most recent internal quality-control review or peer review of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues.

 

·                  Meet with the independent auditors prior to the annual audit to discuss planning and staffing of the audit.

 

·                  Review and evaluate the performance of the independent auditors, as the basis for a decision to reappoint or replace the independent auditors.

 

·                  Set clear hiring policies for employees or former employees of the independent auditors, including but not limited to, as required by all applicable laws and listing rules.

 

·                  Consider whether rotation of the independent auditors is required to ensure independence.

 

38

 

F.             Oversight of Internal Audit

 

In connection with its oversight responsibilities, the Committee shall have authority over and direct responsibility for the internal audit function at the Company at all times. In the Committee’s discretion, the internal audit function may be outsourced to a third-party vendor, provided that such vendor follows the standards and guidelines established by the Committee. The head of the internal audit function (or the third-party vendor providing internal audit function support, if applicable) will report directly to the Committee or its designee. The head of the internal audit function or the relationship manager of the vendor providing internal audit function support, as applicable, shall report at least annually to the Committee regarding the internal audit function’s organizational structure and personnel.

 

In overseeing internal audit, the Committee will:

 

·                  Review the appointment or replacement of the senior internal auditing executive, if any, or, if outsourced, the third-party vendor providing internal audit services.

 

·                  Review, in consultation with management, the independent auditors and the senior internal auditing executive, if any, the plan and scope of internal audit activities.

 

·                  Review internal audit activities, budget and staffing.

 

·                  Review significant reports to management prepared by the internal auditing department and management’s responses to such reports.

 

G.           Disclosure Controls & Procedures (“DC&P”) and Internal Controls over Financial Reporting (“ICFR”)

 

·                  Monitor and review the Company’s Disclosure Policy and the Mandate of its Disclosure and Policy Compliance Committee, on an annual basis.

 

·                  Receive and review the quarterly report of the Disclosure and Policy Compliance Committee on its activities for the quarter.

 

·                  On a quarterly basis, review management’s assessment of the design effectiveness of the Company’s DC&P and ICFR including any significant control deficiencies identified and the related remediation plans.

 

·                  Review management’s assessment of the operating effectiveness of the Company’s DC&P (quarterly) and ICFR (annually) including any significant control deficiencies identified and the related remediation plans.

 

·                  Review and discuss any fraud or alleged fraud involving management or other employees who have a role in Company’s ICFR and the related corrective and disciplinary actions to be taken.

 

·                  Discuss with management any significant changes in the ICFR that are disclosed, or considered for disclosure on a quarterly basis.

 

·                  Review and discuss with the CEO and the CFO the procedures undertaken in connection with the CEO and CFO certifications for the annual and interim filings with the securities commissions.

 

H.           Risk Assessment and Risk Management

 

The Committee shall discuss the Company’s major business, operational, and financial risk exposures and the guidelines, policies and practices regarding risk assessment and risk

 

39

 

management, including derivative policies, insurance programs and steps management has taken to monitor and control major business, operational and financial risks.

 

I.                Ethical Standards

 

The Committee shall establish, maintain and oversee the Company’s Code of Business Conduct and Ethics (the “Code”), including dealing with issues that may arise under the Code related to executive officers and Directors of the Company. The Committee shall be responsible for reviewing and evaluating the Code periodically and will recommend any necessary or appropriate changes thereto to the Board for consideration. The Committee shall also assist the Board with the monitoring of compliance with the Code and consider any waivers of the Code (other than waivers applicable to the Directors or executive officers, which shall be subject to review by the Board as a whole).

 

J.              Related Party Transactions

 

The Committee shall review and approve related-party transactions or recommend related-party transactions for review by independent members of the Board.

 

K.           Submission of Complaints

 

The Committee shall establish procedures for (a) receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, (b) the confidential, anonymous submission by Directors, officers, employees, consultants and contractors of the Company of concerns regarding questionable accounting or auditing matters and (c) the investigation of such matters with appropriate follow-up actions.

 

L.            Legal Compliance

 

On at least an annual basis, the Committee shall review with the Company’s legal counsel and management, all legal and regulatory matters and litigation, claims or contingencies, including tax assessments, license or concession defaults or notifications, health and safety violations or environmental issues, that could have a material effect upon the financial position of the Company, and the manner in which these matters may be, or have been, disclosed in the financial statements.

 

M.         Regulatory Developments

 

The Committee shall monitor and provide reports to the Board with respect to developments in accounting rules and practices, income tax laws and regulations, and other regulatory requirements that affect matters within the scope of the Committee’s authority and responsibilities.

 

N.            Other Responsibilities

 

The Committee shall perform such other duties as may be required by law or requested by the Board or deemed appropriate by the Committee. The Committee shall discharge its responsibilities, and shall assess the information provided to the Committee, in accordance with its business judgment. The Committee shall have the authority to conduct or authorize investigations into any matters within the scope of its responsibilities as it shall deem appropriate.

 

6.              COMMITTEE ADMINISTRATIVE MATTERS

 

A.            Independent Advisors

 

The Committee shall have authority to engage, provide appropriate funding for and cause the Company to pay the compensation to obtain advice and assistance from outside legal, accounting or other advisors to carry out its responsibilities.

 

40

 

B.            Funding

 

The Company shall provide appropriate funding, as determined by the Committee, for payment of compensation to the independent auditors or any other registered public accounting firm engaged for the purpose of rendering or issuing an audit report or performing other audit, review or attest services for the Company; to any other advisors engaged by the Committee; and for ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

 

C.            Access to Records and Personnel

 

The Committee shall have full access to any relevant records of the Company that it deems necessary to carry out its responsibilities. The Committee may request that any officer or other employee of the Company or any advisor to the Company meet with members of the Committee or its advisors, as it deems necessary to carry out its responsibilities.

 

D.            Reports to Board of Directors

 

The Committee shall report regularly to the Board with respect to Committee activities and its conclusions with respect to the independent auditors, with recommendations to the Board as the Committee deems appropriate.

 

E.            Annual Meeting Planner

 

Prior to the beginning of a fiscal year, the Committee shall submit an annual planner for the meetings to be held during the upcoming fiscal year, for review and approval by the Board to ensure compliance with the requirements of the Committee’s Charter.

 

F.             Education and Orientation

 

Members of the Committee shall be provided with appropriate and timely training to enhance their understanding of auditing, accounting, regulatory and industry issues applicable to the Company.

 

New Committee members shall be provided with an orientation program to educate them on the Company’s business, their responsibilities and the Company’s financial reporting and accounting practices.

 

G.           Review of this Charter

 

The Committee shall review and reassess annually the adequacy of this Committee Charter and recommend any proposed changes to the Board.

 

H.           Evaluation of Committee

 

The Committee is responsible for developing and conducting an annual self-assessment of its performance. The Committee shall report to the full Board on the results of its assessment each year and shall make any appropriate recommendations to further enhance the Committee’s performance.

 

41



Exhibit 4.7

 

MATERIAL CHANGE REPORT

 

Item 1                                                            Name and Address of Company

 

Curaleaf Holdings, Inc. (“Curaleaf” or the “Company”)
666 Burrard Street
Suite 1700
Vancouver, BC
V6C 2X8

 

Item 2                                                            Date of Material Change

 

June 22, 2020

 

Item 3                                                            News Release

 

A press release describing the material change was issued via the Cision news service on June 22, 2020.

 

A copy of the press release is also available under the Company’s profile on SEDAR at www.sedar.com.

 

Item 4                                                            Summary of Material Change

 

On June 22, 2020, Curaleaf announced it had signed an amended agreement for its acquisition of GR Companies, Inc. (“Grassroots”).

 

Item 5                                                            Full Description of Material Change

 

5.1                               Full Description of Material Change

 

Transaction Terms and Approvals

 

On July 17, 2019, Curaleaf announced the signing of a definitive agreement to acquire Grassroots (the “Original Merger Agreement”). Under the Original Merger Agreement, the aggregate consideration consisted of:

 

a)             approximately 102,808,038 subordinate voting shares (“SVS”) of Curaleaf, subject to potential adjustments and escrow arrangements;

 

b)             a number of SVS equal to the quotient obtained by dividing U.S. $40,000,000 by the higher of (i) the 10-day volume-weighted average price (“VWAP”) per SVS, determined as of the close of business on the last business day prior to the closing date, on the Canadian Securities Exchange (“CSE”) and (ii) eighty-five percent (85%) of the 1-day volume-weighted average price per SVS, determined as of two trading days prior to the closing date, on the CSE; and

 

c)              U.S. $75 million in cash, subject to certain pre-closing and post-closing adjustments and escrow arrangements as.

 

On June 22, 2020, Curaleaf announced it had signed an amended agreement for its acquisition of Grassroots. Under the new mutually agreed and amended terms of the agreement (the “Amended Merger Agreement”), the principal component of the transaction consideration

 

 

remains the same at approximately 102.8 million SVS. The U.S. $75 million cash component of the consideration has been eliminated, while the component of additional SVS to be priced at the 10-day volume-weighted average price prior to closing of the transaction has been increased from U.S. $40 million to approximately U.S. $90.1 million, subject to final adjustment. Accordingly, the total SVS consideration for the transaction is expected to be approximately 118.9 million SVS1. Curaleaf and Grassroots mutually aligned on the updated terms in support of the further optimization of cash, providing maximum flexibility to support the future growth of the business following the close of the transaction. In addition, the parties have resolved that certain Grassroots assets in Illinois, Ohio and Maryland will be designated for sale after closing to comply with local limitations on license ownership. The transaction price remains subject to usual working capital and other adjustments. Curaleaf’s acquisition of Grassroots is currently expected to close upon completion of certain pre-closing conditions within the coming weeks.

 

Grassroots is a strong market leader throughout the Midwest, with an affiliated portfolio of over 50 dispensary licenses, including more than 30 operational dispensaries. The transaction is expected to strategically accelerate Curaleaf’s expansion into Illinois and Pennsylvania, which are among the largest and fastest-growing cannabis markets in the United States. Grassroots also has a leading presence in new state markets in which Curaleaf does not currently operate, including Arkansas, North Dakota, and Vermont. The transaction is also complementary to Curaleaf’s existing business in seven other states, providing additional scale and operating leverage in major markets such as Arizona, Maryland, Michigan, and Ohio.

 

The planned integration of Grassroots is expected to expand Curaleaf’s presence from 18 to 23 states, with the combined company having over 135 dispensary licenses, 88 operational dispensary locations, over 30 processing facilities and 22 cultivation sites with 1.6 million square feet of current cultivation capacity.

 

At closing, security holders in Grassroots will have approximately 18% pro forma ownership of Curaleaf on a fully-diluted basis. The amended terms of the transaction were unanimously approved by the Boards of Directors at both companies.

 

Upon closing of the transaction, the core security holders of Grassroots will have, as a group, the right to appoint one person to serve on the Curaleaf Board of Directors. Mitch Kahn, co-founder and CEO of Grassroots, will fill the allotted board seat. Kahn co-founded Grassroots in 2014.

 

The above is a summary of certain material terms of the Amended Merger Agreement and is qualified in its entirety by the full text of the Amended Merger Agreement which is available on SEDAR under the Company’s issuer profile at www.sedar.com.

 

5.2                               Disclosure for Restructuring Transactions

 

Not applicable.

 

Item 6                                                            Reliance on subsection 7.1(2) of National Instrument 51-102

 

Not applicable.

 

1  Total SVS of 118.9 million equals the fixed 102.8 million SVS plus an additional 16.1 million SVS which is dependent on the 10-day VWAP of SVS on the CSE of U.S. $5.60 as of June 19, 2020. The actual total number of SVS to be issued at closing will dependent upon the Curaleaf 10-day VWAP on the last trading day prior to closing for the component of additional SVS issued.

 

2

 

Item 7                                                            Omitted Information

 

Not applicable.

 

Item 8                                                            Executive Officer

 

Peter Clateman
Acting General Counsel
+1-781-451-0150

 

Item 9                                                            Date of Report

 

July 7, 2020

 

FORWARD LOOKING STATEMENTS

 

This news release contains “forward-looking information” within the meaning of applicable Canadian securities legislation. All statements, other than statements of historical fact, included herein are forward looking information. Generally, forward-looking information may be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “proposed”, “is expected”, “budgets”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or by the use of words or phrases which state that certain actions, events or results may, could, would, or might occur or be achieved. There can be no assurance that such forward-looking information will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking information. This forward-looking information reflects the current beliefs of Curaleaf and is based on information currently available to Curaleaf and on assumptions that Curaleaf believes are reasonable. These assumptions include, but are not limited to, the ability of Curaleaf to complete the transaction described above and the anticipated benefits to Curaleaf of the transaction described above. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Curaleaf to be materially different from those expressed or implied by such forward-looking information. Such risks and other factors may include, but are not limited to: general business, economic, competitive, political and social uncertainties; general capital market conditions and market prices for securities; the failure of Curaleaf to complete the transaction described above; the ability of Curaleaf to successfully integrate the business of Grassroots and their respective corporate cultures; delay or failure to receive board, shareholder or regulatory approvals; the actual results of future operations; competition; changes in legislation affecting Curaleaf; the timing and availability of external financing on acceptable terms; and lack of qualified, skilled labor or loss of key individuals and the other factors identified in Curaleaf’s Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Year Ended December 31, 2019 and its other public filings with the Canadian Securities Exchange. Although Curaleaf has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. Readers are cautioned that the foregoing list of factors is not exhaustive. Readers are further cautioned not to place undue reliance on forward-looking information as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Forward-looking information contained in this news release is expressly qualified by this cautionary statement. The forward-looking information contained in this news release represents the expectations of Curaleaf as of the date of this news release and, accordingly, is subject to change after such date. However, Curaleaf expressly disclaims

 

3

 

any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable securities law.

 

4



Exhibit 4.8

 

MATERIAL CHANGE REPORT

 

Item 1                                    Name and Address of Company

 

Curaleaf Holdings, Inc. (“Curaleaf” or the “Company”)

666 Burrard Street

Suite 1700

Vancouver, BC

V6C 2X8

 

Item 2                                    Date of Material Change

 

July 2, 2020

 

Item 3                                    News Release

 

A press release describing the material change was issued via the Cision news service on July 2, 2020.

 

A copy of the press release is also available under the Company’s profile on SEDAR at www.sedar.com.

 

Item 4                                    Summary of Material Change

 

On July 2, 2020, Curaleaf announced a private placement of up to C$27,500,000 of subordinate voting shares of the Company (the “Subordinate Voting Shares”) at a price of C$7.70 per Subordinate Voting Share.

 

Item 5                                    Full Description of Material Change

 

On July 2, 2020, Curaleaf announced a private placement of up to C$27,500,000 of Subordinate Voting Shares at a price of C$7.70 per Subordinate Voting Share (the “Offering”).

 

The Offering is being conducted in connection with the anticipated closing of the previously announced proposed and pending acquisition of GR Companies, Inc. d/b/a Grassroots (the “Acquisition”). Net proceeds of the Offering are intended to be used to fund Grassroots’s high-return expansion projects, replenish its working capital as well as for general corporate purposes.

 

Canaccord Genuity Corp. (the “Agent”) is acting as sole bookrunner and agent in respect of the Offering on a marketed, “commercially reasonable efforts” private placement basis.

 

Closing of the Offering is expected to occur on or about July 16, 2020. The Subordinate Voting Shares will be offered for sale on a private placement basis in each of the provinces of Canada pursuant to applicable exemptions from the prospectus requirements of Canadian securities laws. The Subordinate Voting Shares may also be sold (i) in the United States on a private placement basis pursuant to an exemption from the registration requirements of the United States Securities Act of 1933, as amended (the “US Securities Act”), and (ii) in such jurisdictions outside of Canada and the United States as may be agreed upon by the Agent and the Company, in each case in accordance with all applicable laws.

 

The securities being offered have not been, nor will they be, registered under the US Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration or an applicable exemption from the registration requirements. This material change report does not constitute an offer to sell or the solicitation of an offer to buy nor will there be any sale of the securities in any State in which such offer, solicitation or sale would be unlawful.

 

 

All securities issued will be subject to a four month hold period under Canadian securities laws. The Offering is subject to a number of conditions, including, without limitation, receipt of all regulatory approvals.

 

Item 6                                    Reliance on subsection 7.1(2) of National Instrument 51-102

 

Not applicable.

 

Item 7                                    Omitted Information

 

Not applicable.

 

Item 8                                    Executive Officer

 

For further information, contact:

 

Daniel Foley

VP, Corporate Finance & Investor Relations

IR@curaleaf.com

 

Item 9                                    Date of Report

 

July 7, 2020

 

FORWARD LOOKING INFORMATION

 

This material change report contains “forward-looking information” within the meaning of applicable Canadian securities legislation, including information regarding the Acquisition and the Offering. All statements, other than statements of historical fact, included herein are forward looking information. Generally, forward-looking information may be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “proposed”, “is expected”, “budgets”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or by the use of words or phrases which state that certain actions, events or results may, could, would, or might occur or be achieved. There can be no assurance that such forward-looking information will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking information. This forward-looking information reflects the current beliefs of Curaleaf and is based on information currently available to Curaleaf and on assumptions that Curaleaf believes are reasonable. These assumptions include, but are not limited to, the completion of the Acquisition and the Offering on terms contemplated and in a manner consistent with management’s expectations; completion of any other financing agreements; the accuracy of management’s assessment of the effects of the Acquisition, including the ability to generate synergies consistent with management’s expectations; and the ongoing performance of the businesses of Curaleaf. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Curaleaf to be materially different from those expressed or implied by such forward-looking information. Such risks and other factors may include, but are not limited to: general business, economic, competitive, political and social uncertainties; general capital market conditions and market prices for securities; the failure of Curaleaf to complete the transaction described above; the ability of Curaleaf to successfully integrate the business of Grassroots and their respective corporate cultures; delay or failure to receive board, shareholder or regulatory approvals; the actual results of future operations; competition; changes in legislation affecting Curaleaf; the timing and availability of external financing on acceptable terms; and lack of qualified, skilled labor or loss of key individuals and the other factors identified in Curaleaf’s Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Year Ended December 31, 2019 and its other public

 

 

filings with the Canadian Securities Exchange. Although Curaleaf has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. Readers are cautioned that the foregoing list of factors is not exhaustive. Readers are further cautioned not to place undue reliance on forward-looking information as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Forward-looking information contained in this material change report is expressly qualified by this cautionary statement. The forward-looking information contained in this material change report represents the expectations of Curaleaf as of the date of this material change report and, accordingly, is subject to change after such date. However, Curaleaf expressly disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable securities law.

 



Exhibit 4.9

 

MATERIAL CHANGE REPORT

 

Item 1                    Name and Address of Company

 

Curaleaf Holdings, Inc. (“Curaleaf” or the “Company”)

666 Burrard Street

Suite 1700

Vancouver, BC

V6C 2X8

 

Item 2                    Date of Material Change

 

July 23, 2020

 

Item 3                    News Release

 

A press release describing the material change was issued via Cision PR Newswire on July 23, 2020.

 

A copy of the press release is also available under the Company’s profile on SEDAR at www.sedar.com.

 

Item 4                    Summary of Material Change

 

On July 23, 2020, Curaleaf announced the closing of its previously announced acquisition of GR Companies, Inc. (“Grassroots”).

 

Item 5                    Full Description of Material Change

 

On July 23, 2020, Curaleaf announced the closing of its previously announced acquisition of Grassroots (the “Grassroots Transaction”), pursuant to the terms of an amended and restated agreement and plan of merger dated June 22, 2020 (the “A&R Merger Agreement”).

 

Pursuant to the terms of the A&R Merger Agreement, upon closing of the Grassroots Transaction, the Company (i) issued 103,455,816 subordinate voting shares of the Company (the “Subordinate Voting Shares”) to the benefit of the former holders of common stock of Grassroots, and (ii) issued 12,851,005 Subordinate Voting Shares to be held in escrow in accordance with the terms of the A&R Merger Agreement. The total consideration paid in connection with the Grassroots Transaction does not include a cash component. The consideration paid in connection with the Grassroots Transaction is subject to certain adjustments which include the working capital adjustments related to Grassroots at the closing date.

 

In connection with the Grassroots Transaction, the Company conducted a private placement offering (the “Offering”) which generated approximately C$34,056,007 in aggregate gross proceeds for the Company in exchange for 4,383,698 Subordinate Voting Shares. Closing of the Offering occurred on July 20, 2020. Pricing of the initial tranche of the Offering was set on July 2, 2020. Under the initial tranche, subscribers purchased an aggregate of 3,541,429 Subordinate Voting Shares at a price of C$7.70 per Subordinate Voting Share for aggregate gross proceeds of approximately C$27,269,003.  Subsequent to setting the initial tranche, the Company secured a second tranche investment, which was part of the Offering closing of July 20, 2020.  Under the second tranche, a subscriber purchased 842,269 Subordinate Voting Shares at a price of C$8.058 per Subordinate Voting Share for gross proceeds of approximately C$6,787,003. Net proceeds of the Offering will be used by the Company to fund Grassroots’ high-return expansion projects, replenish its working capital as well as for general corporate purposes.

 

The Grassroots Transaction expands Curaleaf’s presence from 18 to 23 states, with the combined company having affiliated operations spanning over 135 dispensary licenses, 88 operational dispensary locations, over 30 processing facilities and 22 cultivation sites with 1.6 million square feet of current

 

 

cultivation capacity. Curaleaf’s expanded geographic dispensary presence now offers access to medical or adult use Cannabis to more than 192 million people, or roughly two-thirds of the United States population.

 

Upon closing of the Grassroots Transaction, Curaleaf has appointed Mitchell Kahn, co-founder and CEO of Grassroots, to the Company’s board of directors, effective immediately. The appointment of Mr. Kahn expands the Company’s board of directors from five to six members.

 

Mr. Kahn co-founded Grassroots Cannabis in 2014 and brings more than 20 years of senior executive experience. He currently serves as Principal and CEO of Frontline Real Estate Partners, for which he is also a Founder, and previously served as President and CEO of Hilco Real Estate. Mr. Kahn is a CPA, as well as an attorney who has formerly practiced real estate law. He is a graduate of the University of Wisconsin, School of Business and Northwestern University, School of Law.

 

The securities issued by the Company pursuant to the Offering and the A&R Merger Agreement have not been, nor will they be, registered under the US Securities Act of 1933, as amended (the “U.S. Securities Act”) or the securities laws of any state of the United States and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration or an applicable exemption from the registration requirements. This material change report does not constitute an offer to sell or the solicitation of an offer to buy nor will there be any sale of the securities in any state of the United States in which such offer, solicitation or sale would be unlawful.

 

A copy of the A&R Merger Agreement is also available under the Company’s profile on SEDAR at www.sedar.com.

 

Item 6                    Reliance on subsection 7.1(2) of National Instrument 51-102

 

Not applicable.

 

Item 7                    Omitted Information

 

Not applicable.

 

Item 8                    Executive Officer

 

For further information, contact:

 

Daniel Foley

VP, Corporate Finance & Investor Relations

IR@curaleaf.com

 

Item 9                    Date of Report

 

July 31, 2020

 

FORWARD LOOKING INFORMATION

 

This material change report contains “forward-looking information” within the meaning of applicable Canadian securities legislation. All statements, other than statements of historical fact, included herein are forward looking information. Forward-looking information in this material change report include, but is not limited to, the intended use of proceeds of the Offering and the anticipated benefits to Curaleaf of the transaction described above. Generally, forward-looking information may be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “proposed”, “is expected”, “budgets”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or by the use of words or phrases which state that

 

 

certain actions, events or results may, could, would, or might occur or be achieved. There can be no assurance that such forward-looking information will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking information. This forward-looking information reflects the current beliefs of Curaleaf and is based on information currently available to Curaleaf and on assumptions that Curaleaf believes are reasonable. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Curaleaf to be materially different from those expressed or implied by such forward-looking information. Such risks and other factors may include, but are not limited to: general business, economic, competitive, political and social uncertainties; general capital market conditions and market prices for securities; the failure of Curaleaf to complete the transaction described above; the ability of Curaleaf to successfully integrate the business of Grassroots and their respective corporate cultures; the actual results of future operations; competition; changes in legislation affecting Curaleaf; the timing and availability of external financing on acceptable terms; and lack of qualified, skilled labor or loss of key individuals and the other factors identified in Curaleaf’s Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Year Ended December 31, 2019 and its other public filings with the Canadian Securities Exchange. Although Curaleaf has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. Readers are cautioned that the foregoing list of factors is not exhaustive. Readers are further cautioned not to place undue reliance on forward-looking information as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Forward-looking information contained in this material change report is expressly qualified by this cautionary statement. The forward-looking information contained in this material change report represents the expectations of Curaleaf as of the date of this material change report and, accordingly, is subject to change after such date.  However, Curaleaf expressly disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable securities law.

 



Exhibit 4.10

 

CURALEAF HOLDINGS, INC.

 

FORM 51-102F4

 

BUSINESS ACQUISITION REPORT

 

Item 1                                                            Identity of Company

 

1.1                               Name and Address of Company

 

Curaleaf Holdings, Inc. (“Curaleaf” or the “Company”)

666 Burrard Street

Vancouver, British Columbia

V6C 2X8

 

1.2                               Executive Officer

 

The following executive officer of the Company is knowledgeable about the significant acquisition and this Business Acquisition report:

 

Joseph Lusardi
Chief Executive Officer
(781) 451-0150

 

Item 2                                                            Details of Acquisition

 

2.1                               Nature of Business Acquired

 

On February 1, 2020 (the “Closing Date”), Curaleaf completed the acquisition of the state regulated cannabis business of Cura Partners, Inc. (“Cura Partners”), owners of the Select brand (“Select”). The acquisition of Cura Partners was completed by way of a merger under the Business Corporation Act of the State of Oregon of a wholly-owned subsidiary of Curaleaf (“Merger Sub”) into Cura Partners, as a result of which the separate corporate existence of Merger Sub ceased, and Cura Partners continued as the surviving corporation and a wholly-owned subsidiary of the Corporation after the merger (the “Acquisition”).

 

The business of Cura Partners includes Select’s manufacturing, processing, distribution and marketing operations and all adult-use cannabis products marketed under the Select brand name, including all intellectual property.

 

2.2                               Date of Acquisition

 

February 1, 2020.

 

2.3                               Consideration

 

Under the terms of the Acquisition, the stockholders of Select were entitled to receive an aggregate of 55,000,000 subordinate voting shares (“SVS”) as of the closing of the Acquisition, subject to certain pre-closing adjustments. Based on the closing price of the SVS on the Canadian Securities Exchange (the “CSE”) of C$13.30 on April 30, 2019, being the last trading day prior to announcement of the Acquisition, this represented a closing payment of approximately C$731.5 million, or approximately US$545 million.

 

 

Upon closing of the Acquisition (and after taking into account pre-closing adjustments), Curaleaf issued an aggregate of 51,349,625 SVS as consideration for the acquisition of all of the outstanding equity securities of Select, being 48,275,476 issued as closing payment, and an additional 3,074,149 SVS to be held in escrow until the 18-month anniversary of the Closing Date. Based on the closing price of the SVS on the CSE of C$9.39 on January 31, 2020, being the last trading day prior to closing of the Acquisition, this represented a closing payment of approximately C$453 million, or approximately US$343 million.

 

Additionally, the former shareholders of Cura Partners are eligible to receive certain contingent payments comprised of (i) payments contingent upon Curaleaf achieving certain calendar year 2020 revenue targets based on Select-branded extract sales beginning at a target of US$130 million with maximum achievement at US$250 million to be settled through the issuance of SVS and (ii) up to US$200 million to be settled through the issuance of SVS, contingent upon Curaleaf exceeding certain 2020 fiscal year revenue targets for its combined wholesale extracts business and Select-branded sales. Based on the price of the SVS on the CSE as of the Closing Date, and assuming that all contingent payments are paid to the former shareholders of Cura Partners, approximately 52,000,000 SVS would be issued to the former shareholders of Cura Partners as contingent consideration.

 

Further information about the Acquisition can be found in the Company’s press releases dated February 3, 2020 and May 1, 2019, the Company’s material change reports dated respectively November 8, 2019 and May 10, 2019, copies of which have been filed under the Company’s profile on SEDAR at www.sedar.com.

 

2.4                               Effect on Financial Position

 

Cura Partners became a wholly owned subsidiary of the Company.

 

Except as disclosed in this business acquisition report, or publicly disclosed and in the ordinary course of business, the Company does not have any current plans or proposals for material changes in the Company’s business affairs, which may have a significant effect on the operations and financial position of the Company.

 

2.5                               Prior Valuations

 

No valuation required by Securities legislation or a Canadian exchange to support the consideration paid by the Company pursuant to the Acquisition has been obtained within the past 12 months.

 

2.6                               Parties to Transaction

 

Mr. Boris Jordan, the Executive Chairman of the Board and controlling shareholder of the Company, controls Measure 8 Venture Partners LP (“Measure 8”), an alternative investment vehicle created to capitalize on the emergence of the U.S. and global cannabis industry which has invested in several business ventures in the U.S. and global cannabis industry. At the time of the announcement of the Acquisition, Measure 8 owned approximately 3.6% of Cura Partner’s shares of common stock and Measure 8 was also the holder of convertible promissory notes issued by Cura Partners (the “Convertible Notes”) in May 2018.

 

For the foregoing reasons, Curaleaf determined in May 2019 that the Acquisition constituted a “related party transaction” within the meaning of Multilateral Instrument 61-101 — Protection of Minority Security Holders in Special Transactions. For further

 

2

 

information, please refer to the Company’s material change reports dated respectively November 8, 2019 and May 10, 2019, copies of which have been filed under the Company’s profile on SEDAR at www.sedar.com.

 

Accordingly, the Acquisition could be interpreted as being with an “informed person” (as such term is defined in Section 1.1 of National Instrument 51-102 — Continuous Disclosure Obligations) of the Company by virtue of the controlling ownership interests of Boris Jordan in both the Company and Cura Partners.

 

2.7                               Date of Report

 

May 29, 2020

 

Item 3                                                            Financial Statements

 

This Business Acquisition Report includes the restated audited consolidated financial statements of Cura Partners, together with the restated notes thereto and the auditor’s report thereon, as at and for the year ended December 31, 2019, attached hereto as Schedule “A”.

 

Cautionary Note Regarding Forward-looking Information

 

Certain statements in this business acquisition report may be considered forward-looking statements, within the meaning of applicable Canadian securities legislation. All statements, other than statements of historical fact, included herein are forward looking information. Generally, forward-looking information may be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “proposed”, “is expected”, “budgets”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or by the use of words or phrases which state that certain actions, events or results may, could, would, or might occur or be achieved. There can be no assurance that such forward-looking information will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking information. This forward-looking information reflects the current beliefs of Curaleaf and is based on information currently available to Curaleaf and on assumptions that Curaleaf believes are reasonable. These assumptions include, but are not limited to, the additional consideration that may be payable to Cura Partners former shareholders and to the effect of the Acquisition on the financial position of the Company. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Curaleaf to be materially different from those expressed or implied by such forward-looking information. Such risks and other factors may include, but are not limited to: general business, economic, competitive, political and social uncertainties; general capital market conditions and market prices for securities; the ability of Curaleaf to successfully integrate the business of Select and their respective corporate cultures; the actual results of future operations; competition; changes in legislation affecting Curaleaf; and lack of qualified, skilled labor or loss of key individuals and the other factors identified in Curaleaf’s Management, Discussion and Analysis filed on SEDAR on March 26, 2020 and available at www.sedar.com. Although Curaleaf has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. Readers are cautioned that the foregoing list of factors is not exhaustive. Readers are further cautioned not to place undue reliance on forward-looking information as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Forward-looking information contained in this news release is expressly qualified by this cautionary statement. The forward-looking information contained in this news release represents the expectations of Curaleaf as of the date of this news release and, accordingly, is subject to change after such date. However, Curaleaf expressly disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable securities law.

 

3

 

SCHEDULE “A”

RESTATED AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CURA PARTNERS

 

See attached.

 

4

 

Cura Partners Inc.

Restated Audited Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

 

 

Cura Partners Inc.

Restated Audited Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

 

Management’s Responsibility for Financial Information

 

The accompanying restated consolidated financial statements and all information in this report were prepared by and are the responsibility of management. The restated consolidated financial statements were prepared in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and reflect management’s best estimates and judgments. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial information presented elsewhere in this report is consistent with that in the consolidated financial statements.

 

The Company maintains a system of internal controls, which provides management with reasonable assurance that financial information is relevant, reliable and accurate and that the Company’s assets are properly accounted for and adequately safeguarded.

 

The Board of Directors carries out its responsibility for the consolidated financial statements principally through its Audit Committee, consisting solely of outside directors. The Audit Committee reviews the Company’s annual consolidated financial statements and has recommended their approval to the Board of Directors. The shareholders’ auditors and Audit Committee meet with and without management being present.

 

The restated consolidated financial statements have been audited by the independent registered public accounting firm appointed by the shareholders, Antares Professional Corporation, Chartered Professional Accountants. In that capacity they have issued a report on the consolidated financial statements for the years ended December 31, 2019 and 2018.

 

/s/ Cameron Forni

 

/s/ Robert Mestemaker

Cameron Forni

 

Robert Mestemaker

Chief Executive Officer

 

VP, Controller

 

The accompanying notes are an integral part of these restated consolidated financial statements

 

2

 

 

Independent Auditor’s Report

 

To the Directors and Shareholders of Cura Partners Inc.:

 

Opinion

 

We have audited the restated consolidated financial statements of Cura Partners Inc. and its subsidiaries (the “Company”), which comprise the restated consolidated statement of financial position as at December 31, 2019, and the restated consolidated statement of operations, changes in shareholder’s (deficiency) equity and cash flows for the year then ended, and notes to the restated consolidated financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying restated consolidated financial statements present fairly, in all material respects, the restated consolidated financial position of the Company as at December 31, 2019, and its restated consolidated financial performance and its restated consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board.

 

Basis for Opinion

 

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Restated Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the restated consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Emphasis of Matter —Restated Consolidated Financial Statements

 

We draw attention to Note 21 of the restated consolidated financial statements, which describes that the consolidated financial statements that we originally reported on April 9, 2020 have been restated and describes the matter that gave rise to the restatement of the consolidated financial statements. Our opinion is not modified in respect of this matter.

 

Other Matters

 

The consolidated financial statements of the Company for the year ended December 31, 2018 were audited by another auditor who expressed a modified opinion on those statements on June 21, 2019. The predecessor auditor was not able to observe the counting of the physical inventories at the beginning of 2017 or satisfy themselves concerning those inventory quantities by alternative means. Since opening inventories affect the determination of the financial performance and cash flows, the predecessor auditor was unable to determine whether any adjustments to the financial performance and cash flows might be necessary for 2017.

 

Responsibilities of Management and Those Charged with Governance for the Restated Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of the restated consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of restated consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the restated consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

 

Antares Professional Corporation, Chartered Professional Accountants (“PKF Antares”) is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms.

 

 

 

Auditor’s Responsibilities for the Audit of the Restated Consolidated Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the restated consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these restated consolidated financial statements.

 

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

·                  Identify and assess the risks of material misstatement of the restated consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

·                  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

·                  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

·                  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the restated consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

·                  Evaluate the overall presentation, structure and content of the restated consolidated financial statements, including the disclosures, and whether the restated consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

·                  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the restated consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audits.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

The engagement partner on the audit resulting in this independent auditor’s report is Erkin Atakhanov.

 

ANTARES PROFESSIONAL CORPORATION

CHARTERED PROFESSIONAL ACCOUNTANTS

 

Calgary, Alberta

Chartered Professional Accountants

May 28, 2020

Licensed Public Accountants

 

Antares Professional Corporation, Chartered Professional Accountants

Suite 400, 906 12 Avenue SW, Calgary, Canada T2R 1K7

T: +1 403 375 9955, www.pkfantares.com

 

Antares Professional Corporation, Chartered Professional Accountants (“PKF Antares”) is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms.

 

 

Cura Partners Inc.

Restated Consolidated Statements of Financial Position

(expressed in US Dollars)

 

 

 

 

 

Restated - See Note 21

 

 

 

 

 

 

 

December 31,

 

December 31,

 

 

 

Note

 

2019

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash

 

 

 

$

15,392,242

 

$

58,124,284

 

Trade and other receivables, net of allowance

 

4

 

10,215,677

 

24,124,662

 

Inventories, net

 

5

 

18,210,862

 

17,249,233

 

Prepaid expenses and other current assets

 

6

 

2,808,674

 

8,308,346

 

Total current assets

 

 

 

46,627,455

 

107,806,525

 

Non-current assets

 

 

 

 

 

 

 

Deferred tax asset

 

15

 

898,856

 

1,516,279

 

Property and equipment, net

 

7

 

8,904,268

 

7,374,395

 

Right-of-use assets

 

 

 

9,795,735

 

—

 

Security deposit

 

 

 

699,107

 

670,238

 

Goodwill

 

9

 

2,149,907

 

2,149,907

 

Total non-current assets

 

 

 

22,447,873

 

11,710,819

 

Total Assets

 

 

 

$

69,075,328

 

$

119,517,344

 

 

 

 

 

 

 

 

 

Liabilities & Shareholders’ (Deficiency) Equity

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

 

 

 

$

4,984,689

 

$

2,791,593

 

Accrued expenses and other current liabilities

 

8

 

13,605,346

 

15,691,021

 

Convertible debt, related party, net of discount

 

9

 

10,800,000

 

10,550,584

 

Current portion of lease liabilities

 

 

 

2,020,402

 

—

 

Income tax payable

 

15

 

2,404,270

 

2,324,802

 

Derivative liabilities

 

16

 

44,435,974

 

50,267,428

 

Total current liabilities

 

 

 

78,250,681

 

81,625,428

 

Deferred tax liability

 

15

 

310,551

 

1,451,578

 

Lease liabilities

 

 

 

8,595,601

 

—

 

Convertible debt, net of discount

 

9

 

—

 

51,947,234

 

Total liabilities

 

 

 

87,156,833

 

135,024,240

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, no par value, 400,000,000 shares authorized 33,294,717 shares issued and outstanding at December 31, 2019 and 27,747,398 at December 31, 2018

 

 

 

126,038,545

 

36,846,690

 

 

 

 

 

 

 

 

 

Share-Based Reserve

 

 

 

16,640,951

 

—

 

Accumulated deficit

 

 

 

(160,761,001

)

(52,353,586

)

Total Shareholders’ Equity

 

 

 

(18,081,505

)

(15,506,896

)

Total Shareholders’ Equity and Liabilities

 

 

 

$

69,075,328

 

$

119,517,344

 

 

The accompanying notes are an integral part of these restated consolidated financial statements

 

3

 

Cura Partners Inc.

Restated Consolidated Statements of Operations

For the years ended December 31, 2019 and 2018

(expressed in US Dollars)

 

 

 

 

 

For the Years ended

 

 

 

 

 

December 31,

 

 

 

 

 

Restated - See Note 21

 

 

 

 

 

Note

 

2019

 

2018

 

Sales

 

 

 

$

115,183,667

 

$

117,101,943

 

Cost of sales

 

 

 

88,439,474

 

81,822,190

 

Gross margin

 

 

 

26,744,193

 

35,279,753

 

Operating expenses

 

 

 

 

 

 

 

Selling expenses

 

12

 

30,376,517

 

13,580,698

 

Administrative expenses

 

13

 

49,633,577

 

30,284,489

 

Share-based compensation

 

20

 

16,640,951

 

—

 

Total operating expenses

 

 

 

96,651,045

 

43,865,187

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

 

(69,906,852

)

(8,585,434

)

 

 

 

 

 

 

 

 

Other (income)/expense

 

 

 

 

 

 

 

Interest expense

 

9

 

14,856,883

 

2,946,172

 

Interest expense related to lease liabilities

 

 

 

1,133,589

 

—

 

Gain on sale of fixed assets

 

 

 

(2,148,000

)

—

 

Loss on subsidiary investment

 

 

 

2,466,098

 

—

 

Other expense

 

 

 

572,166

 

—

 

Amortization of debt discount

 

9

 

13,626,405

 

4,342,342

 

Loss on debt extinguishment

 

9

 

—

 

11,115,433

 

Change in fair value of derivative liabilities

 

14

 

4,470,180

 

3,872,682

 

Total other expense

 

 

 

34,977,321

 

22,276,629

 

Net loss before taxes

 

 

 

(104,884,173

)

(30,862,063

)

Income tax provision

 

15

 

(3,523,242

)

(3,849,207

)

Net loss

 

 

 

$

(108,407,415

)

$

(34,711,270

)

The accompanying notes are an integral part of these restated consolidated financial statements

 

4

 

Cura Partners Inc.

Restated Consolidated Statement of Cash Flows

For the years ended December 31, 2019 and 2018

(expressed in US Dollars)

 

 

 

For the Years ended

 

 

 

December 31,

 

 

 

Restated - See Note 21

 

 

 

 

 

2019

 

2018

 

Cash flows from operating activities

 

 

 

 

 

Net loss for the period

 

$

(108,407,415

)

$

(34,711,270

)

Adjustments for non cash expenses

 

 

 

 

 

Amortization of debt discount

 

13,626,405

 

4,342,342

 

Share-based compensation

 

16,640,951

 

—

 

Bad debt expense

 

12,075,891

 

6,555,000

 

Interest expense related to lease liabilities

 

1,133,589

 

—

 

Gain on sale of assets

 

(2,148,000

)

—

 

Loss on subsidiary investment

 

2,466,098

 

—

 

Depreciation and amortization

 

4,321,774

 

1,061,711

 

Interest expense

 

14,856,883

 

11,115,433

 

Inventory reserve

 

4,535,684

 

1,985,765

 

Change in fair value of derivative liabilities

 

4,470,180

 

3,872,682

 

Deferred tax gain

 

(523,604

)

731,062

 

Other non-cash gain

 

(291,732

)

—

 

Change in operating assets and liabilities other than cash

 

 

 

 

 

Trade & other receivables

 

1,833,094

 

(28,420,684

)

Prepaid expenses and other current assets

 

5,499,672

 

(8,173,899

)

Inventories

 

(17,796,809

)

(9,289,814

)

Security deposit

 

(28,869

)

(670,238

)

Accounts payable

 

2,707,952

 

(1,293,633

)

Accrued expenses and other current liabilities

 

(3,376,558

)

14,929,686

 

Income tax payable

 

79,468

 

(2,343,660

)

Cash used in operating activities

 

(48,325,346

)

(40,309,517

)

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(6,600,416

)

(5,647,195

)

Proceeds from sales of assets

 

12,660,000

 

—

 

Sale of property and equipment

 

3,034,249

 

—

 

Cash used in investing activities

 

9,093,833

 

(5,647,195

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from convertible debt

 

—

 

89,284,000

 

Proceeds from convertible debt, related party

 

—

 

12,650,000

 

Debt issuance costs paid

 

—

 

(4,107,188

)

Lease liability payments

 

(3,500,529

)

—

 

Proceeds from line of credit, related party, net of repayments

 

—

 

(170,000

)

Repayment of note payable

 

—

 

(575,876

)

Repayment of related party note payable

 

—

 

(10,500,000

)

Prepayment penalty on extinguishment of related party note payable

 

—

 

(5,625,000

)

Shares sold for cash

 

—

 

17,035,000

 

Cash (used)/provided by financing activities

 

(3,500,529

)

97,990,936

 

 

 

 

 

 

 

(Decrease)/Increase in cash during the year

 

(42,732,042

)

52,034,224

 

Cash, beginning of period

 

58,124,284

 

6,090,060

 

Cash, end of period

 

$

15,392,242

 

$

58,124,284

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Conversion of convertible debentures to equity

 

$

89,191,857

 

$

—

 

Recognition of ROU assets and lease liabilities, net

 

$

4,320,797

 

$

—

 

Conversion option recognized as debt discount

 

$

—

 

$

7,806,760

 

Conversion option recognized as debt discount, related party

 

$

—

 

$

31,663,480

 

 

 

 

 

 

 

Supplementary Information:

 

 

 

 

 

Interest Paid

 

$

1,315,081

 

$

367,930

 

Income Taxes Paid

 

$

3,967,378

 

$

5,861,238

 

 

The accompanying notes are an integral part of these restated consolidated financial statements

 

5

 

Cura Partners Inc.

Restated Consolidated Statements of Changes in Shareholders’ (Deficiency) Equity

For the years ended December 31, 2019 and 2018

(expressed in US Dollars)

 

 

 

No Par Common Stock

 

Restated-See Note 21

 

Accumulated

 

Total

 

 

 

Note

 

Shares

 

Amount

 

Share-Based Reserve

 

Deficit

 

Equity

 

Balance, January 1, 2018

 

 

 

26,315,989

 

$

19,811,690

 

 

 

$

(17,642,316

)

$

2,169,374

 

Common stock sold for cash

 

10

 

1,431,409

 

17,035,000

 

 

 

 

 

17,035,000

 

Net loss

 

 

 

 

 

 

 

 

 

(34,711,270

)

(34,711,270

)

Balance, December 31, 2018

 

 

 

27,747,398

 

36,846,690

 

 

 

(52,353,586

)

(15,506,896

)

Net issuance of shares

 

9b, 10

 

2,665,287

 

89,191,855

 

 

 

 

 

89,191,855

 

Shared based compensation

 

20

 

 

 

 

 

16,640,951

 

 

 

16,640,951

 

Net loss

 

 

 

 

 

 

 

 

 

(108,407,415

)

(108,407,415

)

Balance, December 31, 2019

 

 

 

30,412,685

 

$

126,038,545

 

$

16,640,951

 

$

(160,761,001

)

$

(18,081,505

)

 

The accompanying notes are an integral part of these restated consolidated financial statements

 

6

 

Cura Partners Inc.

Restated Notes to the Consolidated Financial Statements

For years ended December 31, 2019 and 2018

(expressed in US Dollars except as otherwise indicated)

 

1. NATURE OF OPERATIONS

 

Cura Partners Inc. (“Cura” or the “Company”) earns revenue from the production and sale of cannabis oil. The Company was organized on May 8, 2014 as “Terwilliger Partners, LLC” under the Oregon Limited Liability Company Act. On May 19, 2017, the Company filed articles of amendment with the Oregon Secretary of State changing its name to “Cura Partners, LLC.” On February 2, 2018, the Company approved a Plan of Conversion and Articles of Conversion (Articles of Incorporation) to convert the Company from a limited liability company to a corporation under its current name, “Cura Partners Inc.”. The Company has not altered their tax filing methodology. The Company maintains its corporate headquarters in Portland, Oregon. These consolidated financial statements for the years ended December 31, 2019 and 2018 include Cura Partners Inc. and its wholly-owned subsidiaries. (see Note 2- Summary of Significant Accounting Policies — Basis of consolidation).

 

Liquidity and Management’s Plans

 

As of December 31, 2019, the Company had an accumulated deficit of $160,761,001 and negative working capital of $31,623,226. During the year ended December 31, 2019, the Company had a net loss of $108,407,415 and used cash in operations of $48,325,346. For the year ended December 31, 2018, the Company had a net loss of $34,711,270 and used cash in operations of $40,309,517. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date these financial statements are available to be issued. On February 1, 2020 the Company was acquired by Curaleaf Holdings, Inc. (“Curaleaf”) which alleviated the substantial doubt (Note 22 - Subsequent Events).

 

The Company’s business activities, and the business activities of its subsidiaries, which operate in jurisdictions where the use of marijuana has been legalized under U.S. state and local laws, currently are illegal under U.S. federal law. The U.S. Controlled Substances Act classifies marijuana as a Schedule-1 controlled substance. Any proceeding that may be brought against the Company could have a material adverse effect on the Company’s business plans, financial condition and results of operations.

 

The Company believes that it has sufficient capital to meet its operating expenses and obligations for the next twelve months from the date these financial statements are available to be issued. The Company continues to market its products and to develop sales opportunities that could result in additional sales of its products in the future. However, if other unanticipated difficulties arise, the Company may be required to obtain funding from Cura’s parent organization, Curaleaf, to support its operations until such time as additional capital becomes available. These activities would necessitate the Company to slow its rate of spending and extend its use of cash until additional capital is raised. There can be no assurance that such a

 

7

 

plan will be successful. There is no assurance that additional financing will be available when needed or that the Company will be able to obtain such financing on reasonable terms.

 

Approval of Financial Statements

 

These consolidated financial statements were approved and authorized for issue by the Management on May 28, 2020.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The functional currency of the Company and its subsidiaries is the United States Dollar (“USD”). The consolidated financial statements, which are presented in USD (unless otherwise stated), have been prepared under the historical cost convention, as modified by the measurement at fair value of certain financial assets and financial liabilities. The consolidated financial statements were prepared by management in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and including interpretations of the IFRS Interpretations Committee (“IFRIC”).

 

Basis of consolidation

 

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

 

 

 

State of

 

December 31,2019

 

December 31,2018

 

Business Name

 

Operations

 

Ownership %

 

Ownership %

 

Cura CS, LLC

 

OR

 

100

%

100

%

Cura CA LLC

 

CA

 

100

%

100

%

Cura Wellness LLC

 

OR

 

100

%

100

%

Cura Licensing LLC

 

OR

 

100

%

100

%

Cura NV LLC

 

NV

 

100

%

100

%

Cura AZ LLC

 

AZ

 

100

%

100

%

Cura MI LLC

 

MI

 

100

%

100

%

Michigan Oil Service Company LLC

 

MI

 

100

%

100

%

Cura Select OK LLC

 

OK

 

100

%

100

%

Select House LLC

 

OR

 

100

%

100

%

Cura CO LLC

 

CO

 

100

%

0

%

Garden of Weeden, Inc.

 

CA

 

100

%

100

%

Cura Select Canada Ltd.

 

Canada

 

100

%

100

%

 

All significant intercompany balances and transactions were eliminated in consolidation.

 

8

 

Accounting estimates and judgments

 

The preparation of these consolidated financial statements in accordance with IFRS requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the year.

 

Financial statement items subject to significant management judgment include:

 

·                  Valuation of deferred income tax assets – The valuation of deferred income tax assets requires judgment on their recoverability. Such judgments are made based on management’s estimate on the timing and amount of the Company’s future taxable earnings (see Note 15- Income Taxes).

 

·                  Application of IRS Code to cannabis related businesses - Presently, the Internal Revenue Service (“IRS”) does not have a published position on the tax treatment of cannabis related businesses or the application of Internal Revenue Code (“IRC”) Sections 263A, 280E, and 471 to such businesses. Consequently, significant judgment has been employed in the preparation of the Company’s tax provisions.

 

Financial statement items subject to significant management estimates include:

 

·                  Allowance for doubtful accounts – The valuation of allowances for uncollectible trade receivables requires assumptions including estimated credit losses based on customer history, industry concentrations, and the Company’s knowledge of the financial conditions of its customers. Uncertainty relates to the actual collectability of customer balances that can vary based on management’s estimates and judgment (See - Note 4 and Note 14).

 

·                  Allowance for inventory obsolescence – The Company estimates inventory obsolescence allowances for potential losses resulting from inventory that cannot be processed and/or sold to customers. Additional allowances may be required if the physical condition of inventory deteriorates or customer requirements change.

 

·                  Measurement of impairment in assets – The active market or a binding sale agreement provides the best evidence for determination of fair value, but where neither exists, fair value is based on the best information available to reflect the amount the Company could receive for the assets or its value in use, which is equal to the present value of future cash flows expected to be derived from the use and sale of the assets. Management exercises judgment to determine whether indicators of impairment exist, and if so, management must estimate the timing and amount of future cash flows from sales. There were no indicators of impairment as of December 31, 2019 and 2018.

 

·                  Goodwill – Goodwill is tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill has been impaired. In order to determine if the value of goodwill has been impaired, the cash-generating units (“CGU”) to which goodwill has been allocated must be valued using present value techniques. When applying this valuation technique, the Company relies on a number of factors, including historical resulted business plans, forecasts and market data.

 

9

 

Changes in the conditions for these judgments and estimates can significantly affect the assessed value of goodwill.

 

·                 Share-based payment arrangements - The Company uses the Black-Scholes valuation model to determine the fair value of options granted to employees and directors under share-based payment arrangements, where appropriate. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

 

While management believes that its estimates and judgments are reasonable, actual results may differ materially from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash consists of vault cash and bank deposits within regular checking accounts. Such bank deposits are not federally insured.

 

Financial instruments

 

The Company adopted IFRS 9: Financial Instruments, on January 1, 2018, replacing IAS 39: Financial Instruments, Recognition and Measurement.

 

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Financial assets and financial liabilities are recognized on the statements of financial position at the time the Company becomes a party to the contractual provisions of the financial instrument.

 

Under IFRS 9, financial instruments are initially measured at fair value, plus in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. Subsequently, all assets within scope of IFRS 9 are measured at:

 

·                  Amortized cost;

·                  Fair value through other comprehensive income (“FVOCI”); or

·                  Fair value through profit or loss (“FVTPL”).

 

The classification is based on whether the contractual cash flows give rise to payments on specified dates that are solely payments of principal and interest and the objective of the Company’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell. Financial assets are required to be reclassified only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date.

 

10

 

The impairment requirements under IFRS 9 are based on an expected credit loss model, replacing the IAS 39 incurred loss model. The expected credit loss model applies to debt instruments recorded at amortized cost or at FVOCI, such as loans, debt and most loan commitments and financial guarantee contracts.

 

Inventory

 

Raw materials are valued at the lower of cost or net realizable value. Finished goods and work in process are valued at the lower of cost or net realizable value and consist of the following costs: raw materials, direct and indirect labor and the applicable share of manufacturing overhead. Net realizable value is estimated based on the amount at which inventories are expected to be sold, taking into account estimated costs necessary to make the sale. The difference between cost and net realizable value is recorded as inventory reserve. Finished goods are determined on a first-in, first-out basis. Raw materials are recorded on an actual cost basis.

 

Property and equipment

 

Property and equipment are recorded at cost, net of accumulated depreciation and impairment charges, and are depreciated on a straight-line basis over estimated useful lives using the following annual rates:

 

Building leasehold improvements

 

20-33%

Computers

 

20-33%

Equipment

 

20%

Production equipment

 

20%

Furniture and fixtures

 

33%

Vehicles

 

33%

Software

 

33%

 

Financed lease equipment and leasehold improvements are depreciated on a straight-line basis over the shorter of the useful life of the leasehold improvements or the initial lease term. Construction in progress is not depreciated until the underlying asset is placed into service. Repairs and maintenance costs are charged to operations as incurred.

 

Goodwill

 

The Company’s goodwill is related to the 2016 purchase of Select Strains, a manufacturer of cannabis oils. Goodwill is not subject to amortization. The Company tests for impairment of goodwill on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s annual test for impairment is performed as of the date of its consolidated balance sheet. The Company considers cannabis oil production to be its sole cash generating unit (“CGU”). Impairment is determined for goodwill by assessing if the carrying value of its CGU, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell and the value in use. The fair value is determined using market related valuation models including earnings multiples. If the fair value is less than the carrying value, the

 

11

 

asset is considered impaired. Based upon the use of the fair value model, there has been no impairment to the value of recorded goodwill during the years ended December 31, 2019 and 2018.

 

Impairment of assets

 

Long-lived assets subject to depreciation or amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Management is required to assess at each reporting date whether there is any indication that an asset may be impaired. Where such an indication exists, the asset’s recoverable amount is compared to its carrying value, and an impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value, less costs of disposal and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, or CGU. In determining value in use of a given asset or CGU, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

Long-lived assets that suffered impairment are reviewed for possible reversal of the impairment if there has been a change, since the date of the most recent impairment test, in the estimates used to determine the impaired asset’s recoverable amount. However, an asset’s carrying amount, increased due to the reversal of a prior impairment loss, must not exceed the carrying amount that would have been determined, net of depreciation or amortization, had the original impairment not occurred.

 

Leases and lease inducements

 

Leasing Arrangements effective January 1, 2019

 

At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract contains the right to control the use of the identified asset, the Company assesses whether:

 

·                  The contract involves the use of an identified asset - this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified;

·                  The Company has the right to obtain substantially all of the economic benefits from use of the asset through the period of use; and

·                  The Company has the right to direct the use of the asset. The Company has this right when it has the decisionmaking rights that are most relevant to changing how and for what purpose the asset is used.

 

At inception or on reassessment of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the basis of their relative standalone prices.

 

12

 

As a lessee, the Company recognizes a right-of-use asset and a lease liability at the commencement date of a lease. The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any decommissioning and restoration costs, less any lease incentives received.

 

The right-of-use asset is subsequently depreciated from the commencement date to the earlier of the end of the lease term, or the end of the useful life of the asset. In addition, the right-of-use asset may be reduced due to impairment losses, if any, and adjusted for certain re-measurements of the lease liability.

 

A lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by the interest rate implicit in the lease, or if that rate cannot be readily determined, the incremental borrowing rate. Lease payments included in the measurement of the lease liability are comprised of:

 

·                  fixed payments, including in-substance fixed payments, less any lease incentives receivable;

 

·                  variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

 

·                  amounts expected to be payable under a residual value guarantee;

 

·                  exercise prices of purchase options if the Company are reasonably certain to exercise that option; and

 

·                  payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

 

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, or if there is a change in our estimate or assessment of the expected amount payable under a residual value guarantee, purchase, extension or termination option. Variable lease payments not included in the initial measurement of the lease liability are charged directly to net earnings.

 

The Company will elect not to recognize assets and lease liabilities for short-term leases that have a lease term of 12 months or less, and leases of low-value assets. Lease payments associated with these leases will be recognized as an expense over the lease term. The Company will elect to apply the practical expedient to account for each lease component and any non-lease components as a single lease component.

 

Lease Arrangements effective 2018

 

Prior to January 1, 2019, the Company accounted for lease arrangements in accordance with IAS 17, Leases. Accordingly, the Company classified any lease that substantially transferred the risks and rewards of ownership to the Company as a finance lease. Any lease not deemed a finance lease was designated as an operating lease.

 

13

 

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, including whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or whether the arrangement conveys a right to use an asset.

 

Finance leases are recognized as assets and liabilities at the lower of the fair value of the leased property and the present value of the minimum lease payments at lease inception date. Finance lease assets are shown as part of property, plant and equipment in the consolidated statements of financial position. Amortization of finance lease assets are included within amortization costs on the consolidated statements of operations. Lease payments on finance lease liabilities are allocated between the lease liability and finance cost. The finance cost, or amortization of the discount, on the lease liability is charged to the Consolidated Statements of Operation using the effective interest method to produce a constant periodic rate of interest on the remaining balance of the lease liability for each period.

 

Operating lease payments are recognized as an operating cost in the consolidated statements of operations on a straight-line basis over the lease term.

 

Equity

 

Common Stock: Common stock issued by the Company is classified as equity and proceeds from the issuance of common stock are included in equity, net of any share issuance costs, such as commissions paid to underwriters or legal fees.

 

Revenue recognition

 

Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for services supplied, stated net of discounts, rebates and purchase taxes. The cost of customer promotions and bonuses are deducted from revenue. The Company recognizes revenue at the point the customer obtains controls of the goods and the Company satisfies its performance obligation, which is generally at the time it transfers the product to the customer and it is probable that future economic benefits will flow to the entity, which is based on the customer’s ability and intent to pay as amounts become due. A receivable is recognized when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

 

Income taxes

 

All entities are taxed as corporations and are on the accrual basis of accounting for tax purposes with the exception of Cura Wellness LLC, which is taxed on the cash basis of accounting for tax purposes. On February 2, 2018, Cura approved a Plan of Conversion and Articles of Conversion (“Articles of Incorporation”) to convert the Company from a limited liability company to a corporation in a tax-free reorganization (see Note 10 — Shareholders’ Deficiency for additional details).

 

14

 

Income tax expense comprises current and deferred tax. It is recognized in the consolidated statement of profits and losses except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Interest and penalties related to income taxes, , are accounted for under IAS 37 — Provision, Contingent Liabilities and Contingent Assets. Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustments to the tax payable or receivable with respect to previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date.

 

Deferred tax assets and liabilities are recognized with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

 

Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Future taxable profits are determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary differences is insufficient to recognize a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on the business plans for individual subsidiaries in the Company. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized; such reductions are reversed when the probability of future taxable profit improves. Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that future taxable profits will be available against which they can be used. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Company expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset only if certain criteria are met.

 

The Company classifies income tax related interest and penalties within administrative expenses on its consolidated statements of operations. The Company recorded $192,762 and $106,331 of interest and penalties during the years ended December 31, 2019 and 2018, respectively.

 

3.              RECENT ACCOUNTING STANDARDS

 

New accounting standards recently applied

 

The Company adopted the following standards and amendments to accounting standards:

 

On January 1, 2019 the Company adopted IFRS 16, Leases (“IFRS 16”), which increased transparency and comparability among organizations by recognizing right-of-use (“ROU”) assets and lease liabilities on the balance sheet for most leases previously classified as operating leases. The updated guidance requires

 

15

 

disclosures to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

 

The Company adopted this standard utilizing the modified retrospective approach. The comparative prior period has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of IFRS 16 resulted in a recognition of ROU assets of $17,407,633 with corresponding lease liabilities of $17,617,973. At adoption, the measurement of the lease liabilities utilized the remaining minimum rental payments as defined under the previous accounting standard and the incremental borrowing rate as of January 1, 2019. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate of 9.00%. The Company has elected not to recognize right-of-use assets and lease liabilities for short term leases of 12 months or less and leases of low-value assets. The Company recognizes lease payments associated with these leases as expense on a straight-line basis over the lease term.

 

The adoption of IFRS 16 resulted in the recognition of additional right of use assets and lease liabilities on the balance sheet, and a corresponding increase in depreciation and interest expense. The Company also expects cash flows from operating activities to increase under IFRS 16 as lease payments for substantially all leases will be recorded as financing outflows in the consolidated statement of cash flows as opposed to operating cash flows.

 

The Company adopted IFRIC 23, Uncertainty over Income Tax Treatments (“IFRIC 23”) on January 1, 2019, with retrospective application. IFRIC 23 clarifies the recognition and measurement requirements when there is uncertainty over income tax treatments. The effect of uncertain tax treatments are recognized at the most likely amount or expected value. The adoption of IFRIC 23 had no impact on the consolidated financial statements.

 

New accounting standards issued but not yet applied

 

The IASB has issued the following standards which has not yet been adopted by the Company:

 

·                  On October 22, 2018, the IASB issued amendments to IFRS 3 Business Combinations, that seek to clarify whether a transaction results in an asset or a business acquisition. The amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets. If a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process. The amendments apply to businesses acquired in annual reporting periods beginning on or after January 1, 2020. The Company will apply the requirements of the amendments to transactions entered into after January 1, 2020.

 

On September 26, 2019, the IASB issued amendments for some of its requirements for hedge accounting in IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement, as well as the related Standard on disclosures, IFRS 7 Financial Instruments: Disclosures in relation to Phase 1 of IBOR Reform and its Effects on Financial Reporting project. The

 

16

 

amendments are designed to support the provision of useful financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks such as interbank offered rates (IBORs). The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. The amendments are effective from January 1, 2020, and the Company does not anticipate any impact related to the amendments.

 

4.              TRADE AND OTHER RECEIVABLES

 

 

 

December 31,

 

 

 

2019

 

2018

 

Trade accounts receivable

 

$

25,018,010

 

$

30,508,866

 

Less: allowance for doubtful accounts

 

(14,802,333

)

(6,384,204

)

Total trade and other receivables, net of allowance

 

$

10,215,677

 

$

24,124,662

 

 

Trade receivables are amounts due from customers for goods sold in the ordinary course of business. They are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are recognized initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognized at fair value. The Company holds the trade receivables with the objective to collect the contractual cash flows. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due.

 

Write offs of trade receivables for the years ended December 31, 2019 and 2018 amounted to $3,657,762 and $232,697, respectively. Refer to Note 14 — Financial Instruments — Fair Value and Risks - (i) for the continuity schedule of allowance for trade receivables.

 

5.              INVENTORIES

 

 

 

December 31,

 

 

 

2019

 

2018

 

Raw materials

 

$

14,982,888

 

$

12,599,642

 

Work-in-process

 

443,463

 

182,865

 

Finished goods

 

7,320,195

 

4,466,726

 

Inventory Reserve

 

(4,535,684

)

—

 

Total

 

$

18,210,862

 

$

17,249,233

 

 

During the years ended December 31, 2019 and 2018, inventories in the amount of $55,987,156 and $49,853,515, respectively, were charged to cost of sales in the accompanying consolidated statements of operations. Other costs charged to cost of sales include primarily testing, labor and other supplies. Write offs of inventory for the years ended December 31, 2019 and 2018 amounted to $2,501,220 and $1,985,765, respectively.

 

17

 

6.              PREPAID EXPENSES

 

Prepaid expenses and other current assets consist of the following:

 

 

 

December 31,

 

 

 

2019

 

2018

 

Prepaid rent expense

 

$

171,023

 

$

175,991

 

Prepaid inventory

 

1,351,039

 

7,230,197

 

Prepaid licenses

 

235,769

 

—

 

Prepaid software

 

411,823

 

—

 

Prepaid insurance

 

319,766

 

228,485

 

Other prepaid expenses

 

202,660

 

419,976

 

Other current assets

 

116,594

 

253,697

 

Total

 

$

2,808,674

 

$

8,308,346

 

 

7.              PROPERTY AND EQUIPMENT

 

 

 

Buildings &

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

Leasehold

 

Information

 

Production

 

Furniture &

 

 

 

in

 

 

 

Cost

 

Improvements

 

Technology

 

Equipment

 

Fixtures

 

Vehicles

 

Progress

 

Total

 

Balance, January 1, 2018

 

1,233,653

 

14,469

 

1,625,901

 

109,775

 

256,188

 

—

 

3,239,986

 

2018 Additions

 

1,671,553

 

383,325

 

1,516,667

 

95,589

 

328,018

 

1,773,027

 

5,768,179

 

2018 Disposals

 

(21,261

)

—

 

—

 

—

 

—

 

—

 

(21,261

)

Balance, December 31, 2018

 

2,883,945

 

397,794

 

3,142,568

 

205,364

 

584,206

 

1,773,027

 

8,986,904

 

2019 Additions

 

894,551

 

1,183,085

 

1,280,123

 

10,286

 

275,743

 

2,956,628

 

6,600,416

 

2019 Disposals

 

(277,718

)

(492,720

)

(735,412

)

(146,801

)

(93,816

)

(1,773,027

)

(3,519,494

)

Balance, December 31, 2019

 

3,500,778

 

1,088,159

 

3,687,279

 

68,849

 

766,133

 

2,956,628

 

12,067,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

149,178

 

1,401

 

347,303

 

12,925

 

50,959

 

—

 

561,766

 

2018 Depreciation

 

412,886

 

27,960

 

437,287

 

35,590

 

137,020

 

—

 

1,050,743

 

2018 Disposals

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Balance, December 31, 2018

 

562,064

 

29,361

 

784,590

 

48,515

 

187,979

 

—

 

1,612,509

 

2019 Depreciation

 

739,738

 

310,964

 

790,921

 

40,349

 

244,233

 

—

 

2,126,205

 

2019 Disposals

 

(57,411

)

(52,849

)

(344,796

)

(57,497

)

(62,603

)

—

 

(575,156

)

Balance, December 31, 2019

 

1,244,391

 

287,476

 

1,230,715

 

31,367

 

369,609

 

—

 

3,163,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2018

 

2,321,881

 

368,433

 

2,357,978

 

156,849

 

396,227

 

1,773,027

 

7,374,395

 

At December 31, 2019

 

2,256,387

 

800,683

 

2,456,564

 

37,482

 

396,524

 

2,956,628

 

8,904,268

 

 

Total depreciation expense of $2,126,205 and $1,050,743 for the years ended December 31, 2019 and 2018, respectively, includes $1,571,724 and $742,877 recognized as cost of goods sold and $554,481 and $496,262 recognized as part of operating expenses in the consolidated statement of profits and losses.

 

Certain asset classes from the prior year were reclassed to conform with the current year presentation.

 

18

 

8.              ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

December 31,

 

 

 

2019

 

2018

 

Accrued inventory purchases

 

2,608,186

 

2,989,831

 

Accrued compensation

 

1,800,452

 

1,085,860

 

Accrued expenses

 

2,583,611

 

3,318,272

 

Accrued royalties

 

181,570

 

—

 

Accrued interest payable

 

3,655,044

 

2,349,161

 

Sales, excise and cultivation tax payable

 

2,053,401

 

3,877,756

 

Other current liabilities

 

723,082

 

2,070,141

 

Total

 

$

13,605,346

 

$

15,691,021

 

 

9.              NOTES PAYABLE

 

The Company’s debt obligations consist of the following:

 

 

 

 

 

December 31,

 

Convertible Debt to Related Parties, Net of Discount

 

Note

 

2019

 

2018

 

Convertible Note, related parties

 

a

 

$

27,000,000

 

$

27,000,000

 

Convertible Debenture, related parties

 

b

 

—

 

12,650,000

 

Total convertible debt, related parties

 

 

 

27,000,000

 

39,650,000

 

Less: debt discount

 

a,b

 

(16,200,000

)

(29,099,416

)

Total convertible debt, related parties, net

 

 

 

10,800,000

 

10,550,584

 

Less: current portion

 

 

 

—

 

—

 

Total convertible debt, related parties, net

 

 

 

$

10,800,000

 

$

10,550,584

 

 

 

 

 

 

December 31,

 

Convertible Debenture, Net of Discount

 

Note

 

2019

 

2018

 

Convertible Debenture

 

b

 

—

 

62,284,000

 

Less: debt discount

 

b

 

—

 

(10,336,766

)

Total Convertible Debenture, net

 

 

 

$

—

 

$

51,947,234

 

 

a                            Secured Convertible Promissory Note to related party (the “Convertible Note”)

 

On May 22, 2018, the Company issued a secured convertible promissory note to a company owned and managed by a director of the Company. The Convertible Note has a principal amount of $27,000,000, which included an original principal amount of $25,000,000, together with an additional disbursement to the Company of $2,000,000 with the consent of the lender. As of December 31, 2019, the outstanding balance of this note, inclusive of accrued interest, is $30,655,044. A portion of the proceeds of the Convertible Note in the amount of $16,125,000 was used to pay the remaining balance and interest due on the related party Promissory Note (see Related Party Note Payable, below).

 

19

 

The Convertible Note accrues interest at 8% per annum and matures on May 22, 2021. The Convertible Note is convertible at the option of the holder and is mandatorily converted in the event of a go-public transaction (“Go-Public Transaction”) . The conversion price is the price equal to the lesser of (i) 75% of the selling price of the common stock, or (ii) the default conversion price, defined as $400 million divided by the number of common shares outstanding. Due to this provision, the embedded conversion option qualifies for derivative accounting and bifurcation under IFRS 9 “Financial Instruments”. The initial fair value of the derivative liability of $30,077,912 and cash financing costs of $20,354 were recorded as a discount to the Convertible Note, of which $3,098,266 was immediately amortized and the remainder is being amortized over the term of the convertible note, using the effective interest method. As of December 31, 2019, the carrying value of the Convertible Note was $10,800,000.

 

Immediately prior to the closing of Curaleaf’s acquisition of Cura (see Note 19 - Subsequent Events) all outstanding principal under the Convertible Note plus all accrued and unaccrued interest accrued was converted into shares of Cura.

 

b                 Convertible Debenture

 

On October 30, 2018, the Company closed a $74,934,000 financing consisting of unsecured convertible debentures (“Debenture”) at an issue price of $1,000 per Debenture. Of the gross proceeds received, $150,000 and $12,500,000 were received from the Company’s former CFO and a member of the Board of Directors, respectively. Each Debenture and the accrued and unpaid interest will be convertible into equity securities of the Company which will automatically be converted into the same type of security issued in connection with a potential Go-Public Transaction at a price equal to the lesser of:

 

(a)         in the event that:

 

(i) the Go-Public Transaction occurs on or before March 31, 2019, a 25% discount to the issue price;

 

(b)         (ii) the Go Public Transaction occurs after March 31, 2019 but before the maturity date, a 30% discount to the issue price; a price per unit reflecting a pre-money valuation of the Company equal to $1.125 billion.

 

The Debenture has a term of 24 months, matures on October 20, 2020 (“Maturity Date”) and bears interest at the rate of 8.0% per annum.

 

The initial fair value of the conversion option of $9,392,328 was recorded as a derivative liability and debt discount. Cash financing costs of $4,086,281 were also recorded as a discount to the Debenture. Of the aggregate debt discount of $13,478,609, $2,275,394 was allocated to convertible debt related parties. During the year ended December 31, 2018, the Company recorded amortization of debt discount of $1,042,427 related to the Debenture.

 

On May 1, 2019, the Company modified the terms of the Debenture, including those terms related to the conversion feature. This modification resulted in the conversion of the $74,934,000 principal amount of the

 

20

 

Debenture, accrued interest to maturity and the debt discount for a total consideration of $89,191,855 into the issuance of 2,498,320 common shares.

 

10. SHAREHOLDERS’ (DEFICIENCY) EQUITY

 

On February 2, 2018, the Company approved a Plan of Conversion and Articles of Conversion (Articles of Incorporation) to convert the Company from a limited liability company to a corporation in a tax-free reorganization. Pursuant to the Articles of Incorporation, the Company is authorized to issue 400,000,000 no-par-value common shares, of which 30,412,685 and 27,747,398 are issued and outstanding as of December 31, 2019 and 2018.

 

Pursuant to the Plan of Conversion, each membership unit of the LLC was converted into 100 shares of the Company’s common stock, such that the 263,160 membership units outstanding were converted into 26,144,601 shares of the Company’s common stock. Consequently, the Company has recapitalized its shareholders’ equity and the effect of the recapitalization has been applied retrospectively for the years ended December 31, 2018 and 2017 on the Company’s financial statements.

 

During the year ended December 31, 2018, the Company sold 1,431,409 shares of its common stock for cash proceeds of $17,035,000. During the year ended December 31, 2019, the Company issued an additional 168,634 shares to existing shareholders and 1,667 shares were redeemed from an individual shareholder.

 

11. WARRANTS

 

The following table summarizes warrant activity for the years ended December 31, 2019 and 2018:

 

 

 

 

Membership’ Units

 

Common Stock

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted

 

Fair value

 

 

 

Warrants

 

average

 

Warrants

 

average

 

at date

 

Warrants

 

outstanding

 

exercise price

 

outstanding

 

exercise price

 

of grant

 

Outstanding, December 31, 2017

 

4,822.52

 

1,095.06

 

—

 

—

 

4,089,252

 

Anti-dilution adjustment

 

117.60

 

1,415.01

 

—

 

—

 

—

 

Membership units converted to common stock

 

(4,940.12

)

1,053.00

 

494,012

 

10.53

 

(4,089,252

)

Outstanding, December 31, 2018

 

—

 

$

—

 

494,012

 

$

10.53

 

$

—

 

Outstanding, December 31, 2019

 

—

 

$

—

 

494,012

 

$

10.53

 

$

—

 

 

21

 

The following table summarizes information related to warrants outstanding at December 31, 2019:

 

Warrants Outstanding

 

Warrants Exercisable

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

Outstanding at

 

remaining

 

Exercisable at

 

 

 

 

 

December 31,

 

contractual

 

December 31,

 

 

 

Exercise price

 

2019

 

life

 

2019

 

Original Issue Warrants

 

$

7.47

 

267,866

 

3.8

 

267,866

 

Second Amendment Warrants

 

14.15

 

226,146

 

4.0

 

226,146

 

 

 

 

 

494,012

 

3.9

 

494,012

 

 

Warrants are measured at the fair value of the equity instruments granted on the grant date were measured using the following weighted average assumptions such as peer group volatility, dividend yield, and treasury bill risk-free interest rate, the expected life:

 

 

 

2019

 

2018

 

Risk-free interest rate

 

2.00

%

2.00

%

Expected volatility

 

100

%

80% - 139%

 

Expected life

 

1 year

 

5 years

 

Expected dividends

 

0.00

%

0.00

%

 

See Note 9 — Notes Payable and Note 14 — Financial Instruments — Fair value and Risks for additional details regarding the Original Issue Warrant and Third Amendment Warrant.

 

12. SELLING EXPENSES

 

The following are expenses classified as selling expenses on the consolidated statements of operations:

 

 

 

Years Ended December 31,

 

 

 

2019

 

2018

 

Salaries & Benefits

 

$

8,612,684

 

$

6,807,745

 

Commission

 

2,723,685

 

421,731

 

Travel & Entertainment

 

1,995,874

 

1,438,379

 

Marketing Expenses

 

16,049,090

 

4,146,728

 

Other Expenses

 

995,184

 

766,115

 

Total

 

$

30,376,517

 

$

13,580,698

 

 

22

 

13. ADMINISTRATIVE EXPENSES

 

The following are expenses classified as administrative expenses on the consolidated statements of operations:

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

2019

 

2018

 

Salaries & Benefits

 

 

 

$

13,696,065

 

$

7,946,487

 

Travel & Entertainment

 

 

 

1,416,818

 

1,254,877

 

Office Supplies & Equipment

 

 

 

6,836,554

 

4,834,289

 

Professional Fees

 

 

 

10,178,677

 

4,728,233

 

Provision for bad debts

 

(Note 4,14)

 

12,075,891

 

6,555,000

 

Insurance

 

 

 

1,462,246

 

492,787

 

Utilities

 

 

 

330,735

 

149,310

 

Security

 

 

 

2,146,207

 

823,200

 

Rent

 

 

 

1,055,052

 

1,639,693

 

Other

 

 

 

435,332

 

1,860,613

 

Total

 

 

 

$

49,633,577

 

$

30,284,489

 

 

14. FINANCIAL INSTRUMENTS — FAIR VALUE AND RISKS

 

IFRS 7 - Financial Instruments: Disclosures establishes a fair value hierarchy that reflects the significance of inputs used in making fair value measurements as follows:

 

Level 1                                quoted prices in active markets for identical assets or liabilities;

 

Level 2                                inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. from derived prices); and

 

Level 3                                inputs for the asset or liability that are not based upon observable market data.

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these instruments.

 

The component of the Company’s long-term debt attributed to the host liability is recorded at amortized cost for the debentures and convertible promissory notes.

 

Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of December 31, 2019 and 2018, the Company’s derivative liabilities are categorized as Level 3.

 

The following table sets forth a summary of the changes in the fair value of Level 3 warrant liabilities and embedded conversion options, that are measured at fair value on a recurring basis:

 

23

 

 

 

 

 

Years Ended December 31,

 

 

 

Note

 

2019

 

2018

 

Derivative Liabilities

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

50,267,428

 

$

6,924,506

 

Issuance of derivative liabilities:

 

 

 

 

 

 

 

Warrant derivatives:

 

 

 

 

 

 

 

Embedded conversion option:

 

 

 

 

 

 

 

Convertible Debt

 

9a

 

—

 

30,077,912

 

Debentures

 

9b

 

—

 

9,392,328

 

Conversion of convertible debentures

 

9b

 

(10,301,633

)

—

 

Change in fair value of derivative liabilities

 

 

 

4,470,180

 

3,872,682

 

Ending balance

 

 

 

$

44,435,975

 

$

50,267,428

 

 

Assets and liabilities measured at fair value on a recurring basis are as follows:

 

As of December 31, 2019

 

Note

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Warrant derivatives:

 

 

 

 

 

 

 

 

 

 

 

Original Issue Warrant

 

9

 

$

—

 

$

—

 

$

3,601,481

 

$

3,601,481

 

Third Amendment Warrant

 

9

 

—

 

—

 

1,716,487

 

1,716,487

 

Embedded conversion option:

 

 

 

 

 

 

 

 

 

 

 

Convertible Debt

 

9

 

—

 

—

 

39,118,007

 

39,118,007

 

Debentures

 

9

 

—

 

—

 

—

 

—

 

Total

 

 

 

$

—

 

$

—

 

$

44,435,975

 

$

44,435,975

 

 

As of December 31, 2018

 

Note

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Warrant derivatives:

 

 

 

 

 

 

 

 

 

 

 

Original Issue Warrant

 

9

 

$

—

 

$

—

 

$

2,794,681

 

$

2,794,681

 

Third Amendment Warrant

 

9

 

—

 

—

 

2,050,002

 

2,050,002

 

Embedded conversion option:

 

 

 

 

 

 

 

 

 

 

 

Convertible Debt

 

9

 

—

 

—

 

9,949,892

 

9,949,892

 

Debentures

 

9

 

—

 

—

 

35,472,853

 

35,472,853

 

Total

 

 

 

$

—

 

$

—

 

$

50,267,428

 

$

50,267,428

 

 

The fair value of derivative liabilities was estimated using a Monte Carlo simulation with the following assumptions for each period which took into account variables such as peer group volatility, dividend yield, and treasury bill risk-free interest rate, their contractual life and the probability of the consummation of the Go-Public Transaction:

 

 

 

Years Ended December 31,

 

 

 

2019

 

2018

 

Risk-free interest rate

 

2.00%

 

2.00%

 

Annual volatility

 

100%

 

80% - 139%

 

Contractual term

 

4.0 - 5 years

 

4.0 - 5 years

 

Expected dividend rate

 

0%

 

0%

 

Go-Public Transaction probability

 

100%

 

100%

 

 

24

 

i Credit risk

 

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s accounts receivable. The amounts reported in the consolidated balance sheets are net of allowances for bad debts, estimated by the Company’s management based on prior experience and its assessment of the current economic environment. The Company reviews its trade receivable accounts regularly and reduces amounts to their expected realizable values by adjusting the allowance for doubtful accounts when management determines that the account may not be fully collectible. The Company applies the IFRS 9 simplified approach to measuring expected credit losses (“ECL”) which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The Company has not adopted credit policies in an effort to minimize those risks. The carrying value of trade and other receivables represent the Company’s maximum exposure to credit risk.

 

The following table reflects the balance and age of trade receivables as at December 31, 2019 and 2018 (see Note 5 — Trade and Other Receivables for additional details):

 

 

 

December 31,

 

 

 

2019

 

2018

 

Allowance for Trade Receivables - beginning of period

 

$

6,384,204

 

$

61,901

 

Adjustment for uncollectible accounts

 

12,075,891

 

6,555,000

 

Amounts written off

 

(3,657,762

)

(232,697

)

Allowance for trade receivables - end of period

 

$

14,802,333

 

$

6,384,204

 

 

The following table reflects the changes in the allowance for trade receivables during the years ended December 31, 2019 and 2018:

 

 

 

December 31,

 

 

 

2019

 

2018

 

Trade and other receivables

 

$

25,018,010

 

$

30,508,866

 

Percentage outstanding more than 30 days

 

71

%

28

%

Percentage outstanding more than 90 days

 

55

%

11

%

 

ii Liquidity risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by continuously monitoring forecasted and actual cash flows, as well as anticipated investing and financing activities.

 

The table below reflects the contractual obligations of the Company’s undiscounted cash flows for its financial liabilities as of December 31, 2019:

 

25

 

 

 

Accounts

 

Total

 

 

 

 

 

payables and

 

Lease

 

Contractual

 

 

 

accruals

 

Commitments

 

Obligations

 

For the years ended December 31,

 

 

 

 

 

 

 

2020

 

$

18,590,035

 

$

2,020,402

 

$

20,610,437

 

2021

 

—

 

2,237,798

 

2,237,798

 

2022

 

—

 

2,397,137

 

2,397,137

 

2023

 

—

 

1,456,814

 

1,456,814

 

2024

 

—

 

512,451

 

512,451

 

Thereafter

 

—

 

2,328,873

 

2,328,873

 

Total

 

$

18,590,035

 

$

10,953,475

 

$

29,543,510

 

 

The following table provides a reconciliation of commitments at December 31, 2018 to the Company’s lease liability as of January 1, 2019 and December 31, 2019:

 

Disclosed commitments as of December 31, 2018

 

$

22,666,300

 

Impact of discount

 

(5,048,327

)

Lease liabilty as of January 1, 2019

 

17,617,973

 

Lease payments

 

(3,500,529

)

Amortization of discount

 

1,315,081

 

New leases acquired

 

195,670

 

Early termination of leases

 

(5,012,192

)

Lease liability as of December 31, 2019

 

$

10,616,003

 

 

iii Interest rate risk

 

Interest rate risk relates to changes in interest rates which will affect the Company’s income, or the value of the financial instruments held. The Company is subject to interest rate risk on its cash. However, it does not expect a movement in interest rates to have a significant impact on the Company’s financial position. The Company incurred interest ranging from 8% - 15% from stated rates on debt outstanding during the years ended December 31, 2019 and 2018 (see Note 9 — Notes Payable).

 

15.  INCOME TAXES

 

The income tax provision for the years ended December 31, 2019 and 2018 consists of the following:

 

 

 

Years Ended December 31, 2019

 

 

 

2019

 

2018

 

Current Tax Expense

 

$

(4,046,846

)

$

(3,118,145

)

Deferred Tax Gain/(Expense)

 

523,604

 

(731,062

)

Income tax provision

 

$

(3,523,242

)

$

(3,849,207

)

 

26

 

Deferred tax assets (liabilities) attributable to differences between the financial statement carrying values of the items listed below and their respective income tax basis (temporary differences) as of December 31, 2019 and 2018 and changes during the years then ended are as follows:

 

 

 

Net Balance

 

Recognized

 

Balance as of December 31, 2019

 

 

 

as of

 

In Statement

 

 

 

Deferred

 

Deferred

 

 

 

December 31,

 

of Operations

 

 

 

Tax

 

Tax

 

 

 

2018

 

2019

 

Net

 

Asset

 

Liability

 

Inventory

 

$

452,748

 

$

496,572

 

$

949,320

 

$

949,320

 

$

—

 

Property and equipment

 

(703,157

)

706,332

 

3,175

 

3,175

 

—

 

Cash versus accrual basis of accounting

 

(1,558,325

)

1,028,566

 

(529,759

)

—

 

(529,759

)

Net operating losses

 

5,623,831

 

(5,623,831

)

—

 

—

 

—

 

Accounts receivable

 

1,873,436

 

(1,707,867

)

165,569

 

165,569

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Assets (liabilities) before set-off

 

$

5,688,532

 

$

(5,100,227

)

588,305

 

1,118,064

 

(529,759

)

Set-off of tax

 

 

 

 

 

—

 

(219,208

)

219,208

 

Net tax assets (liabilities)

 

 

 

 

 

$

588,305

 

$

898,856

 

$

(310,551

)

 

 

 

Net Balance

 

Recognized

 

Balance as of December 31, 2018

 

 

 

as of

 

In Statement

 

 

 

Deferred

 

Deferred

 

 

 

January 1,

 

of Operations

 

 

 

Tax

 

Tax

 

 

 

2018

 

2018

 

Net

 

Asset

 

Liability

 

Inventory

 

$

1,049,165

 

$

(596,417

)

$

452,748

 

$

452,748

 

$

—

 

Property and equipment

 

(264,366

)

(438,791

)

(703,157

)

—

 

(703,157

)

Cash versus accrual basis of accounting

 

(174,515

)

(1,383,810

)

(1,558,325

)

—

 

(1,558,325

)

Net operating losses

 

185,480

 

(185,480

)

—

 

—

 

 

 

Accounts receivable

 

—

 

1,873,435

 

1,873,435

 

1,873,435

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Assets (liabilities) before set-off

 

$

795,764

 

$

(731,063

)

64,701

 

2,326,183

 

(2,261,482

)

Set-off of tax

 

 

 

 

 

 

 

(809,904

)

809,904

 

Net tax assets (liabilities)

 

 

 

 

 

$

64,701

 

$

1,516,279

 

$

(1,451,578

)

 

The reconciliation of the Federal statutory rates income taxes for the years ended December 31, 2019 and 2018 with the effective tax rate is as follows:

 

27

 

 

 

Years Ended December 31,

 

 

 

2019

 

 

 

2018

 

 

 

Loss from continuing operations before provision for income taxes

 

$

(104,884,173

)

 

 

$

(30,862,063

)

 

 

Tax benefit using the Company’s statutory Federal tax rate:

 

22,025,676

 

21.0

%

6,481,033

 

21.0

%

Tax effect of:

 

 

 

 

 

 

 

 

 

State and local taxes, net of Federal benefit

 

(549,895

)

(0.5

)%

(974,852

)

(3.2

)%

Permanent differences related to non-deductible expenses:

 

 

 

 

 

 

 

 

 

Cost of sales

 

699,385

 

0.7

%

907,461

 

2.9

%

Operating expenses

 

(14,849,255

)

(14.2

)%

(5,629,175

)

(18.2

)%

Share-based compensation

 

(3,494,600

)

(3.3

)%

—

 

0.0

%

Interest expense

 

(5,981,490

)

(5.7

)%

(622,804

)

(2.0

)%

Change in fair value of derivative liabilities

 

(938,738

)

(0.9

)%

(813,263

)

(2.6

)%

Loss on extinguishment of debt

 

(5

)

(0.0

)%

(2,334,241

)

(7.6

)%

Loss on exchange of debt for equity

 

(324,390

)

(0.3

)%

(911,892

)

(3.0

)%

Other

 

(109,930

)

(0.1

)%

48,526

 

0.2

%

 

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

$

(3,523,242

)

(3.3

)%

$

(3,849,207

)

(12.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax assets are recognized for tax loss carryforwards to the extent that the realization of the related tax benefit through future taxable profits is probable. As of December 31, 2019 and December 31, 2018, the Company had no Federal net operating loss carryforwards and state net operating loss carry forwards of approximately $110,542,000 and $51,311,00, respectively, which may be used to offset future taxable income through 2038. These net operating loss carryovers may be subject to annual limitations under Internal Revenue Code (IRC) Section 382, and similar state provisions, should there be a greater than 50% ownership change as determined under the applicable income tax regulations. The amount of the limitation would be determined based on the value of the Company immediately prior to the ownership change and subsequent ownership changes could further impact the amount of the annual limitation. An ownership change pursuant to Section 382 may have occurred in the past or could happen in the future such that the NOLs available for utilization could be significantly limited.

 

As previously indicated, the Company is a cannabis oil and hemp cannabidiol manufacturer and distributor. Presently, the Internal Revenue Service (IRS) does not have a published position on the tax treatment of cannabis related businesses or the application of IRC Sections 263A, 280E, and 471 to such businesses. The Company has thoroughly researched Federal tax laws as currently written and believes that its income tax filing positions will be sustained upon examination. It does not anticipate any adjustments from such examinations that would result in a material adverse effect on the Company’s financial position, results of operations, or cash flows. Accordingly, the Company has not recorded any reserves, or related accruals for interest and penalties for uncertain income tax positions at December 31, 2019 and 2018.

 

The Company is subject to Federal income taxes and state income taxes for Arizona, California, and Oregon and files income tax returns for each of those jurisdictions. As of December 31, 2019:

 

28

 

a)             Certain Federal income tax returns for the years 2017 and 2018 remain open to examination by the IRS; and

 

b)             State income tax returns for the year 2015 through 2018 remain open to examination by state tax authorities. Currently no state returns are under examination.

 

16.       RELATED PARTY TRANSACTIONS

 

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling activities of the entity, directly or indirectly. The key management personnel of the Company are the members of the Company’s executive management team and Board of Directors, who control a majority of the outstanding shares of the Company.

 

In accordance with IAS 24, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non-executive) of the Company. Key management personnel received salaries and benefits of $1,511,073 and $1,842,344 during the years ended December 31, 2019 and 2018, respectively. Key management personnel were not paid post-employment benefits, termination benefits or other long-term benefits during the years ended December 31, 2019 and 2018.

 

There was no compensation paid to the Company’s directors during the year ended December 31, 2018. In 2019, the Company’s directors were paid for attending board meetings. These payments ranged from $10,000-$12,500 depending on board position. During years ended December 31, 2019 and 2018, legal fees in the amount of $982,584 and $669,029, respectively, were paid to a law firm of which a director of the Company is a partner.

 

During the years ended December 31, 2019 and 2018, the Company entered into the following transactions with directors and officers and corporations controlled by directors and officers of the Company:

 

a.              On May 22, 2018, a company owed and/or managed by a director issued a secured convertible promissory note totaling $27,000,000 (see Note 9a). Part of the proceeds was used to repay a $10,500,000 principal and $5,625,000 of interest and prepayment penalties related to a note payable due to a former director.

 

b.              The Company received a revolving line of credit from a company which is 50% owned by a director and officer and made principal repayments of $420,000.

 

c.               During the year ended December 31, 2019, the Company purchased $467,021 of raw material from a company of which director and officer has 50% ownership.

 

d.              During the year ended December 31, 2018, the Company received proceeds of $1,500,000 related to the sale of 353,780 membership units to directors and other members of key management personnel, pursuant to a private placement (see Note 10).

 

On October 30, 2018, $150,000 and $12,500,000, respectively, of convertible debentures were issued to the Company’s CFO and a member of the board of directors (see Note 9b).

 

29

 

17. CAPITAL MANAGEMENT

 

The Company’s objective in capital management is to maintain a sufficient capital base to support future development, strategic business initiatives, allowing the Company to invest in its future and maintain investor, creditor and supplier confidence, and provide the ability to continue as a going concern.

 

The Company is not subject to any externally imposed capital requirements and the Company does not use financial ratios to manage capital. There were no changes in the Company’s approach to capital management during the years presented.

 

18. COMMITMENTS AND CONTINGENCIES

 

i.             Legal proceedings

 

The Company may be involved in various disputes, claims, liens and litigation matters arising in the normal course of business. While the outcome of these disputes, claims, liens and litigation matters cannot be predicted with certainty, management, after consulting legal counsel, does not believe that the outcome of these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

ii.            Government Regulation

 

Marijuana is categorized as a Schedule-1 controlled substance by the Drug Enforcement Agency and the United States Department of Justice and is illegal to grow, possess and consume under Federal law. A Schedule-1 controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. However, since 1995, thirty-three states and the District of Columbia have passed state laws that permit doctors to recommend prescribing cannabis for medical-use, and ten states and the District of Columbia have enacted laws that legalize the adult-use of cannabis for any reason. While Federal law still categorizes marijuana as a Schedule-1 controlled substance, the Company manufactures and distributes cannabis oil through its subsidiaries and licensed business partners (see Note 1) in states where it is legal to do so and is not in violation of any applicable State law.

 

iii.           Executive Agreements

 

Certain officers of the Company have employment agreements which contain a change of control provision and/or termination of employment provision for payment of severance arrangements. One officer’s employment agreement provides for a severance payment of no less than $5,000,000 (including cash and equity) in the event of termination without Cause or resignation for Good Reason.

 

iv. Garden of Weeden Inc.

 

On September 13, 2018, Cura entered into an agreement for the purchase of the right to become the sole owner of Garden of Weeden Inc., a California corporation, for the purpose of holding and applying for

 

30

 

certain licenses in California (the “Control Agreement”). The transaction is subject to the completion of several conditions as defined in the Control Agreement including the conversion of Garden of Weeden to a for-profit general stock corporation and the filing of applications for certain licenses by the seller. Pursuant to the Control Agreement, the aggregate consideration of $250,000 is to be paid in installments upon the completion of each of the conditions outlined in the agreement.

 

v. Select House LLC

 

On December 4, 2018, Cura formed Select House LLC, a domestic limited liability company registered with the Oregon Secretary of State, as a wholly owned subsidiary of Cura Wellness LLC.

 

On December 12, 2018, Select House LLC signed a 5-year lease to be commenced at an agreed upon date subject to certain conditions. The lease has a free rent period for the first three months and thereafter a basic rent at $17,395 per month with an annual escalation of 3% per year to a maximum of $19,578 for the fifth year. The Company paid prepaid rent and a security deposit of first and last month rent totaling $36,973.

 

19.  SALE OF ASSETS

 

On May 15, 2019 Cura Wellness, LLC (“Wellness”), a subsidiary of the Company entered into a sale and purchase of business assets agreement with Sentia Wellness, Inc. (“Sentia”), whereby Sentia purchased inventory, fixed assets and other certain assets and liabilities from Wellness for $12,660,000.

 

20.  SHARE-BASED COMPENSATION

 

During the year ended December 31, 2019, the Company authorized an Omnibus Equity Incentive Plan (“Plan”) as incentive to attract, retain, and reward certain key employees. The Plan provided for the grant of incentive stock options and other share-based awards. In conjunction with Curaleaf’s acquisition of Cura, all unexercised stock options of Cura issued and outstanding under the Plan were converted to receive an equivalent substitute option under Curaleaf’s 2018 Long Term Incentive Plan (the “LTIP”). The Company estimated the fair value of each stock option grant utilizing the Black-Scholes valuation model.

 

The weighted average inputs used in the measurement of the grant date fair values of the equity-settled share-based payment plans were as follows:

 

 

 

For the Years ended

 

 

 

December 31,

 

 

 

2019

 

2018

 

Share price at grant date

 

$

28.54

 

—

 

Exercise price

 

28.54

 

—

 

Expected volatility

 

50.01

%

—

 

Expected life

 

5.06

 

—

 

Expected dividends

 

—

 

—

 

Risk-free interest rate (based on government bonds)

 

1.45

%

—

 

 

31

 

The expected volatility is estimated based on the historical volatility of a publicly traded set of peer companies. The expected life in years represents the average period of time that options granted are expected to be outstanding. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 

Reconciliation of outstanding share options

 

The number and weighted-average exercise prices of share options under the share option program were as follows:

 

 

 

 

 

Weighted

 

 

 

Number of

 

average

 

 

 

options

 

exercise price

 

 

 

2019

 

2019

 

Outstanding at January 1

 

—

 

$

—

 

Granted during the year

 

1,856,166

 

28.54

 

Outstanding at December 31

 

1,856,166

 

$

28.54

 

Options exercisable at December 31

 

1,692,721

 

$

28.54

 

 

21.  RESTATEMENT

 

Subsequent to the issued consolidated financial statements dated April 9, 2020, management determined that there was a misstatement arising from Plan authorized by the Company during the year ended December 31, 2019 (See Note 20).

 

Line item on the restated consolidated statements of financial position:

 

 

 

 

 

Increase/

 

 

 

 

 

2019

 

(Decrease)

 

2019 Restated

 

Share-Based Reserve

 

—

 

16,640,951

 

16,640,951

 

Accumulated deficit

 

(144,120,050

)

(16,640,951

)

(160,761,001

)

 

Line item on the restated consolidated statements of operations:

 

 

 

 

 

Increase/

 

 

 

 

 

2019

 

(Decrease)

 

2019 Restated

 

Share Based Compensation

 

—

 

16,640,951

 

16,640,951

 

Total operating expenses

 

80,010,094

 

16,640,951

 

96,651,045

 

Net loss before taxes

 

88,243,222

 

16,640,951

 

104,884,173

 

Net loss

 

91,766,464

 

16,640,951

 

108,407,415

 

 

32

 

Line item on the restated consolidated statements of cash flow:

 

 

 

 

 

Increase/

 

 

 

 

 

2019

 

(Decrease)

 

2019 Restated

 

Share Based Compensation

 

—

 

16,640,951

 

16,640,951

 

Net loss for the period

 

91,766,464

 

16,640,951

 

108,407,415

 

 

Line item on the restated consolidated statements of Changes in Shareholders’ (Deficiency) Equity:

 

 

 

 

 

Increase/

 

 

 

 

 

2019

 

(Decrease)

 

2019 Restated

 

Share-Based Reserve

 

—

 

16,640,951

 

16,640,951

 

Net loss

 

91,766,464

 

16,640,951

 

108,407,415

 

 

22.  SUBSEQUENT EVENTS

 

Sale of Cura Partners Inc.

 

On February 1, 2020, Curaleaf Holdings, Inc. closed the acquisition of Cura Partners Inc. originally announced May 1, 2019. The acquisition includes Cura’s manufacturing, processing, distribution, marketing and retail operations, and all adult-use cannabis products marketed under the Select brand name, including all intellectual property. In conjunction with the close of the acquisition, the $27,000,000 related party note (Note 9-Notes Payable) and warrants (Note 11-Warrants) were converted to shares of Curaleaf Holdings, Inc.

 

Supplier Agreement for Product Distribution

 

On March 1, 2020 Cura through its subsidiary Cura CA LLC. signed an exclusive distributor agreement with HERBL, Inc. (“HERBL”) whereby HERBL will be the exclusive distributor of Cura products within California for a period of 3 years with an optional 2-year extension at Cura’s discretion. HERBL will purchase, sell, and assume risk of loss for all Cura products. Pricing to HERBL will be 85.5% of Cura’s current wholesale list price.

 

Cura OK, LLC.

 

On March 20, 2020 Cura OK, LLC commenced operations in Oklahoma, operating under a partnership with SAP Resources, LLC (“SAP”). The partnership is for a period of twelve months with three successive one-year auto renewal periods unless Cura OK provides notice of termination within 60 days of the current term end. As part of the agreement, Cura is entitled to 95% of all net revenue for wholesale sales and will pay a month fee of $2,500 to SAP.

 

33



Exhibit 5.1

 

Consent of Independent Accounting Firm

 

September 25, 2020

 

The Board of Directors 
Curaleaf Holdings, Inc.

 

We consent to the filing with this Registration Statement on Form F-10 being filed by Curaleaf Holdings, Inc. (the “Company”) with the United States Securities and Exchange Commission of:

 

·                                          our report, dated March 26, 2020, on the consolidated financial statements of the Company and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2019, and the consolidated statements of profits and losses, changes in equity and cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies; and

 

·                                          our report, dated May 28, 2020, on the restated consolidated financial statements of Cura Partners Inc. and its subsidiaries, which comprise the restated consolidated statement of financial position as at December 31, 2019, and the restated consolidated statement of operations, changes in shareholder’s (deficiency) equity and cash flows for the year then ended, and notes to the restated consolidated financial statements, including a summary of significant accounting policies.

 

Yours very truly,

Antares Professional Corporation
Chartered Professional Accountants

Calgary, Alberta

 

 



Exhibit 7.1

 

 

CURALEAF HOLDINGS, INC.
 as Issuer

 

and

 

[        ]
as U.S. Trustee

 

and

 

[        ]
as Canadian Trustee

 

Indenture

 

Dated as of [        ]

 

 

 

TABLE OF CONTENTS

 

ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

1

SECTION 1.01

Definitions

1

SECTION 1.02

Rules of Construction

10

SECTION 1.03

Compliance Certificates and Opinions

10

SECTION 1.04

Form of Documents Delivered to Trustees

11

SECTION 1.05

Acts of Holders

11

SECTION 1.06

Notices, Etc. to Trustees and Company

13

SECTION 1.07

Notice to Holders; Waiver

13

SECTION 1.08

Effect of Headings and Table of Contents

14

SECTION 1.09

Successors and Assigns

14

SECTION 1.10

Severability Clause

14

SECTION 1.11

Benefits of Indenture

14

SECTION 1.12

Governing Law

15

SECTION 1.13

Legal Holidays

15

SECTION 1.14

Agent for Service; Submission to Jurisdiction; Waiver of Immunities

15

SECTION 1.15

Conversion of Judgment Currency

16

SECTION 1.16

Currency Equivalent

17

SECTION 1.17

Conflict with Trust Indenture Legislation

17

SECTION 1.18

Incorporators, Shareholders, Officers and Directors of the Company Exempt from Individual Liability

17

SECTION 1.19

Waiver of Jury Trial

17

SECTION 1.20

Counterparts

17

SECTION 1.21

Force Majeure

18

 

 

 

ARTICLE TWO SECURITIES FORMS

18

SECTION 2.01

Forms Generally

18

SECTION 2.02

Form of Trustee’s Certificate of Authentication

18

SECTION 2.03

Securities Issuable in Global Form

19

 

 

 

ARTICLE THREE THE SECURITIES

20

SECTION 3.01

Issuable in Series

20

SECTION 3.02

Denominations

23

SECTION 3.03

Execution, Authentication, Delivery and Dating

23

SECTION 3.04

Temporary Securities

25

SECTION 3.05

Registration, Registration of Transfer and Exchange

27

SECTION 3.06

Mutilated, Destroyed, Lost and Stolen Securities

30

SECTION 3.07

Payment of Principal, Premium and Interest; Interest Rights Preserved; Optional Interest Reset

31

SECTION 3.08

Optional Extension of Stated Maturity

33

SECTION 3.09

Persons Deemed Owners

34

SECTION 3.10

Cancellation

35

SECTION 3.11

Computation of Interest

35

 

i

 

SECTION 3.12

Currency and Manner of Payments in Respect of Securities

35

SECTION 3.13

Appointment and Resignation of Successor Exchange Rate Agent

38

 

 

 

ARTICLE FOUR SATISFACTION AND DISCHARGE

39

SECTION 4.01

Satisfaction and Discharge of Indenture

39

SECTION 4.02

Application of Trust Money

40

 

 

 

ARTICLE FIVE REMEDIES

40

SECTION 5.01

Events of Default

40

SECTION 5.02

Acceleration of Maturity; Rescission and Annulment

41

SECTION 5.03

Collection of Debt and Suits for Enforcement by Trustees

42

SECTION 5.04

Trustees May File Proofs of Claim

43

SECTION 5.05

Trustees May Enforce Claims Without Possession of Securities

43

SECTION 5.06

Application of Money Collected

44

SECTION 5.07

Limitation on Suits

44

SECTION 5.08

Unconditional Right of Holders to Receive Principal, Premium and Interest

45

SECTION 5.09

Restoration of Rights and Remedies

45

SECTION 5.10

Rights and Remedies Cumulative

45

SECTION 5.11

Delay or Omission Not Waiver

45

SECTION 5.12

Control by Holders

46

SECTION 5.13

Waiver of Past Defaults

46

SECTION 5.14

Waiver of Stay or Extension Laws

46

SECTION 5.15

Undertaking for Costs

47

 

 

 

ARTICLE SIX THE TRUSTEES

47

SECTION 6.01

Notice of Defaults

47

SECTION 6.02

Certain Duties and Responsibilities of Trustees

47

SECTION 6.03

Certain Rights of Trustees

48

SECTION 6.04

Trustees Not Responsible for Recitals or Issuance of Securities

49

SECTION 6.05

May Hold Securities

50

SECTION 6.06

Money Held in Trust

50

SECTION 6.07

Compensation and Reimbursement

50

SECTION 6.08

Corporate Trustees Required; Eligibility

51

SECTION 6.09

Resignation and Removal; Appointment of Successor

52

SECTION 6.10

Acceptance of Appointment by Successor

53

SECTION 6.11

Merger, Conversion, Consolidation or Succession to Business

54

SECTION 6.12

Appointment of Authenticating Agent

54

SECTION 6.13

Joint Trustees

56

SECTION 6.14

Other Rights of Trustees

57

 

 

 

ARTICLE SEVEN HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY

58

SECTION 7.01

Company to Furnish Trustees Names and Addresses of Holders

58

SECTION 7.02

Preservation of List of Names and Addresses of Holders

58

SECTION 7.03

Disclosure of Names and Addresses of Holders

58

 

ii

 

SECTION 7.04

Reports by Trustees

58

SECTION 7.05

Reports by the Company

59

 

 

 

ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

59

SECTION 8.01

Company May Consolidate, etc., only on Certain Terms

59

SECTION 8.02

Successor Person Substituted

60

 

 

 

ARTICLE NINE SUPPLEMENTAL INDENTURES

61

SECTION 9.01

Supplemental Indentures Without Consent of Holders

61

SECTION 9.02

Supplemental Indentures with Consent of Holders

62

SECTION 9.03

Execution of Supplemental Indentures

63

SECTION 9.04

Effect of Supplemental Indentures

63

SECTION 9.05

Conformity with Trust Indenture Legislation

64

SECTION 9.06

Reference in Securities to Supplemental Indentures

64

SECTION 9.07

Notice of Supplemental Indentures

64

 

 

 

ARTICLE TEN COVENANTS

64

SECTION 10.01

Payment of Principal, Premium and Interest

64

SECTION 10.02

Maintenance of Office or Agency

64

SECTION 10.03

Money for Securities Payments to Be Held in Trust

66

SECTION 10.04

Statement as to Compliance

67

SECTION 10.05

Payment of Taxes and Other Claims

67

SECTION 10.06

Corporate Existence

67

SECTION 10.07

Waiver of Certain Covenants

67

 

 

 

ARTICLE ELEVEN REDEMPTION OF SECURITIES

68

SECTION 11.01

Applicability of Article

68

SECTION 11.02

Election to Redeem; Notice to Trustees

68

SECTION 11.03

Selection by Trustees of Securities to Be Redeemed

68

SECTION 11.04

Notice of Redemption

68

SECTION 11.05

Deposit of Redemption Price

69

SECTION 11.06

Securities Payable on Redemption Date

70

SECTION 11.07

Securities Redeemed in Part

70

 

 

 

ARTICLE TWELVE SINKING FUNDS

71

SECTION 12.01

Applicability of Article

71

SECTION 12.02

Satisfaction of Sinking Fund Payments with Securities

71

SECTION 12.03

Redemption of Securities for Sinking Fund

71

 

 

 

ARTICLE THIRTEEN REPAYMENT AT OPTION OF HOLDERS

72

SECTION 13.01

Applicability of Article

72

SECTION 13.02

Repayment of Securities

72

SECTION 13.03

Exercise of Option

73

SECTION 13.04

When Securities Presented for Repayment Become Due and Payable

73

SECTION 13.05

Securities Repaid in Part

74

 

iii

 

ARTICLE FOURTEEN DEFEASANCE AND COVENANT DEFEASANCE

74

SECTION 14.01

Company’s Option to Effect Defeasance or Covenant Defeasance

74

SECTION 14.02

Defeasance and Discharge

74

SECTION 14.03

Covenant Defeasance

75

SECTION 14.04

Conditions to Defeasance or Covenant Defeasance

75

SECTION 14.05

Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions

77

SECTION 14.06

Reinstatement

78

 

 

 

ARTICLE FIFTEEN MEETINGS OF HOLDERS OF SECURITIES

78

SECTION 15.01

Purposes for Which Meetings May Be Called

78

SECTION 15.02

Call, Notice and Place of Meetings

78

SECTION 15.03

Persons Entitled to Vote at Meetings

78

SECTION 15.04

Quorum; Action

79

SECTION 15.05

Determination of Voting Rights; Conduct and Adjournment of Meetings

80

SECTION 15.06

Counting Votes and Recording Action of Meetings

80

 

iv

 

CROSS-REFERENCE TABLE

 

TIA
Section

 

Indenture
Section

310

 

(a)

 

6.08(1)

 

 

(b)

 

6.09

 

 

(c)

 

Not Applicable

311

 

(a)

 

6.05

 

 

(b)

 

6.05

 

 

(c)

 

Not Applicable

312

 

(a)

 

7.05

 

 

(b)

 

7.03

 

 

(c)

 

7.03

313

 

(a)

 

7.04

 

 

(b)

 

7.04

 

 

(c)

 

7.04

 

 

(d)

 

7.05

314

 

(a)

 

7.05

 

 

(a)(4)

 

10.04

 

 

(b)

 

Not Applicable

 

 

(c)(1)

 

1.01

 

 

(c)(2)

 

1.01

 

 

(d)

 

Not Applicable

 

 

(e)

 

1.01

 

 

(f)

 

Not Applicable

315

 

(a)

 

6.02

 

 

(b)

 

6.01

 

 

(c)

 

6.02

 

 

(d)

 

6.02

 

 

(e)

 

5.15

316

 

(a)(last sentence)

 

1.02 (“Outstanding”)

 

 

(a)(1)(A)

 

5.12

 

 

(a)(1)(B)

 

5.02, 5.13

 

 

(a)(2)

 

Not Applicable

 

 

(b)

 

5.08

 

 

(c)

 

1.04(e)

317

 

(a)(1)

 

5.03

 

 

(a)(2)

 

5.04

 

 

(b)

 

10.03

318

 

(a)

 

1.16

 

Note:  This Cross-Reference Table shall not, for any purpose, be deemed to be part of this Indenture.

 

 

INDENTURE, dated as of                           , among CURALEAF HOLDINGS, INC., a corporation duly continued and existing under the laws of the Province of British Columbia, Canada (herein called the “Company”), having its principal office at 666 Burrard Street, Suite 1700, Vancouver, British Columbia, Canada, V6C 2X8, and                              , a                              , organized under the laws of                              , as U.S. trustee (herein called the “U.S. Trustee”), and                            , a                             , organized under the laws of                            , as Canadian trustee (the “Canadian Trustee” and, together with the U.S. Trustee, the “Trustees”).

 

RECITALS

 

The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its debentures, notes, bonds or other evidences of indebtedness (herein called the “Securities”), which may be convertible into or exchangeable for any securities of any Person (including the Company), to be issued in one or more series as in this Indenture provided.

 

This Indenture is subject to the provisions of Trust Indenture Legislation that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions.

 

All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.

 

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

 

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows:

 

ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

 

SECTION 1.01                                   Definitions.

 

“Act,” when used with respect to any Holder, has the meaning specified in Section 1.04.

 

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person.  For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

 

“Authenticating Agent” means any Person authorized by the applicable Trustee pursuant to Section 6.12 to act on behalf of such Trustee to authenticate Securities.

 

“Authorized Newspaper” means a newspaper, in the English language or in an official language of the country of publication, customarily published on each Business Day, and of general circulation in each place in connection with which the term is used or in the financial community of each such place.  Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any Business Day.

 

 

“Base Currency” has the meaning specified in Section 1.14.

 

“Bearer Security” means any Security except a Registered Security.

 

“Board of Directors” means the board of directors of the Company or any duly authorized committee thereof.

 

“Board Resolution” means a copy of a resolution certified by the Corporate Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustees.

 

“Business Day,” when used with respect to any Place of Payment or any other particular location referred to in this Indenture or in the Securities, means, unless otherwise specified with respect to any Securities pursuant to Section 3.01, any day other than Saturday, Sunday or any other day on which commercial banking institutions in that Place of Payment or other location are permitted or required by any applicable law, regulation or executive order to close.

 

“calculation period” has the meaning specified in Section 3.11.

 

“Canadian Trustee” means the Person named as the “Canadian Trustee” in the first paragraph of this Indenture until a successor Canadian Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Canadian Trustee” shall mean or include each Person who is then a Canadian Trustee hereunder; provided, however, that if at any time there is more than one such Person, “Canadian Trustee” as used with respect to the Securities of any series shall mean only the Canadian Trustee with respect to Securities of that series.

 

“Commission” means the U.S. Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.

 

“Common Depository” has the meaning specified in Section 3.04.

 

“Company” means the Person named as the “Company” in the first paragraph of this Indenture until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor Person.

 

“Company Request” or “Company Order” means a written request or order signed in the name of the Company by an Officer and delivered to the Trustees.

 

“Component Currency” has the meaning specified in Section 3.12(h).

 

“Conversion Date” has the meaning specified in Section 3.12(d).

 

“Conversion Event” means the cessation of use of (i) a Foreign Currency (other than the Euro or other Currency unit) both by the government of the country which issued such Currency and by a central bank or other public institution of or within the international banking community for the settlement of transactions, (ii) the Euro or (iii) any currency unit (or composite currency) other than the Euro for the purposes for which it was established.

 

2

 

“Corporate Trust Office” means the principal corporate trust office of the U.S. Trustee or the Canadian Trustee, as applicable, at which at any particular time its corporate trust business may be administered, such an office on the date of execution of this Indenture of the U.S. Trustee is located at                                  , Attention:                                  , and of the Canadian Trustee is located at                                 , Attention:                                    , except that with respect to presentation of Securities for payment or for registration of transfer or exchange, such term shall mean the office or agency of the U.S. Trustee or the Canadian Trustee, as applicable, designated in writing to the Company at which, at any particular time, its corporate agency business shall be conducted.

 

“coupon” means any interest coupon appertaining to a Bearer Security.

 

“covenant defeasance” has the meaning specified in Section 14.03.

 

“Currency” means any currency or currencies, composite currency or currency unit or currency units, including, without limitation, the Euro, issued by the government of one or more countries or by any recognized confederation or association of such governments.

 

“Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

 

“Defaulted Interest” has the meaning specified in Section 3.07.

 

“defeasance” has the meaning specified in Section 14.02.

 

“Depositary” means, with respect to the Securities of any series issuable or issued in the form of one or more Registered Securities, the Person designated as Depositary by the Company pursuant to Section 3.05 until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Depositary” shall mean or include each Person who is then a Depositary hereunder, and, if at any time there is more than one such Person, “Depositary” as used with respect to the Securities of any such series shall mean the Depositary with respect to the Registered Securities of that series.

 

“Dollar” or “$” means a dollar or other equivalent unit in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts.

 

“Dollar Equivalent of the Currency Unit” has the meaning specified in Section 3.12(g).

 

“Dollar Equivalent of the Foreign Currency” has the meaning specified in Section 3.12(f).

 

“Election Date” has the meaning specified in Section 3.12(h).

 

“Euro” means the single currency of the participating member states from time to time of the European Union described in legislation of the European Counsel for the operation of a single unified European currency (whether known as the Euro or otherwise).

 

“Event of Default” has the meaning specified in Section 5.01.

 

“Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

 

“Exchange Date” has the meaning specified in Section 3.04.

 

3

 

“Exchange Rate Agent” means, with respect to Securities of or within any series, unless otherwise specified with respect to any Securities pursuant to Section 3.01, a New York clearing house bank, designated pursuant to Section 3.01 or Section 3.13.

 

“Exchange Rate Officer’s Certificate” means a tested telex or a certificate setting forth (i) the applicable Market Exchange Rate and (ii) the Dollar or Foreign Currency amounts of principal, premium (if any) and interest (if any) (on an aggregate basis and on the basis of a Security having the lowest denomination principal amount determined in accordance with Section 3.02 in the relevant Currency), payable with respect to a Security of any series on the basis of such Market Exchange Rate, sent (in the case of a telex) or signed (in the case of a certificate) by the Chief Executive Officer, President or Chief Financial Officer of the Company.

 

“Extension Notice” has the meaning specified in Section 3.08.

 

“Extension Period” has the meaning specified in Section 3.08.

 

“Final Maturity” has the meaning specified in Section 3.08.

 

“First Currency” has the meaning specified in Section 1.15.

 

“Foreign Currency” means any Currency other than Currency of the United States.

 

“GAAP” means generally accepted accounting principles in Canada in effect from time to time, unless the Person’s most recent audited or quarterly financial statements are not prepared in accordance with generally accepted accounting principles in Canada, in which case “GAAP” shall mean generally accepted accounting principles in the United States in effect from time to time.

 

“Government Obligations” means, unless otherwise specified with respect to any series of Securities pursuant to Section 3.01, securities which are (i) direct obligations of the government which issued the Currency in which the Securities of a particular series are payable or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the government which issued the Currency in which the Securities of such series are payable, the payment of which is unconditionally guaranteed by such government, which, in either case, are full faith and credit obligations of such government payable in such Currency and are not callable or redeemable at the option of the issuer thereof and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest or principal of the Government Obligation evidenced by such depository receipt.

 

“Holder” means, in the case of a Registered Security, the Person in whose name a Security is registered in the Security Register and, in the case of a Bearer Security, the bearer thereof and, when used with respect to any coupon, shall mean the bearer thereof.

 

“Indenture” means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, and shall include the terms of particular series of Securities established as contemplated by Section 3.01; provided, however, that, if at any time more than one Person is acting as Trustee under this instrument, “Indenture” shall mean, with respect to any one or more series of Securities

 

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for which such Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of the particular series of Securities for which such Person is Trustee established as contemplated by Section 3.01, exclusive, however, of any provisions or terms which relate solely to other series of Securities for which such Person is not Trustee, regardless of when such terms or provisions were adopted, and exclusive of any provisions or terms adopted by means of one or more indentures supplemental hereto executed and delivered after such Person had become such Trustee but to which such Person, as such Trustee, was not a party.

 

“Indexed Security” means a Security the terms of which provide that the principal amount thereof payable at Stated Maturity may be more or less than the principal face amount thereof at original issuance.

 

“interest,” when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity at the rate prescribed in such Original Issue Discount Security.

 

“Interest Payment Date,” when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security.

 

“Judgment Currency” has the meaning specified in Section 1.14.

 

“Lien” means any mortgage, pledge, hypothecation, charge, assignment, deposit arrangement, encumbrance, security interest, lien (statutory or other), or preference, priority or other security or similar agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any agreement to give or grant a Lien or any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing).

 

“mandatory sinking fund payment” has the meaning specified in Section 12.01.

 

“Market Exchange Rate” means, unless otherwise specified with respect to any Securities pursuant to Section 3.01, (i) for any conversion involving a Currency unit on the one hand and Dollars or any Foreign Currency on the other, the exchange rate between the relevant Currency unit and Dollars or such Foreign Currency calculated by the method specified pursuant to Section 3.01 for the Securities of the relevant series, (ii) for any conversion of Dollars into any Foreign Currency, the noon (New York City time) buying rate for such Foreign Currency for cable transfers quoted in New York City as certified for customs purposes by the Federal Reserve Bank of New York and (iii) for any conversion of one Foreign Currency into Dollars or another Foreign Currency, the spot rate at noon local time in the relevant market at which, in accordance with normal banking procedures, the Dollars or Foreign Currency into which conversion is being made could be purchased with the Foreign Currency from which conversion is being made from major banks located in New York City, Vancouver, London or any other principal market for Dollars or such purchased Foreign Currency, in each case determined by the Exchange Rate Agent.  Unless otherwise specified with respect to any Securities pursuant to Section 3.01, in the event of the unavailability of any of the exchange rates provided for in the foregoing clauses (i), (ii) and (iii), the Exchange Rate Agent shall use, in its sole discretion and without liability on its part, such quotation of the Federal Reserve Bank of New York as of the most recent available date, or quotations from one or more major banks in New York City, Vancouver, London or another principal market for the Currency in question, or such other quotations as the Exchange Rate Agent shall deem appropriate.  Unless otherwise specified by the Exchange Rate Agent, if there is more than one market for dealing in any Currency by reason of foreign exchange regulations or otherwise, the market to be used in respect of such Currency

 

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shall be that upon which a non-resident issuer of securities designated in such Currency would purchase such Currency in order to make payments in respect of such securities.

 

“Maturity,” when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption, notice of option to elect repayment or otherwise.

 

“Notice of Default” has the meaning specified in Section 6.01.

 

“Officer” means the Chair of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Operating Officer, any Executive Vice President, any Vice President, the Treasurer or the Corporate Secretary of the Company or, in the event that the Company is a partnership or a limited liability company that has no such officers, a person duly authorized under applicable law by the general partner, managers, members or a similar body to act on behalf of the Company.

 

“Officer’s Certificate” means a certificate, which shall comply with this Indenture, signed by an Officer and delivered to the Trustees.

 

“Opinion of Counsel” means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, who shall be acceptable to the Trustees, which opinion may contain customary exceptions and qualifications as to the matters set forth therein.

 

“Optional Reset Date” has the meaning specified in Section 3.07.

 

“optional sinking fund payment” has the meaning specified in Section 12.01.

 

“Original Issue Discount Security” means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 5.02.

 

“Original Stated Maturity” has the meaning specified in Section 3.08.

 

“Outstanding,” when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

 

(i)                                     Securities theretofore cancelled by either Trustee or delivered to either Trustee for cancellation;

 

(ii)                                  Securities, or portions thereof, for whose payment or redemption or repayment at the option of the Holder, money in the necessary amount has been theretofore deposited with either Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities and any coupons appertaining thereto; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustees has been made;

 

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(iii)                               Securities, except to the extent provided in Section 14.02 and Section 14.03, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Fourteen; and

 

(iv)                              Securities which have been paid pursuant to Section 3.06 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustees proof satisfactory to them that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company;

 

provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or are present at a meeting of Holders for quorum purposes, and for the purpose of making the calculations required by TIA Section 313, (i) the principal amount of an Original Issue Discount Security that may be counted in making such determination or calculation and that shall be deemed to be Outstanding for such purpose shall be equal to the amount of principal thereof that would be (or shall have been declared to be) due and payable, at the time of such determination, upon a declaration of acceleration of the maturity thereof pursuant to Section 5.02, (ii) the principal amount of any Security denominated in a Foreign Currency that may be counted in making such determination or calculation and that shall be deemed Outstanding for such purpose shall be equal to the Dollar equivalent, determined as of the date such Security is originally issued by the Company as set forth in an Exchange Rate Officer’s Certificate delivered to the Trustees, of the principal amount (or, in the case of an Original Issue Discount Security, the Dollar equivalent as of such date of original issuance of the amount determined as provided in clause (i) above) of such Security, (iii) the principal amount of any Indexed Security that may be counted in making such determination or calculation and that shall be deemed outstanding for such purpose shall be equal to the principal face amount of such Indexed Security at original issuance, unless otherwise provided with respect to such Security pursuant to Section 3.01, and (iv) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustees shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustees know to be so owned shall be so disregarded.  Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustees the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor.

 

“Paying Agent” means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of, premium (if any) or interest (if any) on any Securities on behalf of the Company.  Such Person must be capable of making payment in the Currency of the issued Security.

 

“Person” means any individual, corporation, body corporate, partnership, limited partnership, limited liability partnership, joint venture, limited liability company, unlimited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

 

“Place of Payment” means, when used with respect to the Securities of or within any series, each place where the principal of, premium (if any) and interest (if any) on such Securities are payable as specified as contemplated by Sections 3.01 and 10.02.

 

“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this

 

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definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security or a Security to which a mutilated, destroyed, lost or stolen coupon appertains shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security or the Security to which the mutilated, destroyed, lost or stolen coupon appertains, as the case may be.

 

“Privacy Laws” has the meaning specified in Section 6.14.

 

“rate(s) of exchange” has the meaning specified in Section 1.14.

 

“Redemption Date,” when used with respect to any Security to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture.

 

“Redemption Price,” when used with respect to any Security to be redeemed, in whole or in part, means the price at which it is to be redeemed pursuant to this Indenture, plus accrued and unpaid interest thereon to the Redemption Date.

 

“Registered Security” means any Security registered in the Security Register.

 

“Regular Record Date” for the interest payable on any Interest Payment Date on the Registered Securities of or within any series means the date specified for that purpose as contemplated by Section 3.01.

 

“Repayment Date” means, when used with respect to any Security to be repaid at the option of the Holder, the date fixed for such repayment pursuant to this Indenture.

 

“Reset Notice” has the meaning specified in Section 3.07.

 

“Responsible Officer,” when used with respect to a Trustee, means any vice president, secretary, any assistant secretary, treasurer, any assistant treasurer, any senior trust officer, any trust officer, the controller within the corporate trust administration division of a Trustee or any other officer of a Trustee customarily performing functions similar to those performed by any of the above-designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject.

 

“Securities” has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture; provided, however, that if at any time there is more than one Person acting as Trustee under this Indenture, “Securities” with respect to the Indenture as to which such Person is Trustee shall have the meaning stated in the first recital of this Indenture and shall more particularly mean Securities authenticated and delivered under this Indenture, exclusive, however, of Securities of any series as to which such Person is not Trustee.

 

“Security Register” and “Security Registrar” have the respective meanings specified in Section 3.05.

 

“Special Record Date” for the payment of any Defaulted Interest on the Registered Securities of or within any series means a date fixed by the Trustees pursuant to Section 3.07.

 

“Specified Amount” has the meaning specified in Section 3.12(h).

 

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“Stated Maturity,” when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security or a coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable, as such date may be extended pursuant to the provisions of Section 3.08 (if applicable).

 

“Subsequent Interest Period” has the meaning specified in Section 3.07.

 

“Trust Indenture Act” or “TIA” means the United States Trust Indenture Act of 1939, as amended, as in force at the date as of which this Indenture was executed, except as provided in Section 9.05.

 

“Trust Indenture Legislation” means, at any time, the provisions of (i) any applicable statute of Canada or any province or territory thereof and the regulations thereunder as amended or re-enacted from time to time, but only to the extent applicable, or (iii) the Trust Indenture Act and regulations thereunder, in each case, relating to trust indentures and to the rights, duties and obligations of trustees under trust indentures and of corporations issuing debt obligations under trust indentures, to the extent that such provisions are at such time in force and applicable to this Indenture or the Company or the Trustees.

 

“Trustee” or “Trustees” means the U.S. Trustee and the Canadian Trustee.  If a Canadian Trustee is not appointed under this Indenture, or resigns or is removed and, pursuant to Section 6.09, the Company is not required to appoint a successor Trustee to the Canadian Trustee, “Trustee,” “Trustees” and any reference to “either Trustee,” “both of the Trustees” or such similar references shall mean the Person named as the U.S. Trustee or any successor thereto appointed pursuant to the applicable provisions of this Indenture.  Except to the extent otherwise indicated, “Trustees” shall refer to the Canadian Trustee (if appointed and still serving) and the U.S. Trustee, both jointly and individually.

 

“U.S. Federal Bankruptcy Code” means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time.

 

“U.S. Trustee” means the Person named as the “U.S. Trustee” in the first paragraph of this Indenture until a successor U.S. Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “U.S. Trustee” shall mean or include each Person who is then a U.S. Trustee hereunder; provided, however, that if at any time there is more than one such Person, “U.S. Trustee” as used with respect to the Securities of any series shall mean only the U.S. Trustee with respect to Securities of that series.

 

“United States” means, unless otherwise specified with respect to any Securities pursuant to Section 3.01, the United States of America (including the states and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction.

 

“United States person” means, unless otherwise specified with respect to any Securities pursuant to Section 3.01, an individual who is a citizen or resident of the United States, a corporation, partnership (including any entity treated as a corporation or as a partnership for United States federal income tax purposes) or other entity created or organized in or under the laws of the United States, any state thereof or the District of Columbia, an estate the income of which is subject to United States federal income taxation regardless of its source, or a trust if (A) it is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (B) it has a valid election in effect under applicable United States Treasury Regulations to be treated as a United States person.

 

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“Valuation Date” has the meaning specified in Section 3.12(c).

 

“Writing” has the meaning specified in Section 6.13.

 

“Yield to Maturity” means the yield to maturity, computed at the time of issuance of a Security (or, if applicable, at the most recent redetermination of interest on such Security) and as set forth in such Security in accordance with generally accepted United States bond yield computation principles.

 

SECTION 1.02                                   Rules of Construction.

 

For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

 

(1)                                 the terms defined in this Indenture have the meanings assigned to them hereinand include the plural as well as the singular;

 

(2)                                 all terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms “cash transaction” and “self-liquidating paper,” as used in TIA Section 319, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act;

 

(3)                                 the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision;

 

(4)                                 “or” is not exclusive;

 

(5)                                 words implying any gender shall apply to all genders;

 

(6)                                 the words Subsection, Section and Article refer to the Subsections, Sections and Articles, respectively, of this Indenture unless otherwise noted; and

 

(7)                                 “include,” “includes” or “including” means include, includes or including, in each case, without limitation.

 

SECTION 1.03                                   Compliance Certificates and Opinions.

 

Upon any application or request by the Company to the Trustees to take any action under any provision of this Indenture, the Company shall furnish to the Trustees an Officer’s Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.

 

Every certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture (other than pursuant to Section 10.04) shall include:

 

(1)                                 a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;

 

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(2)                                 a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

 

(3)                                 a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and

 

(4)                                 a statement as to whether, in the opinion of each such individual, such covenant or condition has been complied with.

 

SECTION 1.04                                   Form of Documents Delivered to Trustees.

 

In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons may certify or give an opinion with respect to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

 

Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, a certificate of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous.  Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

 

Any certificate or opinion of an officer of the Company or counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of, or representations by, an accountant or firm of accountants in the employ of the Company, unless such officer or counsel, as the case may be, knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the accounting matters upon which such certificate or opinion may be based are erroneous.  Any certificate or opinion of any independent firm of public accountants filed with the Trustees shall contain a statement that such firm is independent.

 

Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

 

SECTION 1.05                                   Acts of Holders.

 

(a)                                 Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of the Outstanding Securities of all series or one or more series, as the case may be, may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing.  If Securities of a series are issuable as Bearer Securities, any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of such series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of

 

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Holders of Securities of such series duly called and held in accordance with the provisions of Article Fifteen, or a combination of such instruments and any such record.  Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustees and, where it is hereby expressly required, to the Company.  Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments or so voting at any such meeting.  Proof of execution of any such instrument or of a writing appointing any such agent, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustees and the Company, if made in the manner provided in this Section 1.05.  The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 15.06.

 

(b)                                 The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof.  Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority.  The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustees deem sufficient.

 

(c)                                  The principal amount and serial numbers of Registered Securities held by any Person, and the date of holding the same, shall be proved by the Security Register.

 

(d)                                 The principal amount and serial numbers of Bearer Securities held by any Person, and the date of holding the same, may be proved by the production of such Bearer Securities or by a certificate executed, as depositary, by any trust company, bank, banker or other depositary, wherever situated, if such certificate shall be deemed by the Trustees to be satisfactory, showing that at the date therein mentioned such Person had on deposit with such depositary, or exhibited to it, the Bearer Securities therein described; or such facts may be proved by the certificate or affidavit of the Person holding such Bearer Securities, if such certificate or affidavit is deemed by the Trustees to be satisfactory.  The Trustees and the Company may assume that such ownership of any Bearer Security continues until (1) another certificate or affidavit bearing a later date issued in respect of the same Bearer Security is produced, or (2) such Bearer Security is produced to the Trustees by some other Person, or (3) such Bearer Security is surrendered in exchange for a Registered Security, or (4) such Bearer Security is no longer Outstanding.  The principal amount and serial numbers of Bearer Securities held by any Person, and the date of holding the same, may also be proved in any other manner that the Trustees deem sufficient.

 

(e)                                  If the Company shall solicit from the Holders of Registered Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so.  Notwithstanding Trust Indenture Legislation, including TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed.  If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request,

 

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demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date.

 

(f)                                   Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees or the Company in reliance thereon, whether or not notation of such action is made upon such Security.

 

SECTION 1.06                                   Notices, Etc. to Trustees and Company.

 

Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other documents provided or permitted by this Indenture to be made upon, given or furnished to, or filed with:

 

(1)                                 the U.S. Trustee, by the Canadian Trustee, any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the U.S. Trustee at its Corporate Trust Office, Attention:                             , or

 

(2)                                 the Canadian Trustee, by the U.S. Trustee, any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Canadian Trustee at its Corporate Trust Office, Attention:                           , or

 

(3)                                 the Company by either Trustee or any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, or sent by overnight courier, to the Company at 666 Burrard Street, Suite 1700, Vancouver, British Columbia, Canada, V6C 2X8, Attention:  Corporate Secretary’s office or such other address and/or officer as the Company may designate on written notice to the Trustees.

 

SECTION 1.07                                   Notice to Holders; Waiver.

 

Where this Indenture provides for notice of any event to Holders of Registered Securities by the Company or the Trustees, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each such Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice.  In any case where notice to Holders of Registered Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders of Registered Securities or the sufficiency of any notice to Holders of Bearer Securities given as provided.  Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice.

 

In case, by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impractical to mail notice of any event to Holders of Registered Securities when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustees shall be deemed to be sufficient giving of such notice for every purpose hereunder.

 

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Except as otherwise expressly provided herein or otherwise specified with respect to any Securities pursuant to Section 3.01, where this Indenture provides for notice to Holders of Bearer Securities of any event, such notice shall be sufficiently given to Holders of Bearer Securities if published in an Authorized Newspaper in The City of New York and in such other city or cities as may be specified in such Securities on a Business Day at least twice, the first such publication to be not earlier than the earliest date, and not later than the latest date, prescribed for the giving of such notice.  Any such notice shall be deemed to have been given on the date of the first such publication.

 

In case, by reason of the suspension of publication of any Authorized Newspaper or Authorized Newspapers or by reason of any other cause, it shall be impracticable to publish any notice to Holders of Bearer Securities as provided above, then such notification to Holders of Bearer Securities as shall be satisfactory to the Trustees shall be deemed to be sufficient giving of such notice for every purpose hereunder.  Neither the failure to give notice by publication to Holders of Bearer Securities as provided above, nor any defect in any notice so published, shall affect the sufficiency of such notice with respect to other Holders of Bearer Securities or the sufficiency of any notice to Holders of Registered Securities given as provided herein.

 

Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication.

 

Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice.  Waivers of notice by Holders shall be filed with the Trustees, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

 

SECTION 1.08                                   Effect of Headings and Table of Contents.

 

The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

 

SECTION 1.09                                   Successors and Assigns.

 

All covenants and agreements in this Indenture by the Company and the Trustees shall bind their successors and assigns, whether so expressed or not.

 

SECTION 1.10                                   Severability Clause.

 

In case any provision in this Indenture or in any Security or coupon shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

 

SECTION 1.11                                   Benefits of Indenture.

 

Nothing in this Indenture or in the Securities or coupons, express or implied, shall give to any Person, other than the parties hereto, any Authenticating Agent, any Paying Agent, any Securities Registrar and their successors hereunder and the Holders of Securities or coupons, any benefit or any legal or equitable right, remedy or claim under this Indenture.  Subject to Section 1.16, at all times in relation to this Indenture and any action to be taken hereunder, the Company and the Trustees each shall observe and comply with Trust Indenture Legislation and the Company, the Trustees and each Holder of a Security shall be entitled to the benefits of Trust Indenture Legislation.

 

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SECTION 1.12                                   Governing Law.

 

This Indenture and the Securities and coupons shall be governed by and construed in accordance with the law of the State of New York, but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby.  Each Trustee and the Company agrees to comply with all provisions of Trust Indenture Legislation applicable to or binding upon it in connection with this Indenture and any action to be taken hereunder.  This Indenture is subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions.  Notwithstanding the preceding sentence, the exercise, performance or discharge by the Canadian Trustee of any of its rights, powers, duties or responsibilities hereunder shall be construed in accordance with the laws of the Province of [British Columbia] and the federal laws of Canada applicable thereto.

 

SECTION 1.13                                   Legal Holidays.

 

In any case where any Interest Payment Date, Redemption Date, sinking fund payment date or Stated Maturity or Maturity of any Security shall not be a Business Day at any Place of Payment or other location contemplated hereunder, then (notwithstanding any other provision of this Indenture or of any Security or coupon other than a provision in the Securities of any series which specifically states that such provision shall apply in lieu of this Section 1.13), payment of principal, premium (if any) or interest (if any), need not be made at such Place of Payment or other location contemplated hereunder on such date, but may be made on the next succeeding Business Day at such Place of Payment or other location contemplated hereunder with the same force and effect as if made on the Interest Payment Date or Redemption Date or sinking fund payment date, or at the Stated Maturity or Maturity; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, sinking fund payment date, Stated Maturity or Maturity, as the case may be.

 

SECTION 1.14                                   Agent for Service; Submission to Jurisdiction; Waiver of Immunities.

 

By the execution and delivery of this Indenture, the Company (i) acknowledges that it has irrevocably designated and appointed                                  as its authorized agent upon which process may be served in any suit, action or proceeding arising out of or relating to the Securities or this Indenture that may be instituted in any United States federal or New York state court located in The Borough of Manhattan, The City of New York, or brought by the Trustees (whether in their individual capacity or in their capacity as Trustees hereunder), (ii) irrevocably submits to the non-exclusive jurisdiction of any such court in any such suit or proceeding, and (iii) agrees that service of process upon                                 and written notice of said service to the Company (mailed or delivered to the Company at 666 Burrard Street, Suite 1700, Vancouver, British Columbia, Canada, V6C 2X8, Attention:  Corporate Secretary’s office or such other address and/or officer as the Company may designate on written notice to the Trustees), shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding.  The Company further agrees to take any and all action, including the execution and filing of any and all such documents and instruments, as may be necessary to continue such designation and appointment of                               in full force and effect so long as this Indenture shall be in full force and effect.

 

To the extent that the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations under this Indenture and the Securities, to the extent permitted by law.

 

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The Company irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any such action, suit or proceeding in any such court or any appellate court with respect thereto.  The Company irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of any such action, suit or proceeding in any such court.

 

SECTION 1.15                                   Conversion of Judgment Currency.

 

(a)                                 The Company covenants and agrees that the following provisions shall apply to conversion of Currency in the case of the Securities and this Indenture, to the fullest extent permitted by applicable law:

 

(i)                                     If for the purposes of obtaining judgment in, or enforcing the judgment of, any court in any country, it becomes necessary to convert into a Currency (the “Judgment Currency”) an amount due or contingently due in any other Currency under the Securities of any series and this Indenture (the “Base Currency”), then the conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which the final judgment is given or the order of enforcement is made, as the case may be (unless a court shall otherwise determine).

 

(ii)                                  If there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment referred to in (i) above is given or an order of enforcement is made, as the case may be (or such other date as a court shall determine), and the date of receipt of the amount due, the Company shall pay such additional (or, as the case may be, such lesser) amount, if any, as may be necessary so that the amount paid in the Judgment Currency when converted at the rate of exchange prevailing on the date of receipt will produce the amount in the Base Currency originally due.

 

(b)                                 In the event of the winding-up of the Company at any time while any amount or damages owing under the Securities and this Indenture, or any judgment or order rendered in respect thereof, shall remain outstanding, the Company shall indemnify and hold the Holders and the Trustees harmless against any deficiency arising or resulting from any variation in rates of exchange between (1) the date as of which the equivalent of the amount in the Base Currency due or contingently due under the Securities and this Indenture (other than under this Subsection (b)) is calculated for the purposes of such winding-up and (2) the final date for the filing of proofs of claim in such winding-up.  For the purpose of this Subsection (b) the final date for the filing of proofs of claim in the winding-up of the Company shall be the date fixed by the liquidator or otherwise in accordance with the relevant provisions of applicable law as being the latest practicable date as at which liabilities of the Company may be ascertained for such winding-up prior to payment by the liquidator or otherwise in respect thereto.

 

(c)                                  The obligations contained in Subsections (a)(ii) and (b) of this Section 1.15 shall constitute separate and independent obligations of the Company from its other obligations under the Securities and this Indenture, shall give rise to separate and independent causes of action against the Company, shall apply irrespective of any waiver or extension granted by any Holder or the Trustees from time to time and shall continue in full force and effect notwithstanding any judgment or order or the filing of any proof of claim in the winding up of the Company for a liquidated sum in respect of amounts due hereunder (other than under Subsection (b) above) or under any such judgment or order.  Any such deficiency as aforesaid shall be deemed to constitute a loss suffered by the Holders or the Trustees, as the case may be, and no proof or evidence of any actual loss shall be required by the Company or its liquidator.  In the case of Subsection (b) above, the amount of such deficiency shall not be deemed to be increased or reduced by any variation in rates of exchange occurring between the said final date and the date of any liquidating distribution.

 

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The term “rate(s) of exchange” shall mean the rate of exchange quoted by a Canadian chartered bank as may be designated in writing by the Company to the Trustees from time to time, at its central foreign exchange desk in its main office in Vancouver at 12:00 noon (Vancouver time) on the relevant date for purchases of the Base Currency with the Judgment Currency and includes any premiums and costs of exchange payable.  The Trustees shall have no duty or liability with respect to monitoring or enforcing this Section 1.15.

 

SECTION 1.16                                   Currency Equivalent.

 

Except as otherwise provided in this Indenture, for purposes of the construction of the terms of this Indenture or of the Securities, in the event that any amount is stated herein in the Currency of one nation (the “First Currency”), as of any date such amount shall also be deemed to represent the amount in the Currency of any other relevant nation which is required to purchase such amount in the First Currency at the Bank of Canada noon rate as reported by Telerate on screen 3194 (or such other means of reporting the Bank of Canada noon rate as may be agreed upon by each of the parties to this Indenture) on the date of determination.

 

SECTION 1.17                                   Conflict with Trust Indenture Legislation.

 

If and to the extent that any provision of this Indenture limits, qualifies or conflicts with any mandatory requirement of Trust Indenture Legislation, such mandatory requirement shall control.  If and to the extent that any provision hereof modifies or excludes any provision of Trust Indenture Legislation that may be so modified or excluded, the latter provision shall be deemed to apply hereof as so modified or to be excluded, as the case may be.

 

SECTION 1.18                                   Incorporators, Shareholders, Officers and Directors of the Company Exempt from Individual Liability.

 

No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such, or against any past, present or future shareholder, officer or director, as such, of the Company or of any successor, either directly or through the Company or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities by the Holders and as part of the consideration for the issue of the Securities.

 

SECTION 1.19                                   Waiver of Jury Trial.

 

Each of the Company and the Trustees hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Indenture, the Securities or the transactions contemplated hereby.

 

SECTION 1.20                                   Counterparts.

 

This Indenture may be executed in any number of counterparts (either by facsimile or by original manual signature), each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture.

 

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SECTION 1.21                                   Force Majeure.

 

Except for the payment obligations of the Company contained herein, neither the Company nor the Trustees shall be liable to each other, or held in breach of this Indenture, if prevented, hindered, or delayed in the performance or observance of any provision contained herein by reason of act of God, riots, terrorism, acts of war, epidemics, governmental action or judicial order, earthquakes, or any other similar causes (including, but not limited to, mechanical, electronic or communication interruptions, disruptions or failures).  Performance times under this Indenture shall be extended for a period of time equivalent to the time lost because of any delay that is excusable under this Section 1.21.

 

ARTICLE TWO
SECURITIES FORMS

 

SECTION 2.01                                   Forms Generally.

 

The Registered Securities, if any, of each series and the Bearer Securities, if any, of each series and related coupons, if any, shall be in substantially the forms as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the Officer executing such Securities or coupons, as evidenced by the execution of such Securities or coupons by such Officer.  If the forms of Securities or coupons of any series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Corporate Secretary or an Assistant Secretary of the Company and delivered to the Trustees at or prior to the delivery of the Company Order contemplated by Section 3.03 for the authentication and delivery of such Securities or coupons.  Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security.

 

Unless otherwise specified as contemplated by Section 3.01, Bearer Securities shall have interest coupons attached.

 

Either Trustee’s certificate of authentication shall be in substantially the form set forth in this Article Two.

 

SECTION 2.02                                   Form of Trustee’s Certificate of Authentication.

 

Subject to Section 6.12, either Trustee’s certificate of authentication shall be in substantially the following form:

 

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

 

(Certificate of Authentication may be executed by either Trustee)

 

Dated:

 

                                          , as U.S. Trustee, certifies that this is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

 

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                                                                      ,

 

as U.S. Trustee

 

 

 

 

 

 

 

By:

 

 

Authorized Officer

 

Dated:

 

                                , as Canadian Trustee, certifies that this is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

 

 

                                                                      ,

 

as Canadian Trustee

 

 

 

 

 

 

 

By:

 

 

Authorized Officer

 

SECTION 2.03                                   Securities Issuable in Global Form.

 

If Securities of or within a series are issuable in global form, as specified and contemplated by Section 3.01, then any such Security shall represent such of the Outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggregate amount of Outstanding Securities of such series from time to time endorsed thereon and that the aggregate amount of Outstanding Securities of such series represented thereby may from time to time be increased or decreased to reflect exchanges.  Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the amount, of Outstanding Securities represented thereby shall be made by the Trustees in such manner and upon instructions given by the Holder or its nominee as shall be specified therein or in the Company Order to be delivered to the Trustees pursuant to Section 3.03 or 3.04.  Subject to the provisions of Sections 3.03 and 3.04 (if applicable), the Trustees shall deliver and redeliver any Security in global form in the manner and upon instructions given by the Holder or its nominee as shall be specified therein or in the applicable Company Order.  If a Company Order pursuant to Section 3.03 or Section 3.04 has been, or simultaneously is, delivered, any instructions by the Company with respect to endorsement or delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 1.03 and need not be accompanied by an Opinion of Counsel.

 

Notwithstanding the provisions of Section 3.07, unless otherwise specified as contemplated by Section 3.01, payment of principal of, premium (if any) and interest (if any) on any Security in permanent global form shall be made to the Holder or its nominee specified therein.

 

Notwithstanding Section 3.09 and except as provided in the preceding paragraph, the Company, the Trustees and any agent of the Company and the Trustees shall treat as the Holder of such principal amount of Outstanding Securities represented by a permanent global Security (i) in the case of a permanent global Security in registered form, the Holder of such permanent global Security in registered form, or (ii) in the case of a permanent global Security in bearer form, the Depositary.

 

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ARTICLE THREE

THE SECURITIES

 

SECTION 3.01           Issuable in Series.

 

The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.

 

The Securities may be issued in one or more series and may be denominated and payable in Dollars or any Foreign Currency.  There shall be established in one or more Board Resolutions or pursuant to authority granted by one or more Board Resolutions and set forth in, or determined in the manner provided in, an Officer’s Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, any or all of the following, as applicable:

 

(1)                                 the title of the Securities of the series (which shall distinguish the Securities of such series from the Securities of all other series);

 

(2)                                 the aggregate principal amount of the Securities of the series and any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer (including any restriction or condition on the transferability of the Securities of such series) of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.07 or 13.05) and, in the event that no limit upon the aggregate principal amount of the Securities of that series is specified, the Company shall have the right, subject to any terms, conditions or other provisions specified pursuant to this Section 3.01 with respect to the Securities of such series, to re-open such series for the issuance of additional Securities of such series from time to time;

 

(3)                                 the extent and manner, if any, to which payment on or in respect of the Securities of the series will be senior or will be subordinated to the prior payment of other liabilities and obligations of the Company, and whether the payment of principal, premium (if any) and interest (if any) will be guaranteed by any other Person;

 

(4)                                 the percentage or percentages of principal amount at which the Securities of the series will be issued;

 

(5)                                 the date or dates, or the method by which such date or dates will be determined or extended, on which the Securities of the series may be issued and the date or dates, or the method by which such date or dates will be determined or extended, on which the principal of and premium (if any) on the Securities of the series is payable;

 

(6)                                 the rate or rates at which the Securities of the series shall bear interest, whether fixed or variable (if any), or the method by which such rate or rates shall be determined, whether such interest shall be payable in cash or additional Securities of the same series or shall accrue and increase the aggregate principal amountoutstanding of such series, the date or dates from which such interest shall accrue, or the method by which such date or dates shall be determined, the Interest Payment Dates on which such interest shall be payable and the Regular Record Date, if any, for the interest payable on any Registered Security on any Interest Payment Date, or the method by which such date or dates shall be determined, and the basis upon which interest shall be calculated if other than on the basis of a 360-day year of twelve 30-day months;

 

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(7)                                 the place or places, if any, other than or in addition to the Borough of Manhattan, The City of New York, where the principal of, premium (if any) and interest (if any) on Securities of the series shall be payable, where any Registered Securities of the series may be surrendered for registration of transfer, where Securities of the series may be surrendered for exchange, where Securities of the series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable and, if different than the location specified in Section 1.06, the place or places where notices or demands to or upon the Company in respect of the Securities of the series and this Indenture may be served;

 

(8)                                 the period or periods within which, the date or dates on which, the price or prices at which, the Currency in which, and other terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company, if the Company is to have that option;

 

(9)                                 the obligation, if any, of the Company to redeem, repay or purchase Securities of the series pursuant to any sinking fund, amortization or analogous provisions or at the option of a Holder thereof, and the period or periods within which, the price or prices at which, the Currency in which, and other terms and conditions upon which Securities of the series shall be redeemed, repaid or purchased, in whole or in part, pursuant to such obligation;

 

(10)                          if other than denominations of $1,000 and any integral multiple thereof, the denomination or denominations in which any Registered Securities of the series shall be issuable and, if other than denominations of $5,000, the denomination or denominations in which any Bearer Securities of the series shall be issuable;

 

(11)                          the identity of each Security Registrar and/or Paying Agent;

 

(12)                          if other than the principal amount thereof, the portion of the principal amount of Securities of the series that shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 5.02 or the method by which such portion shall be determined;

 

(13)                          if other than Dollars, the Foreign Currency in which payment of the principal of, premium (if any) or interest (if any) on the Securities of the series shall be payable or in which the Securities of the series shall be denominated and the particular provisions applicable thereto in accordance with, in addition to or in lieu of any of the provisions of Section 3.12;

 

(14)                          whether the amount of payments of principal of, premium (if any) or interest (if any) on the Securities of the series may be determined with reference to an index, formula or other method (which index, formula or method may be based, without limitation, on one or more Currencies, commodities, equity indices or other indices), and the manner in which such amounts shall be determined;

 

(15)                          whether the principal of, premium (if any) or interest (if any) on the Securities of the series are to be payable, at the election of the Company or a Holder thereof, in a Currency other than that in which such Securities are denominated or stated to be payable, the period or periods within which (including the Election Date), and the terms and conditions upon which, such election may be made, and the time and manner of determining the exchange rate between the Currency in which such Securities are

 

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denominated or stated to be payable and the Currency in which such Securities are to be so payable, in each case in accordance with, in addition to or in lieu of any of the provisions of Section 3.12;

 

(16)                          the designation of the initial Exchange Rate Agent, if any;

 

(17)                          the applicability, if any, of Sections 14.02 and/or 14.03 to the Securities of the series and any provisions in modification of, in addition to or in lieu of any of the provisions of Article Fourteen that shall be applicable to the Securities of the series;

 

(18)                          provisions, if any, granting special rights to the Holders of Securities of the series upon the occurrence of such events as may be specified;

 

(19)                          any deletions from, modifications of or additions to the Events of Default or covenants (including any deletions from, modifications of or additions to Section 10.09) of the Company with respect to Securities of the series, whether or not such Events of Default or covenants are consistent with the Events of Default or covenants set forth herein;

 

(20)                          whether Securities of the series are to be issuable as Registered Securities, Bearer Securities (with or without coupons) or both, any restrictions applicable to the offer, sale or delivery of Securities of the series, whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to be issuable in permanent global form with or without coupons and, if so, whether beneficial owners of interests in any such permanent global Security may exchange such interests for Securities of such series and of like tenor of any authorized form and denomination and the circumstances under which any such exchanges may occur, if other than in the manner provided in Section 3.05, whether Registered Securities of the series may be exchanged for Bearer Securities of the series (if permitted by applicable laws and regulations), whether Bearer Securities of the series may be exchanged for Registered Securities of such series, and the circumstances under which and the place or places where any such exchanges may be made and, if Securities of the series are to be issuable in global form, the designation of any Depositary therefor;

 

(21)                          the date as of which any Bearer Securities of the series and any temporary global Security of the series shall be dated if other than the date of original issuance of the first Security of the series to be issued;

 

(22)                          the Person to whom any interest on any Registered Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, the manner in which, or the Person to whom, any interest on any Bearer Security of the series shall be payable, if otherwise than upon presentation and surrender of the coupons appertaining thereto as they severally mature, and the extent to which, or the manner in which, any interest payable on a temporary global Security on an Interest Payment Date will be paid if other than in the manner provided in Section 3.04;

 

(23)                          if Securities of the series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions, the form and/or terms of such certificates, documents or conditions;

 

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(24)                          if the Securities of the series are to be issued upon the exercise of warrants or subscription receipts, the time, manner and place for such Securities to be authenticated and delivered;

 

(25)                          if the Securities of the series are to be convertible into or exchangeable for any securities or property of any Person (including the Company), the terms and conditions upon which such Securities will be so convertible or exchangeable, and any additions or changes to permit or facilitate such conversion or exchange;

 

(26)                          provisions as to modification, amendment or variation of any rights or terms attaching to the Securities;

 

(27)                          whether the Securities will be secured or unsecured and the nature and priority of any security; and

 

(28)                          any other terms, conditions, rights and preferences (or limitations on such rights and preferences) relating to the series (which terms shall not be inconsistent with the requirements of Trust Indenture Legislation or the provisions of this Indenture).

 

All Securities of any one series and the coupons appertaining to any Bearer Securities of such series shall be substantially identical except, in the case of Registered Securities, as to denomination and except as may otherwise be provided in or pursuant to such Board Resolution (subject to Section 3.03) and set forth in such Officer’s Certificate or in any such indenture supplemental hereto.  Not all Securities of any one series need be issued at the same time, and, unless otherwise provided, a series may be reopened for issuances of additional Securities of such series.

 

If any of the terms of the series are established by action taken pursuant to one or more Board Resolutions, such Board Resolutions shall be delivered to the Trustees at or prior to the delivery of the Officer’s Certificate setting forth the terms of the series.

 

SECTION 3.02           Denominations.

 

The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 3.01.  With respect to Securities of any series denominated in Dollars, in the absence of any such provisions, the Registered Securities of such series, other than Registered Securities issued in global form (which may be of any denomination), shall be issuable in denominations of $1,000 and any integral multiple thereof and the Bearer Securities of such series, other than the Bearer Securities issued in global form (which may be of any denomination), shall be issuable in a denomination of $5,000 and any integral multiples thereof.

 

SECTION 3.03           Execution, Authentication, Delivery and Dating.

 

The Securities and any coupons appertaining thereto shall be executed on behalf of the Company by an Officer.  The signature of an Officer on the Securities or coupons may be the manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Securities.

 

Securities or coupons bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities or coupons.

 

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At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series together with any coupons appertaining thereto, executed by the Company to the applicable Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the applicable Trustee in accordance with such Company Order shall authenticate and deliver such Securities; provided, however, that, in connection with its original issuance, no Bearer Security shall be mailed or otherwise delivered to any location in the United States; provided further that, unless otherwise specified with respect to any series of Securities pursuant to Section 3.01, a Bearer Security may be delivered in connection with its original issuance only if the Person entitled to receive such Bearer Security shall have furnished a certificate in the form set forth in Exhibit A-1 to this Indenture, dated no earlier than 15 days prior to the earlier of the date on which such Bearer Security is delivered and the date on which any temporary Security first becomes exchangeable for such Bearer Security in accordance with the terms of such temporary Security and this Indenture.  If any Security shall be represented by a permanent global Bearer Security, then, for purposes of this Section 3.03 and Section 3.04, the notation of a beneficial owner’s interest therein upon original issuance of such Security or upon exchange of a portion of a temporary global Security shall be deemed to be delivery in connection with its original issuance of such beneficial owner’s interest in such permanent global Security. Except as permitted by Section 3.06, the Trustees shall not authenticate and deliver any Bearer Security unless all appurtenant coupons for interest then matured have been detached and cancelled.  If not all the Securities of any series are to be issued at one time and if the Board Resolution or supplemental indenture establishing such series shall so permit, such Company Order may set forth procedures acceptable to the Trustees for the issuance of such Securities and determining terms of particular Securities of such series such as interest rate, Stated Maturity, date of issuance and date from which interest shall accrue.

 

In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustees shall be entitled to receive, and (subject to Trust Indenture Legislation, including TIA Sections 315(a) through 315(d)) shall be fully protected in relying upon, an Opinion of Counsel stating:

 

(a)           that the form or forms of such Securities and any coupons have been established in conformity with the provisions of this Indenture;

 

(b)           that the terms of such Securities and any coupons have been established in conformity with the provisions of this Indenture;

 

(c)           that such Securities, together with any coupons appertaining thereto, when completed by appropriate insertions and executed and delivered by the Company to the applicable Trustee for authentication in accordance with this Indenture, authenticated and delivered by the applicable Trustee in accordance with this Indenture and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their terms;

 

(d)           the execution and delivery by the Company of such Securities, any coupons and any supplemental indenture will not contravene the articles of incorporation or continuance, or such other constating documents then in effect, if any, or the by-laws of the Company, or violate applicable laws; and

 

(e)           that the Company has the corporate power to issue such Securities and any coupons, and has duly taken all necessary corporate action with respect to such issuance.

 

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Notwithstanding the provisions of Section 3.01 and of the preceding two paragraphs, if not all the Securities of any series are to be issued at one time, it shall not be necessary to deliver the Officer’s Certificate otherwise required pursuant to Section 3.01 or the Company Order and Opinion of Counsel otherwise required pursuant to the preceding two paragraphs prior to or at the time of issuance of each Security, but such documents shall be delivered prior to or at the time of issuance of the first Security of such series.

 

The Trustees shall not be required to authenticate and deliver any such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustees’ own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustees.

 

Each Registered Security shall be dated the date of its authentication and each Bearer Security shall be dated as of the date specified as contemplated by Section 3.01.

 

No Security or coupon shall entitle a Holder to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the applicable Trustee by manual signature of an authorized officer thereof, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture.  Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustees for cancellation as provided in Section 3.10 together with a written statement (which need not comply with Section 1.03 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never entitle a Holder to the benefits of this Indenture.

 

SECTION 3.04           Temporary Securities.

 

Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the applicable Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued, in registered form or, if authorized, in bearer form with one or more coupons or without coupons, and with such appropriate insertions, omissions, substitutions and other variations as the Officer executing such Securities may determine, as conclusively evidenced by their execution of such Securities.  Such temporary Securities may be in global form.

 

Except in the case of temporary Securities in global form (which shall be exchanged in accordance with the provisions of the following paragraphs), if temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay.  After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder.  Upon surrender for cancellation of any one or more temporary Securities of any series (accompanied by any unmatured coupons appertaining thereto), the Company shall execute and the applicable Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series of authorized denominations and of like tenor and evidencing the same indebtedness; provided, however, that no definitive Bearer Security shall be delivered in exchange for a temporary Registered Security; provided further that a definitive Bearer Security shall be delivered in

 

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exchange for a temporary Bearer Security only in compliance with the conditions set forth in Section 3.03.  Until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series.

 

If temporary Securities of any series are issued in global form, any such temporary global Security shall, unless otherwise provided therein, be delivered to the office of the Depositary for credit to the respective accounts of the beneficial owners of such Securities (or to such other accounts as they may direct).

 

Without unnecessary delay, but in any event not later than the date specified in, or determined pursuant to the terms of, any such temporary global Security (the “Exchange Date”), the Company shall deliver to the Trustees definitive Securities, in aggregate principal amount equal to the principal amount of such temporary global Security and of like tenor and evidencing the same indebtedness, executed by the Company.  On or after the Exchange Date, such temporary global Security shall be surrendered by the Depositary to the Trustees, as the Company’s agent for such purpose, to be exchanged, in whole or from time to time in part, for definitive Securities without charge and the applicable Trustee shall authenticate and deliver, in exchange for each portion of such temporary global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor and evidencing the same indebtedness as the portion of such temporary global Security to be exchanged.  The definitive Securities to be delivered in exchange for any such temporary global Security shall be in bearer form, registered form, permanent global bearer form or permanent global registered form, or any combination thereof, as specified as contemplated by Section 3.01, and, if any combination thereof is so specified, as requested by the beneficial owner thereof; provided, however, that, unless otherwise specified in such temporary global Security, upon such presentation by the Depositary, such temporary global Security is accompanied by a certificate dated the Exchange Date or a subsequent date and signed by the Depositary as to the portion of such temporary global Security held for its account then to be exchanged and a certificate dated the Exchange Date or a subsequent date, each in the form set forth in Exhibit A-2 to this Indenture (or in such other form as may be established pursuant to Section 3.01); provided further that definitive Bearer Securities shall be delivered in exchange for a portion of a temporary global Security only in compliance with the requirements of Section 3.03.

 

Unless otherwise specified in such temporary global Security, the interest of a beneficial owner of Securities of a series in a temporary global Security shall be exchanged for definitive Securities of the same series and of like tenor and evidencing the same indebtedness following the Exchange Date when the account holder instructs the Depositary to request such exchange on his behalf and delivers to the Depositary a certificate in the form set forth in Exhibit A-1 to this Indenture (or in such other form as may be established pursuant to Section 3.01), dated no earlier than 15 days prior to the Exchange Date, copies of which certificate shall be available from the offices of the Depositary, the Trustees, any Authenticating Agent appointed for such series of Securities and each Paying Agent.  Unless otherwise specified in such temporary global Security, any such exchange shall be made free of charge to the beneficial owners of such temporary global Security, except that a Person receiving definitive Securities must bear the cost of insurance, postage, transportation and the like in the event that such Person does not take delivery of such definitive Securities in person at the offices of the Depositary.  Definitive Securities in bearer form to be delivered in exchange for any portion of a temporary global Security shall be delivered only outside the United States and Canada.

 

Until exchanged in full as hereinabove provided, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and of like tenor and evidencing the same indebtedness authenticated and delivered hereunder, except that, unless otherwise specified as contemplated by Section 3.01, interest payable on a temporary global Security on an Interest Payment Date for Securities of such series occurring prior to the applicable

 

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Exchange Date shall be payable to the Depositary on such Interest Payment Date upon delivery by the Depositary to the Trustees of a certificate or certificates in the form set forth in Exhibit A-2 to this Indenture (or in such other form as may be established pursuant to Section 3.01), for credit without further interest thereon on or after such Interest Payment Date to the respective accounts of the Persons who are the beneficial owners of such temporary global Security on such Interest Payment Date and who have each delivered to the Depositary a certificate dated no earlier than 15 days prior to the Interest Payment Date occurring prior to such Exchange Date in the form set forth in Exhibit A-1 to this Indenture (or in such other form as may be established pursuant to Section 3.01).  Notwithstanding anything to the contrary herein contained, the certifications made pursuant to this paragraph shall satisfy the certification requirements of the preceding two paragraphs of this Section 3.04 and of the third paragraph of Section 3.03 and the interests of the Persons who are the beneficial owners of the temporary global Security with respect to which such certification was made will be exchanged for definitive Securities of the same series and of like tenor and evidencing the same indebtedness on the Exchange Date or the date of certification if such date occurs after the Exchange Date, without further act or deed by such beneficial owners.  Except as otherwise provided in this paragraph, no payments of principal of, premium (if any) or interest (if any) owing with respect to a beneficial interest in a temporary global Security will be made unless and until such interest in such temporary global Security shall have been exchanged for an interest in a definitive Security.  Any interest so received by the Depositary and not paid as herein provided shall be returned to the Trustees immediately prior to the expiration of two years after such Interest Payment Date in order to be repaid to the Company in accordance with Section 10.03.

 

SECTION 3.05           Registration, Registration of Transfer and Exchange.

 

So long as required by Trust Indenture Legislation, the Company shall cause to be kept at the Corporate Trust Offices of the Trustees a register for each series of Securities (the registers maintained in the Corporate Trust Offices of the Trustees and in any other office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of the Holders of Registered Securities and of transfers of Registered Securities.  The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time.  At all reasonable times, the Security Register shall be open to inspection by the Trustees.  The Trustees are hereby initially appointed as security registrar (the “Security Registrar”) for the purpose of registering Registered Securities and transfers of Registered Securities as herein provided.  The Company shall have the right to remove and replace from time to time the Security Registrar for any series of Securities; provided, however, that, no such removal or replacement shall be effective until a successor Security Registrar with respect to such series of Registered Securities shall have been appointed by the Company and shall have accepted such appointment by the Company.  In the event that the Trustees shall not be or shall cease to be the Securities Registrar with respect to a series of Securities, they shall have the right to examine the Security Register for such series at all reasonable times.  There shall be only one Securities Register for such series of Securities.

 

Upon surrender for registration of transfer of any Registered Security of any series at the office or agency in a Place of Payment for that series, the Company shall execute, and the applicable Trustee shall authenticate and deliver, in the name of the designated transferee, one or more new Registered Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor and evidencing the same indebtedness.

 

For Canadian Securities, the Security must be duly endorsed for transfer or in a duly endorsed transferable form as applicable and must comply with the current industry practice in accordance with the Securities Transfer Association of Canada.

 

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At the option of the Holder, Registered Securities of any series may be exchanged for other Registered Securities of the same series, of any authorized denomination and of a like aggregate principal amount and tenor and evidencing the same indebtedness, upon surrender of the Registered Securities to be exchanged at such office or agency.  Whenever any Registered Securities are so surrendered for exchange, the Company shall execute, and the applicable Trustee shall authenticate and deliver, the Registered Securities which the Holder making the exchange is entitled to receive.  Unless otherwise specified with respect to any series of Securities as contemplated by Section 3.01, Bearer Securities may not be issued in exchange for Registered Securities.

 

If (but only if) expressly permitted in or pursuant to the applicable Board Resolution and (subject to Section 3.03) set forth in the applicable Officer’s Certificate, or in any indenture supplemental hereto, delivered as contemplated by Section 3.01, at the option of the Holder, Bearer Securities of any series may be exchanged for Registered Securities of the same series of any authorized denomination and of a like aggregate principal amount and tenor and evidencing the same indebtedness, upon surrender of the Bearer Securities to be exchanged at the office of the applicable Trustee, with all unmatured coupons and all matured coupons in default thereto appertaining.  If the Holder of a Bearer Security is unable to produce any such unmatured coupon or coupons or matured coupon or coupons in default, any such permitted exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Company in an amount equal to the face amount of such missing coupon or coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustees if there is furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless.  If thereafter the Holder of such Security shall surrender to any Paying Agent any such missing coupon in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment; provided, however, that, except as otherwise provided in Section 10.02, interest represented by coupons shall be payable only upon presentation and surrender of those coupons at an office or agency located outside the United States.  Notwithstanding the foregoing, in case a Bearer Security of any series is surrendered at any such office or agency in a permitted exchange for a Registered Security of the same series and like tenor after the close of business at such office or agency on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the coupon relating to such Interest Payment Date or proposed date for payment, as the case may be, and interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such coupon when due in accordance with the provisions of this Indenture.

 

Whenever any Securities are so surrendered for exchange, the Company shall execute, and the applicable Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.

 

Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 3.01, any permanent global Security shall be exchangeable only as provided in this Section.  If any beneficial owner of an interest in a permanent global Security is entitled to exchange such interest for Securities of such series and of like tenor and principal amount of another authorized form and denomination, as contemplated by Section 3.01 and provided that any applicable notice provided in the permanent global Security shall have been given to the Company, the Trustees and the Depositary, then without unnecessary delay but in any event not later than the earliest date on which such interest may be so exchanged, the Company shall deliver to the applicable Trustee definitive Securities in aggregate principal amount equal to the principal amount of such beneficial owner’s interest in such permanent global Security, executed by the Company.  On or after the earliest date on which such interests may be

 

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so exchanged, such permanent global Security shall be surrendered by the Depositary or such other depositary as shall be specified in the Company Order with respect thereto to the applicable Trustee, as the Company’s agent for such purpose, to be exchanged in whole or from time to time in part, for definitive Securities without charge, and the applicable Trustee shall authenticate and deliver, in exchange for each portion of such permanent global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such permanent global Security to be exchanged which, unless the Securities of the series are not issuable both as Bearer Securities and as Registered Securities, as specified as contemplated by Section 3.01, shall be in the form of Bearer Securities or Registered Securities, or any combination thereof, as shall be specified by the beneficial owner thereof.  No Bearer Security delivered in exchange for a portion of a permanent global Security shall be mailed or otherwise delivered to any location in the United States or Canada.  If a Registered Security is issued in exchange for any portion of a permanent global Security after the close of business at the office or agency where such exchange occurs on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of such Registered Security, but will be payable on such Interest Payment Date or proposed date for payment, as the case may be, only to the Person to whom interest in respect of such portion of such permanent global Security is payable in accordance with the provisions of this Indenture.

 

Transfers of global Securities shall be limited to transfers in whole, but not in part, to the Depositary, its successors or their respective nominees.  If at any time the Depositary for Securities of a series notifies the Company that it is unwilling, unable or no longer qualifies to continue as Depositary for Securities of such series or if at any time the Depositary for such series shall no longer be registered or in good standing under the Exchange Act, or other applicable statute or regulation, the Company shall appoint a successor Depositary for the Securities of such series.  If a successor to the Depositary for Securities of such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, the Company’s election pursuant to Section 3.01 shall no longer be effective with respect to the Securities for such series and the Company will execute, and the applicable Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Securities of such series, will authenticate and deliver Securities of such series in definitive, registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the global Security or Securities representing such series and evidencing the same indebtedness in exchange for such global Security or Securities.

 

The Company may at any time and in its sole discretion determine that the Securities of any series issued in the form of one or more global Securities shall no longer be represented by such global Security or Securities.  In such event the Company will execute, and the applicable Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Securities of such series, will authenticate and deliver Securities of such series in definitive, registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the global Security or Securities representing such series and evidencing the same indebtedness in exchange for such global Security or Securities.

 

Upon the exchange of a global Security for Securities in definitive registered form, such global Security shall be cancelled by the applicable Trustee.  Securities issued in exchange for a global Security pursuant to this Section 3.05 shall be registered in such names and in such authorized denominations as the Depositary for such global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the applicable Trustee in writing.  The applicable Trustee shall deliver such Securities to the Persons in whose names such Securities are so registered.

 

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All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.

 

Every Registered Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Security Registrar or applicable securities transfer industry practices) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing.

 

Any registration of transfer or exchange of Securities may be subject to service charges by the Securities Registrar and the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06, 11.07 or 13.05 not involving any transfer.

 

The Company shall not be required (i) to issue, register the transfer of or exchange Securities of any series in definitive form during a period beginning at the opening of business 15 days before the day of the selection for redemption of Securities of that series under Section 11.03 or 12.03 and ending at the close of business on (A) if Securities of the series are issuable only as Registered Securities, the day of the mailing of the relevant notice of redemption and (B) if Securities of the series are issuable as Bearer Securities, the day of the first publication of the relevant notice of redemption or, (C) if Securities of the series are also issuable as Registered Securities and there is no publication, the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Registered Security in definitive form so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part, or (iii) to exchange any Bearer Security so selected for redemption except that such a Bearer Security may be exchanged for a Registered Security of that series and like tenor; provided that such Registered Security shall be simultaneously surrendered for redemption, or (iv) to issue, register the transfer of or exchange any Security in definitive form which has been surrendered for repayment at the option of the Holder, except the portion, if any, of such Security not to be so repaid.

 

SECTION 3.06           Mutilated, Destroyed, Lost and Stolen Securities.

 

If any mutilated Security or a Security with a mutilated coupon appertaining to it is surrendered to the applicable Trustee, the Company shall execute and the applicable Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and evidencing the same indebtedness and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to the surrendered Security, or, in case any such mutilated Security or coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, with coupons corresponding to the coupons, if any, appertaining to the surrendered Security, pay such Security or coupon.  If there shall be delivered to the Company and to the Trustees (i) evidence to their satisfaction of the destruction, loss or theft of any Security or coupon and (ii) such security (or surety in the case of the Canadian Trustee) or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustees that such Security or coupon has been acquired by a bona fide purchaser , the Company shall execute and upon Company Order the applicable Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security or in exchange for the Security for which a destroyed, lost or stolen coupon appertains (with all appurtenant coupons not destroyed, lost or stolen), a new Security of the same series and of like tenor and principal amount and evidencing the same indebtedness and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to such destroyed, lost or stolen Security or to the Security to which such destroyed, lost or stolen coupon appertains.

 

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Notwithstanding the provisions of the previous two paragraphs, in case any such mutilated, destroyed, lost or stolen Security or coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, with coupons corresponding to the coupons, if any, appertaining to such mutilated, destroyed, lost or stolen Security or to the Security to which such mutilated, destroyed, lost or stolen coupon appertains, pay such Security or coupon; provided, however, that payment of principal of, premium (if any) and interest (if any) on Bearer Securities shall, except as otherwise provided in Section 10.02, be payable only at an office or agency located outside the United States and Canada and, unless otherwise specified as contemplated by Section 3.01, any interest on Bearer Securities shall be payable only upon presentation and surrender of the coupons appertaining thereto.

 

Upon the issuance of any new Security under this Section 3.06, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustees) connected therewith.

 

Every new Security of any series with its coupons, if any, issued pursuant to this Section 3.06 in lieu of any mutilated, destroyed, lost or stolen Security or in exchange for a Security to which a mutilated, destroyed, lost or stolen coupon appertains, shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security and its coupons, if any, or the mutilated, destroyed, lost or stolen coupon shall be at any time enforceable by anyone, and the Holders of such Security shall be entitled to all the benefits of this Indenture equally and proportionately with the Holders of any and all other Securities of that series and their coupons, if any, duly issued hereunder.

 

The provisions of this Section 3.06 as amended or supplemented pursuant to this Indenture with respect to a particular series of Securities or generally are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or coupons.

 

SECTION 3.07           Payment of Principal, Premium and Interest; Interest Rights Preserved; Optional Interest Reset.

 

(a)                                   Unless otherwise provided as contemplated by Section 3.01 with respect to any series of Securities, interest (if any) on any Registered Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid by the Paying Agent to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 10.02; provided, however, that each installment of interest (if any) on any Registered Security may at the Company’s option be paid by (i) mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 3.09, to the address of such Person as it appears on the Security Register or (ii) wire transfer to an account located in the United States maintained by the Person entitled to such payment as specified in the Security Register.  Unless otherwise provided as contemplated by Section 3.01 with respect to any series of Securities, principal and premium (if any) paid in relation to any Security shall be paid to the Holder of such Security only upon presentation and surrender of such Security at the office or agency of the Company maintained for such purpose pursuant to Section 10.02.

 

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Unless otherwise provided as contemplated by Section 3.01 with respect to the Securities of any series, payment of interest (if any) may be made, in the case of a Bearer Security, by transfer to an account located outside the United States and Canada maintained by the payee.

 

Unless otherwise provided as contemplated by Section 3.01, every permanent global Security will provide that interest (if any) payable on any Interest Payment Date will be paid to the Depositary with respect to that portion of such permanent global Security held for its account by the Depositary, for the purpose of permitting the Depositary to credit the interest (if any) received by it in respect of such permanent global Security to the accounts of the beneficial owners thereof.

 

Any interest on any Registered Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such defaulted interest and, if applicable, interest on such defaulted interest (to the extent lawful) at the rate specified in the Securities of such series (such defaulted interest and, if applicable, interest thereon herein collectively called “Defaulted Interest”) must be paid by the Company as provided for in either clause (1) or (2), at the Company’s election:

 

(1)                                 The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner.  The Company shall notify the Trustees in writing of the amount of Defaulted Interest proposed to be paid on each Registered Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the applicable Trustee an amount of money in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.01 for the Securities of such series and except, if applicable, as provided in Sections 3.12(b), 3.12(d) and 3.12(e)) equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustees for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided.  Thereupon the Trustees shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustees of the notice of the proposed payment.  The Trustees shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided in Section 1.07, not less than 10 days prior to such Special Record Date.  Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in whose name the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2).

 

(2)                                 The Company may make payment of any Defaulted Interest on the Registered Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and, upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustees of

 

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the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustees.

 

(b)                                 The provisions of this Section 307(b) may be made applicable to any series of Securities pursuant to Section 3.01 (with such modifications, additions or substitutions as may be specified pursuant to such Section 3.01).  The interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) on any Security of such series may be reset by the Company on the date or dates specified on the face of such Security (each an “Optional Reset Date”).  The Company may exercise such option with respect to such Security by notifying the Trustees of such exercise at least 50 but not more than 60 days prior to an Optional Reset Date for such Security.  Not later than 40 days prior to each Optional Reset Date, the Trustees shall transmit, in the manner provided for in Section 1.07, to the Holder of any such Security a notice (the “Reset Notice”) indicating whether the Company has elected to reset the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable), and if so (i) such new interest rate (or such new spread or spread multiplier, if applicable) and (ii) the provisions, if any, for redemption during the period from such Optional Reset Date to the next Optional Reset Date or if there is no such next Optional Reset Date, to the Stated Maturity of such Security (each such period a “Subsequent Interest Period”), including the date or dates on which or the period or periods during which and the price or prices at which such redemption may occur during the Subsequent Interest Period.

 

Notwithstanding the foregoing, not later than 20 days prior to the Optional Reset Date, the Company may, at its option, revoke the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) provided for in the Reset Notice and establish an interest rate (or the spread or spread multiplier, if applicable) that is higher than the interest rate (or the spread or spread multiplier, if applicable) provided for in the Reset Notice, for the Subsequent Interest Period by causing the Trustees to transmit, in the manner provided for in Section 1.07, notice of such higher interest rate (or such higher spread or spread multiplier, if applicable) to the Holder of such Security.  Such notice shall be irrevocable.  All Securities with respect to which the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) is reset on an Optional Reset Date, and with respect to which the Holders of such Securities have not tendered such Securities for repayment (or have validly revoked any such tender) pursuant to the next succeeding paragraph, will bear such higher interest rate (or such higher spread or spread multiplier, if applicable).

 

The Holder of any such Security will have the option to elect repayment by the Company of the principal of such Security on each Optional Reset Date at a price equal to the principal amount thereof plus interest accrued to such Optional Reset Date.  In order to obtain repayment on an Optional Reset Date, the Holder must follow the procedures set forth in Article Thirteen for repayment at the option of Holders except that the period for delivery or notification to the Trustees shall be at least 25 but not more than 35 days prior to such Optional Reset Date and except that, if the Holder has tendered any Security for repayment pursuant to the Reset Notice, the Holder may, by written notice to the Trustees, revoke such tender or repayment until the close of business on the tenth day before such Optional Reset Date.

 

Subject to the foregoing provisions of this Section 3.07 and Section 3.05, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.

 

SECTION 3.08           Optional Extension of Stated Maturity.

 

The provisions of this Section 3.08 may be made applicable to any series of Securities pursuant to Section 3.01 (with such modifications, additions or substitutions as may be specified pursuant to such

 

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Section 3.01).  The Stated Maturity of any Security of such series may be extended at the option of the Company for the period or periods specified on the face of such Security (each an “Extension Period”) up to but not beyond the date (the “Final Maturity”) set forth on the face of such Security.  The Company may exercise such option with respect to any Security by notifying the Trustees of such exercise at least 50 but not more than 60 days prior to the Stated Maturity of such Security in effect prior to the exercise of such option (the “Original Stated Maturity”).  If the Company exercises such option, the Trustees shall transmit, in the manner provided for in Section 1.07, to the Holder of such Security not later than 40 days prior to the Original Stated Maturity a notice (the “Extension Notice”) indicating (i) the election of the Company to extend the Stated Maturity, (ii) the new Stated Maturity, (iii) the interest rate (if any) applicable to the Extension Period and (iv) the provisions, if any, for redemption during such Extension Period.  Upon the Trustees’ transmittal of the Extension Notice, the Stated Maturity of such Security shall be extended automatically and, except as modified by the Extension Notice and as described in the next paragraph, such Security will have the same terms as prior to the transmittal of such Extension Notice.

 

Notwithstanding the foregoing, not later than 20 days before the Original Stated Maturity of such Security, the Company may, at its option, revoke the interest rate provided for in the Extension Notice and establish a higher interest rate for the Extension Period by causing the Trustees to transmit, in the manner provided for in Section 1.07, notice of such higher interest rate to the Holder of such Security.  Such notice shall be irrevocable.  All Securities with respect to which the Stated Maturity is extended will bear such higher interest rate.

 

If the Company extends the Maturity of any Security, the Holder will have the option to elect repayment of such Security by the Company on the Original Stated Maturity at a price equal to the principal amount thereof, plus interest accrued to such date.  In order to obtain repayment on the Original Stated Maturity once the Company has extended the Maturity thereof, the Holder must follow the procedures set forth in Article Thirteen for repayment at the option of Holders, except that the period for delivery or notification to the Trustees shall be at least 25 but not more than 35 days prior to the Original Stated Maturity and except that, if the Holder has tendered any Security for repayment pursuant to an Extension Notice, the Holder may by written notice to the Trustees revoke such tender for repayment until the close of business on the tenth day before the Original Stated Maturity.

 

SECTION 3.09           Persons Deemed Owners.

 

Prior to due presentment of a Registered Security for registration of transfer, the Company, the Trustees and any agent of the Company or the Trustees may treat the Person in whose name such Registered Security is registered as the owner of such Registered Security for the purpose of receiving payment of principal of, premium (if any) and (subject to Sections 3.05 and 3.07) interest (if any) on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Trustees or any agent of the Company or the Trustees shall be affected by notice to the contrary.

 

Title to any Bearer Security and any coupons appertaining thereto shall pass by delivery.  The Company, the Trustees and any agent of the Company or the Trustees may treat the bearer of any Bearer Security and the bearer of any coupon as the absolute owner of such Security or coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes whatsoever, whether or not such Security or coupons be overdue, and none of the Company, the Trustees or any agent of the Company or the Trustees shall be affected by notice to the contrary.

 

The Depositary for Securities may be treated by the Company, the Trustees, and any agent of the Company or the Trustees as the owner of such global Security for all purposes whatsoever.  None of the

 

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Company, the Trustees, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Security in global form or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

 

Notwithstanding the foregoing, with respect to any global Security, nothing herein shall prevent the Company, the Trustees, or any agent of the Company or the Trustees, from giving effect to any written certification, proxy or other authorization furnished by any Depositary, as a Holder, with respect to such global Security or impair, as between such Depositary and owners of beneficial interests in such global Security, the operation of customary practices governing the exercise of the rights of such Depositary (or its nominee) as Holder of such global Security.

 

SECTION 3.10           Cancellation.

 

All Securities and coupons surrendered for payment, redemption, repayment at the option of the Holder, registration of transfer or exchange or for credit against any current or future sinking fund payment shall, if surrendered to any Person other than a Trustee, be delivered to either Trustee.  All Securities and coupons so delivered to either Trustee shall be promptly cancelled by such Trustee.  The Company may at any time deliver to a Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to either Trustee (or to any other Person for delivery to such Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by such Trustee.  If the Company shall so acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to either Trustee for cancellation.  No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section 3.10, except as expressly permitted by this Indenture.  All cancelled Securities held by either Trustee shall be disposed of by such Trustee in accordance with its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that cancelled Securities be returned to it.

 

SECTION 3.11           Computation of Interest.

 

Except as otherwise specified as contemplated by Section 3.01 with respect to any Securities, interest (if any) on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months.  For the purposes of disclosure under the Interest Act (Canada), the yearly rate of interest to which interest calculated under a Security for any period in any calendar year (the “calculation period”) is equivalent, is the rate payable under a Security in respect of the calculation period multiplied by a fraction the numerator of which is the actual number of days in such calendar year and the denominator of which is the actual number of days in the calculation period.

 

SECTION 3.12           Currency and Manner of Payments in Respect of Securities.

 

(a)                                 With respect to Registered Securities of any series not permitting the election provided for in paragraph (b) below or the Holders of which have not made the election provided for in paragraph (b) below, and with respect to Bearer Securities of any series, except as provided in paragraph (d) below, payment of the principal of, premium (if any) and interest (if any) on such Registered Security or Bearer Security of such series will be made in the Currency in which such Registered Security or Bearer Security, as the case may be, is payable.  The provisions of this Section 3.12 may be modified or superseded with respect to any Securities pursuant to Section 3.01.

 

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(b)                                 It may be provided pursuant to Section 3.01 with respect to Registered Securities of any series that Holders shall have the option, subject to paragraphs (d) and (e) below, to receive payments of principal of, premium (if any) or interest (if any) on such Registered Securities in any of the Currencies which may be designated for such election by delivering to the Trustees a written election with signature guarantees and in the applicable form established pursuant to Section 3.01, not later than the close of business on the Election Date immediately preceding the applicable payment date.  If a Holder so elects to receive such payments in any such Currency, such election will remain in effect for such Holder or any transferee of such Holder until changed by such Holder or such transferee by written notice to the Trustees (but any such change must be made not later than the close of business on the Election Date immediately preceding the next payment date to be effective for the payment to be made on such payment date and no such change of election may be made with respect to payments to be made on any Registered Security of such series with respect to which an Event of Default has occurred or with respect to which the Company has deposited funds pursuant to Article Four or Fourteen or with respect to which a notice of redemption has been given by the Company or a notice of option to elect repayment has been sent by such Holder or such transferee).  Any Holder of any such Registered Security who shall not have delivered any such election to the Trustees not later than the close of business on the applicable Election Date will be paid the amount due on the applicable payment date in the relevant Currency as provided in Section 3.12(a).  The Trustees shall notify the Exchange Rate Agent as soon as practicable after the Election Date of the aggregate principal amount of Registered Securities for which Holders have made such written election.

 

(c)                                  Unless otherwise specified pursuant to Section 3.01, if the election referred to in paragraph (b) above has been provided for pursuant to Section 3.01, then, unless otherwise specified pursuant to Section 3.01, not later than the fourth Business Day after the Election Date for each payment date for Registered Securities of any series, the Exchange Rate Agent will deliver to the Company a written notice specifying, in the Currency in which Registered Securities of such series are payable, the respective aggregate amounts of principal of, premium (if any) and interest (if any) on the Registered Securities to be paid on such payment date, specifying the amounts in such Currency so payable in respect of the Registered Securities as to which the Holders of Registered Securities of such series shall have elected to be paid in another Currency as provided in paragraph (b) above.  If the election referred to in paragraph (b) above has been provided for pursuant to Section 3.01 and if at least one Holder has made such election, then, unless otherwise specified pursuant to Section 3.01, on the second Business Day preceding such payment date the Company will deliver to the Trustees for such series of Registered Securities an Exchange Rate Officer’s Certificate in respect of the Dollar or Foreign Currency payments to be made on such payment date.  Unless otherwise specified pursuant to Section 3.01, the Dollar or Foreign Currency amount receivable by Holders of Registered Securities who have elected payment in a Currency as provided in paragraph (b) above shall be determined by the Company on the basis of the applicable Market Exchange Rate in effect on the third Business Day (the “Valuation Date”) immediately preceding each payment date, and such determination shall be conclusive and binding for all purposes, absent manifest error.

 

(d)                                 If a Conversion Event occurs with respect to a Foreign Currency in which any of the Securities are denominated or payable other than pursuant to an election provided for pursuant to paragraph (b) above, then, with respect to each date for the payment of principal of, premium (if any) and interest (if any) on the applicable Securities denominated or payable in such Foreign Currency occurring after the last date on which such Foreign Currency was used (the “Conversion Date”), the Dollar shall be the Currency of payment for use on each such payment date.  Unless otherwise specified pursuant to Section 3.01, the Dollar amount to be paid by the Company to the Trustees and by the Trustees or any Paying Agent to the Holders of such Securities with respect to such payment date shall be, in the case of a Foreign Currency other than a currency unit, the Dollar Equivalent of the Foreign Currency or, in the case

 

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of a currency unit, the Dollar Equivalent of the Currency Unit, in each case as determined by the Exchange Rate Agent in the manner provided in paragraph (f) or (g) below.

 

(e)                                  Unless otherwise specified pursuant to Section 3.01, if the Holder of a Registered Security denominated in any Currency shall have elected to be paid in another Currency as provided in paragraph (b) above, and a Conversion Event occurs with respect to such elected Currency, such Holder shall receive payment in the Currency in which payment would have been made in the absence of such election; and if a Conversion Event occurs with respect to the Currency in which payment would have been made in the absence of such election, such Holder shall receive payment in Dollars as provided in paragraph (d) above.

 

(f)                                   The “Dollar Equivalent of the Foreign Currency” shall be determined by the Exchange Rate Agent and shall be obtained for each subsequent payment date by converting the specified Foreign Currency into Dollars at the Market Exchange Rate on the Conversion Date.

 

(g)                                  The “Dollar Equivalent of the Currency Unit” shall be determined by the Exchange Rate Agent and subject to the provisions of paragraph (h) below shall be the sum of each amount obtained by converting the Specified Amount of each Component Currency into Dollars at the Market Exchange Rate for such Component Currency on the Valuation Date with respect to each payment.

 

(h)                                 For purposes of this Section 3.12 the following terms shall have the following meanings:

 

A “Component Currency” shall mean any Currency which, on the Conversion Date, was a component currency of the relevant currency unit, including, but not limited to, the Euro.

 

A “Specified Amount” of a Component Currency shall mean the number of units of such Component Currency or fractions thereof which were represented in the relevant currency unit, including, but not limited to, the Euro, on the Conversion Date.  If after the Conversion Date the official unit of any Component Currency is altered by way of combination or subdivision, the Specified Amount of such Component Currency shall be divided or multiplied in the same proportion.  If after the Conversion Date two or more Component Currencies are consolidated into a single currency, the respective Specified Amounts of such Component Currencies shall be replaced by an amount in such single Currency equal to the sum of the respective Specified Amounts of such consolidated Component Currencies expressed in such single Currency, and such amount shall thereafter be a Specified Amount and such single Currency shall thereafter be a Component Currency.  If after the Conversion Date any Component Currency shall be divided into two or more currencies, the Specified Amount of such Component Currency shall be replaced by amounts of such two or more currencies, having an aggregate Dollar Equivalent value at the Market Exchange Rate on the date of such replacement equal to the Dollar Equivalent value of the Specified Amount of such former Component Currency at the Market Exchange Rate immediately before such division and such amounts shall thereafter be Specified Amounts and such currencies shall thereafter be Component Currencies.  If, after the Conversion Date of the relevant currency unit, including, but not limited to, the Euro, a Conversion Event (other than any event referred to above in this definition of “Specified Amount”) occurs with respect to any Component Currency of such currency unit and is continuing on the applicable Valuation Date, the Specified Amount of such Component Currency shall, for purposes of calculating the Dollar Equivalent of the Currency Unit, be converted into Dollars at the Market Exchange Rate in effect on the Conversion Date of such Component Currency.

 

“Election Date” shall mean the date for any series of Registered Securities as specified pursuant to clause (15) of Section 3.01 by which the written election referred to in paragraph (b) above may be made.

 

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All decisions and determinations of the Exchange Rate Agent regarding the Dollar Equivalent of the Foreign Currency, the Dollar Equivalent of the Currency Unit, the Market Exchange Rate and changes in the Specified Amounts as specified above shall be in its sole discretion and shall, in the absence of manifest error, be conclusive for all purposes and irrevocably binding upon the Company, the Trustees and all Holders of such Securities denominated or payable in the relevant Currency.  The Exchange Rate Agent shall promptly give written notice to the Company and the Trustees of any such decision or determination.

 

In the event that the Company determines in good faith that a Conversion Event has occurred with respect to a Foreign Currency, the Company will immediately give written notice thereof to the Trustees and to the Exchange Rate Agent (and the Trustees will promptly thereafter give notice in the manner provided for in Section 1.07 to the affected Holders) specifying the Conversion Date.  In the event the Company so determines that a Conversion Event has occurred with respect to the Euro or any other currency unit in which Securities are denominated or payable, the Company will immediately give written notice thereof to the Trustees and to the Exchange Rate Agent (and the Trustees will promptly thereafter give notice in the manner provided for in Section 1.07 to the affected Holders) specifying the Conversion Date and the Specified Amount of each Component Currency on the Conversion Date.  In the event the Company determines in good faith that any subsequent change in any Component Currency as set forth in the definition of Specified Amount above has occurred, the Company will similarly give written notice to the Trustees and the Exchange Rate Agent.

 

The Trustees shall be fully justified and protected in relying and acting upon information received by it from the Company and the Exchange Rate Agent and shall not otherwise have any duty or obligation to determine the accuracy or validity of such information independent of the Company or the Exchange Rate Agent.

 

SECTION 3.13           Appointment and Resignation of Successor Exchange Rate Agent.

 

(a)                                 Unless otherwise specified pursuant to Section 3.01, if and so long as the Securities of any series (i) are denominated in a Currency other than Dollars or (ii) may be payable in a Currency other than Dollars, or so long as it is required under any other provision of this Indenture, then the Company will maintain with respect to each such series of Securities, or as so required, at least one Exchange Rate Agent.  The Company will cause the Exchange Rate Agent to make the necessary foreign exchange determinations at the time and in the manner specified pursuant to Section 3.01 for the purpose of determining the applicable rate of exchange and, if applicable, for the purpose of converting the issued Currency into the applicable payment Currency for the payment of principal, premium (if any) and interest (if any) pursuant to Section 3.12.

 

(b)                                 The Company shall have the right to remove and replace from time to time the Exchange Rate Agent for any series of Securities.  No resignation of the Exchange Rate Agent and no appointment of a successor Exchange Rate Agent pursuant to this Section 3.13 shall become effective until the acceptance of appointment by the successor Exchange Rate Agent as evidenced by a written instrument delivered to the Company and the Trustees.

 

(c)                                  If the Exchange Rate Agent shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Exchange Rate Agent for any cause with respect to the Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Exchange Rate Agent or Exchange Rate Agents with respect to the Securities of that or those series (it being understood that any such successor Exchange Rate Agent may be appointed with respect to the Securities of one or more or all of such series and that, unless otherwise specified pursuant to Section 3.01, at any time there shall only be one Exchange Rate Agent with respect to the Securities of

 

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any particular series that are originally issued by the Company on the same date and that are initially denominated and/or payable in the same Currency).

 

ARTICLE FOUR

SATISFACTION AND DISCHARGE

 

SECTION 4.01           Satisfaction and Discharge of Indenture.

 

This Indenture shall upon Company Request cease to be of further effect with respect to any series of Securities specified in such Company Request (except as to any surviving rights of registration of transfer or exchange of Securities of such series expressly provided for herein or pursuant hereto and the rights of Holders of such series of Securities and any related coupons to receive, solely from the trust fund described in subclause (b) of clause (1) of this Section 4.01, payments in respect of the principal of, premium (if any) and interest (if any) on such Securities and any related coupons when such payments are due and except as provided in the last paragraph of this Section 4.01) and the Trustees, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture as to such series when

 

(1)                                 either

 

(a)                                 all Securities of such series theretofore authenticated and delivered and all coupons, if any, appertaining thereto (other than (i) coupons appertaining to Bearer Securities surrendered for exchange for Registered Securities and maturing after such exchange, whose surrender is not required or has been waived as provided in Section 3.05, (ii) Securities and coupons of such series which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06, (iii) coupons appertaining to Securities called for redemption and maturing after the relevant Redemption Date, whose surrender has been waived as provided in Section 11.06, and (iv) Securities and coupons of such series for whose payment money has theretofore been deposited in trust with either Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company, as provided in Section 10.03) have been delivered to either Trustee for cancellation; or

 

(b)                                 all Securities of such series and, in the case of (i) or (ii) below, any coupons appertaining thereto not theretofore delivered to either Trustee for cancellation

 

(i)                                     have become due and payable, or

 

(ii)                                  will become due and payable at their Stated Maturity within one year, or

 

(iii)                               if redeemable at the option of the Company, are to be called for redemption within one year under arrangements satisfactory to the Trustees for the giving of notice of redemption by the Trustees in the name, and at the expense, of the Company,

 

and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with either Trustee as trust funds in trust for such purpose an amount in the Currency in which the Securities of such series are payable, sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to such Trustee for cancellation, for principal, premium (if any) and interest (if any) to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;

 

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(2)                                 the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

 

(3)                                 the Company has delivered to the Trustees an Officer’s Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series have been complied with.

 

Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustees under Section 6.07, the obligations of the Trustees to any Authenticating Agent under Section 6.12 and, if money shall have been deposited with the Trustees pursuant to subclause (b) of clause (1) of this Section 4.01, the obligations of the Trustees under Section 4.02 and the last paragraph of Section 10.03 shall survive.

 

SECTION 4.02                                   Application of Trust Money.

 

Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustees pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities, the coupons and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustees may determine, to the Persons entitled thereto, of the principal, premium (if any) and interest (if any) for whose payment such money has been deposited with the Trustees; but such money need not be segregated from other funds except to the extent required by law.

 

ARTICLE FIVE
REMEDIES

 

SECTION 5.01                                   Events of Default.

 

“Event of Default,” wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), unless such event is specifically deleted or modified in or pursuant to a supplemental indenture, Board Resolution or Officer’s Certificate establishing the terms of such series pursuant to Section 3.01 of this Indenture:

 

(1)                                 default in the payment of any interest due on any Security of that series, or any related coupon, when such interest or coupon becomes due and payable, and continuance of such default for a period of 30 days; or

 

(2)                                 default in the payment of the principal or premium (if any) in respect of any Security of that series at its Maturity; or

 

(3)                                 default in the deposit of any sinking fund, amortization or analogous payment when due by the terms of any Security of that series and Article Twelve; or

 

(4)                                 default in the performance, or breach, of any covenant or agreement of the Company in this Indenture which affects or is applicable to the Securities of that series (other than a covenant or agreement, a default in whose performance or whose breach is elsewhere in this Section 5.01 specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given (and 120 days with respect to a default or breach under Section 7.05), by registered or certified mail, to the Company by the

 

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Trustees or to the Company and the Trustees by the Holders of at least 25% in principal amount of all Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

 

(5)                                 the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under or subject to the Bankruptcy and Insolvency Act (Canada), the Companies’ Creditors Arrangement Act (Canada), the U.S. Federal Bankruptcy Code or any other federal, provincial, state or foreign bankruptcy, insolvency or analogous laws, or the issuance of a sequestration order or the (appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or in receipt of any substantial part of the property of the Company, and any such decree, order or appointment continues unstayed and in effect for a period of 90 consecutive days; or

 

(6)                                 the institution by the Company of proceedings to be adjudicated bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under or subject to the Bankruptcy and Insolvency Act (Canada), the Companies’ Creditors Arrangement Act (Canada), the U.S. Federal Bankruptcy Code or any other federal, provincial, state or foreign bankruptcy, insolvency or analogous laws or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of a general assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due or the taking by it of corporate action in furtherance of any of the aforesaid purposes; or

 

(7)                                 any other Event of Default provided with respect to Securities of that series.

 

SECTION 5.02                                   Acceleration of Maturity; Rescission and Annulment.

 

If an Event of Default described in clause (1), (2), (3), (4) or (7) of Section 5.01 with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case, either Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series, may declare the principal amount (or, if the Securities of that series are Original Issue Discount Securities or Indexed Securities, such portion of the principal amount as may be specified in the terms of that series) of all of the Securities of that series and all interest thereon to be due and payable immediately, by a notice in writing to the Company (and to the Trustees if given by Holders), and upon any such declaration such principal amount (or specified portion thereof) shall become immediately due and payable.  If an Event of Default specified in clause (5) or (6) of Section 5.01 occurs and is continuing, then the principal amount of all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustees or any Holder.

 

At any time after such a declaration of acceleration with respect to Securities of any series (or of all series, as the case may be) has been made and before a judgment or decree for payment of the money due has been obtained by either Trustee as hereinafter provided in this Article Five, the Holders of a majority in principal amount of the Outstanding Securities of that series (or of all series, as the case may be), by written notice to the Company and the Trustees, may rescind and annul such declaration and its consequences if:

 

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(1)                                 the Company has paid or deposited with either Trustee a sum sufficient to pay in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.01 for the Securities of such series and except, if applicable, as provided in Sections 3.12(b), 3.12(d) and 3.12(e)),

 

(a)                                 all overdue interest (if any) on all Outstanding Securities of that series (or of all series, as the case may be) and any related coupons,

 

(b)                                 all unpaid principal of and premium (if any) on any Outstanding Securities of that series (or of all series, as the case may be) which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal and premium (if any) at the rate or rates prescribed therefor in such Securities,

 

(c)                                  to the extent that payment of such interest is legally enforceable, interest on overdue interest at the rate or rates prescribed therefor in such Securities, and

 

(d)                                 all sums paid or advanced by the Trustees hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustees, their agents and counsel; and

 

(2)                                 all Events of Default with respect to Securities of that series (or of all series, as the case may be), other than the non-payment of amounts of principal of, premium (if any) or interest (if any) on Securities of that series (or of all series, as the case may be) which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13.

 

No such rescission shall affect any subsequent default or impair any right consequent thereon.

 

SECTION 5.03                                   Collection of Debt and Suits for Enforcement by Trustees.

 

The Company covenants that if

 

(1)                                 default is made in the payment of any installment of interest on any Security and any related coupon when such interest becomes due and payable and such default continues for a period of 30 days, or

 

(2)                                 default is made in the payment of the principal of or premium (if any) any Security at the Maturity thereof,

 

then the Company will, upon demand of the Trustees, pay to the applicable Trustee for the benefit of the Holders of such Securities and coupons, the whole amount then due and payable on such Securities and coupons for principal of, premium (if any) and interest (if any) and interest on any overdue principal, overdue premium (if any) and, to the extent lawful, overdue interest (if any), at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustees, their agents and counsel.

 

If the Company fails to pay such amounts forthwith upon such demand, the Trustees, in their own names as trustees of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or

 

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decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated.

 

If an Event of Default with respect to Securities of any series (or of all series, as the case may be) occurs and is continuing, either Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series (or of all series, as the case may be) by such appropriate judicial proceedings as such Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

 

SECTION 5.04                                   Trustees May File Proofs of Claim.

 

In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, each Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether either Trustee shall have made any demand on the Company for the payment of overdue principal, premium (if any) or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise,

 

(i)                                     to file and prove a claim for the whole amount of principal and premium (if any), or such portion of the principal amount of any series of Original Issue Discount Securities or Indexed Securities as may be specified in the terms of such series, and interest (if any) owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of such Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of such Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and

 

(ii)                                  to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same;

 

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to such Trustee and, in the event that such Trustee shall consent to the making of such payments directly to the Holders, to pay to such Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of each Trustee, its agents and counsel, and any other amounts due to such Trustee under Section 6.07.

 

Nothing herein contained shall be deemed to authorize the Trustees to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustees to vote in respect of the claim of any Holder in any such proceeding.

 

SECTION 5.05                                   Trustees May Enforce Claims Without Possession of Securities.

 

All rights of action and claims under this Indenture, the Securities or coupons may be prosecuted and enforced by the Trustees without the possession of any of the Securities or coupons or the production thereof in any proceeding relating thereto, and any such proceeding instituted by either Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of such Trustee,

 

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its agents and counsel, be for the ratable benefit of the Holders of the Securities and coupons in respect of which such judgment has been recovered.

 

SECTION 5.06                                   Application of Money Collected.

 

Any money collected by either Trustee pursuant to this Article Five shall be applied in the following order, at the date or dates fixed by the Trustees and, in case of the distribution of such money on account of principal of, premium (if any) or interest (if any) upon presentation of the Securities or coupons, or both, as the case may be, and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

 

First:  to the payment of all amounts due the Trustees under Section 6.07;

 

Second:  to the payment of the amounts then due and unpaid for principal of, premium (if any) and interest (if any), on the Securities and coupons in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities and coupons for principal, premium (if any) and interest (if any), respectively; and

 

Third:  the balance, if any, to the Person or Persons entitled thereto.

 

SECTION 5.07                                   Limitation on Suits.

 

No Holder of any Security of any series or any related coupons shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or the Securities, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless

 

(1)                                 such Holder has previously given written notice to the Trustees of a continuing Event of Default with respect to the Securities of that series;

 

(2)                                 the Holders of not less than 25% in principal amount of the Outstanding Securities of that series in the case of any Event of Default described in clause (1), (2), (3), (4) or (7) of Section 5.01, or, in the case of any Event of Default described in clause (5) or (6) of Section 5.01, the Holders of not less than 25% in principal amount of all Outstanding Securities, shall have made written request to the Trustees to institute proceedings in respect of such Event of Default in their own names as Trustees hereunder;

 

(3)                                 such Holder or Holders have offered to the Trustees reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;

 

(4)                                 the Trustees for 60 days after their receipt of such notice, request and offer of indemnity have failed to institute any such proceeding; and

 

(5)                                 no direction inconsistent with such written request has been given to the Trustees during such 60-day period by the Holders of a majority or more in principal amount of the Outstanding Securities of that series in the case of any Event of Default described in clause (1), (2), (3), (4) or (7) of Section 5.01, or in the case of any Event of Default described in clause (5) or (6) of Section 5.01, by the Holders of a majority or more in principal amount of all Outstanding Securities;

 

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it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Securities of the same series, in the case of any Event of Default described in clause (1), (2), (3), (4) or (7) of Section 5.01, or of Holders of all Securities in the case of any Event of Default described in clause (5) or (6) of Section 5.01, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all Holders of Securities of the same series, in the case of any Event of Default described in clause (1), (2), (3), (4) or (7) of Section 5.01, or of Holders of all Securities in the case of any Event of Default described in clause (5) or (6) of Section 5.01.

 

SECTION 5.08                                   Unconditional Right of Holders to Receive Principal, Premium and Interest.

 

Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Fourteen) and in such Security, of the principal of and premium (if any) and (subject to Section 3.07) interest (if any) on, such Security or payment of such coupon on the respective Stated Maturities expressed in such Security or coupon (or, in the case of redemption, on the Redemption Date or, in the case of repayment at the option of the Holder as contemplated by Article Twelve, on the Repayment Date) and subject to the limitations on a Holder’s ability to institute suit contained Section 5.07, to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

 

SECTION 5.09                                   Restoration of Rights and Remedies.

 

If either Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to such Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustees and the Holders of Securities and coupons shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustees and the Holders shall continue as though no such proceeding had been instituted.

 

SECTION 5.10                                   Rights and Remedies Cumulative.

 

Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or coupons in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustees or to the Holders of Securities or coupons is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or remedy hereunder, or otherwise, shall not, to the extent permitted by law, prevent the concurrent assertion or employment of any other appropriate right or remedy.

 

SECTION 5.11                                   Delay or Omission Not Waiver.

 

No delay or omission of the Trustees or of any Holder of any Security or coupon to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein.  Every right and remedy given by this Article Five or by law to the Trustees or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustees or by the Holders, as the case may be.

 

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SECTION 5.12                                   Control by Holders.

 

With respect to the Securities of any series, the Holders of not less than a majority in principal amount of the Outstanding Securities of such series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustees, or exercising any trust or power conferred on the Trustees, relating to or arising under clause (1), (2), (3), (4) or (7) of Section 5.01, and, with respect to all Securities, the Holders of not less than a majority in principal amount of all Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustees, or exercising any trust or power conferred on the Trustees, not relating to or arising under clause (1), (2), (3), (4) or (7) of Section 5.01, provided that in each case

 

(1)                                 such direction shall not be in conflict with any rule of law or with this Indenture,

 

(2)                                 the Trustees may take any other action deemed proper by the Trustees which is not inconsistent with such direction, and

 

(3)                                 the Trustees need not take any action which might involve them in personal liability or be unjustly prejudicial to the Holders of Securities of such series not consenting.

 

SECTION 5.13                                   Waiver of Past Defaults.

 

Subject to Section 5.02, the Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past Default described in clause (1), (2), (3), (4) or (7) of Section 5.01 (or, in the case of a Default described in clause (5) or (6) of Section 5.01, the Holders of not less than a majority in principal amount of all Outstanding Securities may waive any such past Default), and its consequences, except a default

 

(1)                                 in respect of the payment of the principal of, premium (if any) or interest (if any) on any Security or any related coupon, or

 

(2)                                 in respect of a covenant or provision herein which under Article Nine cannot be modified or amended without the consent of the Holder of each outstanding Security of such series affected.

 

Upon any such waiver, any such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon.

 

SECTION 5.14                                   Waiver of Stay or Extension Laws.

 

The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustees, but will suffer and permit the execution of every such power as though no such law had been enacted.

 

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SECTION 5.15                                   Undertaking for Costs.

 

In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against either Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in Trust Indenture Legislation; provided, however, that neither this Section 5.15 nor the provisions of TIA Section 315(e) shall apply to any suit instituted by either Trustee or by any Holder or group of Holders holding more than 10% in principal amount of all Outstanding Securities or by any Holder of any Security on any suit for the enforcement of the right to receive the principal of and interest on any such Securities.

 

ARTICLE SIX
THE TRUSTEES

 

SECTION 6.01                                   Notice of Defaults.

 

Each Trustee shall promptly give the other Trustee notice of any Default or Event of Default known to it.  Within a reasonable time, but no more than 30 days after either Trustee has knowledge of any Default hereunder with respect to the Securities of any series, one or both of the Trustees shall transmit in the manner and to the extent provided in Trust Indenture Legislation, including TIA Section 313(c), notice to the Holders of such Default hereunder known to either Trustee, unless such Default shall have been cured or waived (and, in the case where such Default shall have been cured, the Trustees shall notify the Holders in writing of such cure in writing within a reasonable time, but not exceeding 30 days, after the Trustees have become aware that the Default has been cured); provided, however, that, except in the case of a Default in the payment of the principal of, premium (if any) or interest (if any) on any Security of such series or in the payment of any sinking fund installment with respect to Securities of such series, the Trustees shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of each Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Securities of such series and any related coupons; provided further that in the case of any Default of the character specified in clause (4) of Section 5.01 with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof.

 

SECTION 6.02                                   Certain Duties and Responsibilities of Trustees.

 

(a)                                 The Trustees, prior to the occurrence of an Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform with respect to the Securities of any series such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustees.

 

(b)                                 In all instances, in the exercise of the powers, rights, duties and discharge of obligations prescribed or conferred by the terms of this Indenture, each Trustee shall act honestly and in good faith with a view to the best interests of the Holders and exercise that degree of care, diligence and skill that a reasonably prudent trustee in respect of indentures for the purpose of issuing corporate debt obligations would exercise in comparable circumstances.

 

(c)                                  No provision of this Indenture shall be construed to relieve each Trustee from liability for its own actions or failure to act in accordance with Subsection 6.02(b), except that:

 

(i)                                     prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred:

 

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(A)                               the duties and obligations of each Trustee with respect to the Securities of any series shall be determined solely by the express provisions of this Indenture, and the Trustees shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustees; and

 

(B)                               in the absence of bad faith on the part of either Trustee, such Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustees and conforming to the requirements of this Indenture and Trust Indenture Legislation; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustees, the Trustees shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; provided, however, the Canadian Trustee shall not be required to determine whether the certificates or opinions presented to it conform to the Trust Indenture Act and the U.S. Trustee shall not be required to determine whether the certificates or opinions presented to it conform to Canadian Trust Indenture Legislation.

 

(ii)                                  the Trustees shall not be liable with respect to any action taken or omitted to be taken by them in good faith in accordance with the direction of the Holders of not less than a majority in principal amount of the Securities of any series at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustees, or exercising any trust or power conferred upon the Trustees under this Indenture;

 

(iii)                               none of the provisions contained in this Indenture shall require either Trustee to expend or risk their own funds or otherwise incur personal or any financial liability in the performance of any of their duties or in the exercise of any of their rights or powers; and

 

(iv)                              whether or not therein expressly so provided, except to the extent expressly provided herein to the contrary, every provision of this Indenture relating to the conduct or effecting the liability or affording protection to the Trustees shall be subject to the provisions of this Section 6.02.

 

(d)                                 Notwithstanding the provisions of this Section 6.02 or any provision in this Indenture or in the Securities, the Trustees will not be charged with knowledge of the existence of any Event of Default or any other fact that would prohibit the making of any payment of monies to or by the Trustees, or the taking of any other action by the Trustees, unless and until the Trustees have received written notice thereof from the Company or any Holder.

 

SECTION 6.03                                   Certain Rights of Trustees.

 

Subject to the provisions of TIA Sections 315(a) through 315(d):

 

(1)                                 the Trustees may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction,

 

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consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by them to be genuine and to have been signed or presented by the proper party or parties;

 

(2)                                 any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;

 

(3)                                 whenever in the administration of this Indenture the Trustees shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, each Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officer’s Certificate;

 

(4)                                 the Trustees may consult with counsel and the written advice of such counsel or any opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by them hereunder in good faith and in reliance thereon;

 

(5)                                 the Trustees shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Securities of any series or any related coupons pursuant to this Indenture, unless such Holders shall have offered to the Trustees reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by them in compliance with such request or direction;

 

(6)                                 the Trustees shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustees, in their discretion, may make such further inquiry or investigation into such facts or matters as they may see fit, and, if the Trustees shall determine to make such further inquiry or investigation, they shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney;

 

(7)                                 in an Event of Default, the Trustees’ powers shall not be infringed upon so long as they act in accordance with Section 6.02(b);

 

(8)                                 the Trustees may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustees shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by them hereunder; and

 

(9)                                 the Trustees shall not be liable for any action taken, suffered or omitted by them in good faith and believed by them to be authorized or within the discretion or rights or powers conferred upon them by this Indenture, so long as they act in accordance with this Section 6.02(b).

 

SECTION 6.04                                   Trustees Not Responsible for Recitals or Issuance of Securities.

 

The recitals contained herein and in the Securities, except for a Trustee’s certificate of authentication, and in any coupons shall be taken as the statements of the Company, and neither Trustee nor any Authenticating Agent assumes any responsibility for their correctness.  The Trustees make no representations as to the validity or sufficiency of this Indenture or of the Securities or coupons, except

 

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that the Trustees represent that they are duly authorized to execute and deliver this Indenture, authenticate the Securities and perform their obligations hereunder and that the statements made by the U.S. Trustee in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein.  Neither Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof.  Nothing herein contained will impose on either Trustee any obligation to see to, or to require evidence of, the registration or filing (or renewal thereof) of this Indenture or any supplemental indenture.  The Trustees shall not be bound to give notice to any person of the execution hereof.

 

SECTION 6.05                                   May Hold Securities.

 

The Trustees, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company or of the Trustees, in their individual or any other capacity, may become the owner or pledgee of Securities and coupons and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company, including, without limitation, as a creditor of the Company, with the same rights they would have if they were not Trustees, Authenticating Agent, Paying Agent, Security Registrar or such other agent.  A Trustee that has resigned or is removed shall remain subject to TIA Section 311(a) to the extent provided therein.

 

SECTION 6.06                                   Money Held in Trust.

 

Money held by the Trustees in trust hereunder need not be segregated from other funds except to the extent required by law.  The Trustees shall be under no liability for interest on any money received by them hereunder except as otherwise agreed with the Company.

 

SECTION 6.07                                   Compensation and Reimbursement.

 

The Company agrees:

 

(1)                                 to pay to the Trustees from time to time reasonable compensation for all services rendered by them hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

 

(2)                                 except as otherwise expressly provided herein, to reimburse the Trustees upon their request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of their agents and counsel), except any such expense, disbursement or advance as may be attributable to the U.S. Trustee’s gross negligence or bad faith or the Canadian Trustee’s gross negligence or willful misconduct, respectively; and

 

(3)                                 to indemnify the Trustees for, and to hold them and their directors, officers, agents, representatives, successors, assigns and employees harmless against, any loss, liability or expense incurred without gross negligence or bad faith on the part of the U.S. Trustee, or gross negligence or willful misconduct on the part of the Canadian Trustee, respectively, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including reasonable attorneys’ fees and other reasonable costs and expenses of defending themselves against any claim or liability in connection with the exercise or performance of any of their powers or duties hereunder.

 

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The obligations of the Company under this Section 6.07 to compensate the Trustees, to pay or reimburse the Trustees for expenses, disbursements and advances and to indemnify and hold harmless the Trustees shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee.  As security for the performance of such obligations of the Company, the Trustees shall have a claim prior to the Securities upon all property and funds held or collected by the Trustees as such, except funds held in trust for the payment of principal of, premium (if any) or interest (if any) on particular Securities or any coupons.

 

When the Trustees incur expenses or render services in connection with an Event of Default specified in clause (5) or (6) of Section 5.01, the expenses (including reasonable charges and expense of its counsel) of and the compensation for such services are intended to constitute expenses of administration under any applicable United States or Canadian federal, state or provincial bankruptcy, insolvency or other similar law.

 

The provisions of this Section 6.07 shall survive the termination of this Indenture.

 

SECTION 6.08                                   Corporate Trustees Required; Eligibility.

 

(1)                                 There shall be at all times a U.S. Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and, together with its immediate parent, shall have a combined capital and surplus of at least $50,000,000.  If the U.S. Trustee publishes reports of condition at least annually, pursuant to law or to the requirements of United States federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 6.08, the combined capital and surplus of U.S. Trustee shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.  If at any time the U.S. Trustee shall cease to be eligible in accordance with the provisions of this Section 6.08, it shall resign immediately in the manner and with the effect hereinafter specified in this Article Six.

 

(2)                                 For so long as required by Trust Indenture Legislation, there shall be a Canadian Trustee under this Indenture.  The Canadian Trustee shall at all times be a resident or authorized to do business in the Province of [British Columbia] and any other province in Canada where Holders may be resident from time to time.  The Canadian Trustee represents and warrants that no material conflict of interest exists in the Canadian Trustee’s role as a fiduciary hereunder and agrees that in the event of a material conflict of interest arising hereafter it will, within 30 days after ascertaining that it has such material conflict of interest, either eliminate the same or resign its trust hereunder.  If any such material conflict of interests exists or hereafter shall exist, the validity and enforceability of this Indenture shall not be affected in any manner whatsoever by reason thereof.

 

(3)                                 The Trustees will not be required to give any bond or security in respect of the execution of the trusts and powers set out in this Indenture or otherwise in respect of the premises.

 

(4)                                 Neither Trustee nor any Affiliate of either Trustee shall be appointed a receiver or receiver and manager or liquidator of all or any part of the assets or undertaking of the Company.

 

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SECTION 6.09                                   Resignation and Removal; Appointment of Successor.

 

(1)                                 No resignation or removal of either Trustee and no appointment of a successor Trustee pursuant to this Article Six shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.10.

 

(2)                                 Either Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company.  If the instrument of acceptance by a successor Trustee required by Section 6.10 shall not have been delivered to such Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

 

(3)                                 Either Trustee may be removed following 30 days notice at any time with respect to the Securities of any series by Act of the Holders of not less than a majority in principal amount of the Outstanding Securities of such series, delivered to such Trustee and to the Company.

 

(4)                                 If at any time:

 

(i)                                     either Trustee shall acquire any conflicting interest as defined in TIA Section 310(b) and fail to comply with the provisions of TIA Section 310(b)(i), or

 

(ii)                                  either Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or

 

(iii)                               either Trustee shall cease to be eligible under Section 6.08 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or

 

(iv)                              either Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of such Trustee or of its property shall be appointed or any public officer shall take charge or control of such Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

 

then, in any such case, (i) the Company, by a Board Resolution, may remove such Trustee with respect to all Securities, or (ii) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of such Trustee with respect to all Securities of such series and the appointment of a successor Trustee or Trustees.

 

(5)                                 If either Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the U.S. Trustee or the Canadian Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series) provided, however, that the Company shall not be required to appoint a successor Trustee to the Canadian Trustee if

 

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the Canadian Trustee resigns or is removed and a Canadian Trustee under this Indenture is no longer required under Trust Indenture Legislation.  If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company.  If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

 

(6)                                 The Company shall give notice of each resignation and each removal of a Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to the Holders of Securities of such series in the manner provided for in Section 1.07.  Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.

 

(7)                                 If a Canadian Trustee under this Indenture is no longer required by Trust Indenture Legislation, then the Company by a Board Resolution may remove the Canadian Trustee.

 

SECTION 6.10                                   Acceptance of Appointment by Successor.

 

(1)                                 In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

 

(2)                                 In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to

 

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provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.  Whenever there is a successor Trustee with respect to one or more (but less than all) series of Securities issued pursuant to this Indenture, the terms “Indenture” and “Securities” shall have the meanings specified in the provisos to the respective definitions of those terms in Section 1.01 which contemplate such situation.

 

(3)                                 Upon reasonable request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all rights, powers and trusts referred to in paragraph (1) or (2) of this Section 6.10, as the case may be.

 

(4)                                 No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article Six.

 

SECTION 6.11                                   Merger, Conversion, Consolidation or Succession to Business.

 

Any corporation into which either Trustee or its corporate trust business may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which either Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of either Trustee, shall be the successor of such Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article Six, without the execution or filing of any paper or any further act on the part of any of the parties hereto.  In case any Securities shall have been authenticated, but not delivered, by a Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.  In case any of the Securities shall not have been authenticated by such predecessor Trustee, any successor Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee.  In all such cases such certificates shall have the full force and effect which this Indenture provides for the certificate of authentication of such Trustee; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.

 

SECTION 6.12                                   Appointment of Authenticating Agent.

 

At any time when any of the Securities remain outstanding, the Trustees may appoint an Authenticating Agent or Agents, with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustees to authenticate Securities of such series and the Trustees shall give written notice of such appointment to all Holders of Securities of the series with respect to which

 

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such Authenticating Agent will serve, in the manner provided for in Section 1.07.  Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the applicable Trustee hereunder.  Any such appointment shall be evidenced by an instrument in writing signed by a Responsible Officer of the Trustees, and a copy of such instrument shall be promptly furnished to the Company.  Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustees or either Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustees by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustees by an Authenticating Agent.  Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia or the laws of Canada or any province thereof, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by United States federal or state or Canadian federal or provincial authority.  If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section 6.12, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.  If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.12, it shall resign immediately in the manner and with the effect specified in this Section 6.12.

 

Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section 6.12, without the execution or filing of any paper or any further act on the part of the Trustees or the Authenticating Agent.

 

An Authenticating Agent may resign at any time by giving written notice thereof to the Trustees and to the Company.  The Trustees may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company.  Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.12, the Trustees may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give written notice of such appointment to all Holders of Securities of the series with respect to which such Authenticating Agent will serve, in the manner provided for in Section 1.07.  Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent.  No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section 6.12.

 

The Trustees agree to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section 6.12, and the Trustees shall be entitled to be reimbursed for such payments, subject to the provisions of Section 6.07.

 

If an appointment with respect to one or more series is made pursuant to this Section 6.12, the Securities of such series may have endorsed thereon, in addition to either Trustee’s certificate of authentication, an alternate certificate of authentication in the following form:

 

(Certificate of Authentication may be executed by either Trustee)

 

                                             , as U.S. Trustee, certifies that this is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

 

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Dated:

 

 

 

 

 

 

 

 

 

 

 

                                                                              ,

 

 

as U.S. Trustee

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

As Authenticating Agent

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

Authorized Officer

 

 

                                          , as Canadian Trustee, certifies that this is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

 

Dated:

 

 

 

 

 

 

 

 

 

 

 

                                                                ,

 

 

as Canadian Trustee

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

As Authenticating Agent

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

 

Authorized Officer

 

SECTION 6.13                                   Joint Trustees.

 

The rights, powers, duties and obligations conferred and imposed upon the Trustees are conferred and imposed upon and shall be exercised and performed by the U.S. Trustee and the Canadian Trustee individually, except to the extent the Trustees are required under Trust Indenture Legislation to perform such acts jointly, and neither Trustee shall be liable or responsible for the acts or omissions of the other Trustee.  If the U.S. Trustee and Canadian Trustee are unable to agree jointly to act or refrain from acting, the applicable Trustee shall make the decision in accordance with its applicable legislation.  Unless the context implies or requires otherwise, any written notice, request, direction, certificate, instruction, opinion or other document (each such document, a “Writing”) delivered pursuant to any provision of this Indenture to any of the U.S. Trustee or the Canadian Trustee shall be deemed for all purposes of this Indenture as delivery of such Writing to the Trustee.  Each such Trustee in receipt of such Writing shall notify such other Trustee of its receipt of such Writing within two Business Days of such receipt provided, however, that any failure of such trustee in receipt of such Writing to so notify such other Trustee shall not be deemed as a deficiency in the delivery of such Writing to the Trustee.

 

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SECTION 6.14                                   Other Rights of Trustees.

 

Each Trustee shall retain the right not to act and shall not be liable for refusing to act if, due to a lack of information or for any other reason whatsoever, either Trustee, in its sole judgment, determines that such act might cause it to be in non-compliance with any applicable anti-money laundering or anti-terrorist legislation, regulation or guideline.  Further, should either Trustee, in its sole judgment, determine at any time that its acting under this Indenture has resulted in its being in non-compliance with any applicable anti-money laundering or anti-terrorist legislation, regulation or guideline, then it shall have the right to resign on 10 days written notice to all parties provided (i) that such Trustee’s written notice shall describe the circumstances of such non-compliance; and (ii) that if such circumstances are rectified to such Trustee’s satisfaction within such 10 day period, then such resignation shall not be effective.

 

The parties hereto acknowledge that Canadian federal and provincial legislation addressing the protection of individuals’ personal information (collectively, “Privacy Laws”) applies to obligations and activities under this Indenture.  Despite any other provision of this Indenture, neither party shall take or direct any action that would contravene, or cause the other to contravene, applicable Privacy Laws.  The Company, prior to transferring, or causing to be transferred, personal information to the Canadian Trustee, shall obtain and retain required consents of the relevant individuals to the collection, use and disclosure of their personal information, or shall have determined that such consents either have been previously given and can be relied on or are not required under Privacy Laws.  The Canadian Trustee shall use commercially reasonable efforts to ensure that its services hereunder comply with Privacy Laws.  Specifically, the Trustee agrees to (i) have designated a chief privacy officer; (ii) maintain policies and procedures to protect personal information and to receive and respond to any privacy complaint or inquiry; (iii) use personal information solely for the purposes of providing its services under or ancillary to this Indenture and not to use it for any other purpose except with the consent and direction of the Company; (iv) not sell or otherwise improperly disclose personal information to any third party; and (v) use employee administrative, physical and technological safeguards to reasonably secure and protect personal information against loss, theft or unauthorized access, use or modification.

 

It is expressly acknowledged and agreed that the Canadian Trustee may, in the course of providing services hereunder, collect or receive, use and disclose financial and other personal information about such parties and/or their representatives, as individuals, or about other individuals related to the subject matter hereof, and use such information for the following purposes:

 

(i)                                     to provide the services required under this Indenture and other services that may be requested from time to time;

 

(ii)                                  to help the Canadian Trustee manage its servicing relationships with such individuals;

 

(iii)                               to meet the Canadian Trustee’s legal and regulatory requirements; and

 

(iv)                              if social insurance numbers are collected by the Canadian Trustee, to perform tax reporting and to assist in verification of an individual’s identity for security purposes.

 

Further, each party agrees that it shall not provide or cause to be provided to the Canadian Trustee any personal information relating to an individual who is not a party to this Indenture unless that party has assured itself that such individual understands and has consented to the aforementioned uses and disclosures.  Notwithstanding anything to the contrary herein, the Company and the Trustees may,

 

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without liability, disclose information about the Holders and beneficial owners or potential Holders or potential beneficial owners of the Securities pursuant to subpoena or other order issued by a court of competent jurisdiction or when otherwise required by applicable law.

 

Each Trustee hereby accepts the trusts in this Indenture declared and provided for and agrees to perform the same upon the terms and conditions herein set forth and to hold all rights, privileges and benefits conferred hereby and by law in trust for the various persons who shall from time to time be holders, subject to all the terms and conditions herein set forth.

 

ARTICLE SEVEN
HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY

 

SECTION 7.01                                   Company to Furnish Trustees Names and Addresses of Holders.

 

The Company will furnish or cause to be furnished to the Trustees (1) not more than 15 days after each Regular Record Date, or such lesser time as required by the Trustees, a list, in such form as the Trustees may reasonably require, of the names and addresses of Holders as of such Regular Record Date; provided, however, that the Company shall not be obligated to furnish or cause to be furnished such list at any time that the list shall not differ in any respect from the most recent list furnished to the Trustees by the Company or at such times as either Trustee is acting as Security Registrar for the applicable series of Securities and (2) at such other times as the Trustees may request in writing within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished.

 

SECTION 7.02                                   Preservation of List of Names and Addresses of Holders.

 

The Trustees shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the Holders contained in the most recent list furnished to them as provided in Section 7.01 and as to the names and addresses of Holders received by either Trustee in its capacity as Security Registrar for the applicable series of Securities (if acting in such capacity).

 

The Trustees may destroy any list furnished as provided in Section 7.01 upon receipt of a new list so furnished.

 

Holders may communicate as provided in TIA Section 312(b) with other Holders with respect to their rights under this Indenture or under the Securities.

 

SECTION 7.03                                   Disclosure of Names and Addresses of Holders.

 

Every Holder of Securities or coupons, by receiving and holding the same, agrees with the Company and the Trustees that none of the Company or the Trustees or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustees shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b).

 

SECTION 7.04                                   Reports by Trustees.

 

(1)                                 Within 60 days after May 15 of each year commencing with the first year after the first issuance of Securities pursuant to this Indenture, the U.S. Trustee shall transmit to the

 

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Holders of Securities, in the manner and to the extent provided in TIA Section 313(c), a brief report dated as of such reporting date, if required by TIA Section 313(a).

 

(2)                                 The U.S. Trustee shall comply with TIA Sections 313(b) and 313(c).

 

(3)                                 A copy of such report shall, at the time of such transmission to the Holders, be filed by the U.S. Trustee with the Company, with each securities exchange upon which any of the Securities are listed (if so listed) and also with the Commission.  The Company agrees to notify the Trustees when the Securities become listed on any securities exchange.

 

SECTION 7.05                                   Reports by the Company.

 

(1)                                 The Company will file with the Trustees, within 20 days after filing with or furnishing to the Commission, copies of its annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Company is required to file or furnish with the Commission pursuant to Section 13 or 15(d) of the Exchange Act or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustees and the Commission, in accordance with rules and reulations prescribed by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed in such rules and regulations; provided that any such reports, information or documents filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval (EDGAR) system shall be deemed filed with the Trustees.

 

(2)                                 The Company will transmit to all Holders, in the manner and to the extent provided in TIA Section 313(c), within 30 days after the filing thereof with the Trustees, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraph (1) of this Section 7.05 as may be required by rules and regulations prescribed from time to time by the Commission.

 

(3)                                 If at any time the Securities are guaranteed by a direct or indirect parent of the Company, and such parent has furnished the reports required by this Section 7.05 with respect to parent as required by this Section 7.05 as if parent were the Company (including any financial information required hereby), the Company shall be deemed to be in compliance with this Section 7.05.

 

ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

 

SECTION 8.01                                   Company May Consolidate, etc., only on Certain Terms.

 

The Company shall not amalgamate or consolidate with or merge into or enter into any statutory arrangement with any other Person, or, directly or indirectly, convey, transfer or lease all or substantially all of its properties and assets to any Person, unless:

 

(1)                                 the Person formed by or continuing from such amalgamation or consolidation or into which the Company is merged or with which it enters into such statutory arrangement or the Person which acquires by operation of law or by conveyance or transfer, or which

 

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leases, all or substantially all of the properties and assets of the Company shall be a corporation, partnership or trust organized and validly existing under the laws of Canada or any province or territory thereof, the United States of America or any state thereof or the District of Columbia or, if such amalgamation, consolidation, merger, statutory arrangement or other transaction would not impair the rights of Holders, any other country, and, unless the Company is the continuing corporation, shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustees, in form satisfactory to the Trustees, the Company’s obligation for the due and punctual payment of the principal of, premium (if any) and interest (if any) on all the Securities and the performance and observance of every covenant of this Indenture on the part of the Company to be performed or observed;

 

(2)                                 immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing; and

 

(3)                                 the Company or such Person shall have delivered to the Trustees an Officer’s Certificate and an Opinion of Counsel, each stating that such amalgamation, consolidation, merger, statutory arrangement or other transaction and such supplemental indenture comply with this Article Eight and that all conditions precedent herein provided for relating to such transaction have been complied with.

 

Notwithstanding the above, the Company may consolidate with, amalgamate with, undergo an arrangement with, merge with or into an Affiliate of the Company solely for the purpose of reincorporating the Company in a state of the United States or the District of Columbia or in another province or territory of Canada.

 

This Section 8.01 shall only apply to a merger, consolidation or amalgamation in which the Company is not the surviving Person and to conveyances, leases and transfers by the Company as transferor or lessor.

 

SECTION 8.02                                   Successor Person Substituted.

 

Upon any amalgamation or consolidation by the Company with or merger by the Company into any other corporation or a statutory arrangement or any conveyance, transfer or lease of all or substantially all of the properties and assets of the Company to any Person in accordance with Section 8.01, the successor Person formed by such amalgamation or consolidation or into which the Company is merged or statutory arrangement, or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and in the event of any such conveyance or transfer, the Company (which term shall for this purpose mean the Person named as the “Company” in the first paragraph of this Indenture or any successor Person which shall theretofore become such in the manner described in Section 8.01), except in the case of a lease, shall be discharged of all obligations and covenants under this Indenture and the Securities and the coupons and may be dissolved and liquidated.

 

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ARTICLE NINE
SUPPLEMENTAL INDENTURES

 

SECTION 9.01                                   Supplemental Indentures Without Consent of Holders.

 

Notwithstanding Section 9.02, without the consent of any Holders, the Company, when authorized by or pursuant to a Board Resolution, and the Trustees, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustees, for any of the following purposes:

 

(1)                                 to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Securities; or

 

(2)                                 to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities and any related coupons (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or

 

(3)                                 to add any additional Events of Default (and if such Events of Default are to be for the benefit of less than all series of Securities, stating that such Events of Default are being included solely for the benefit of such series); or

 

(4)                                 to delete or modify any Events of Default with respect to all or any series of the Securities, the form and terms of which are being established pursuant to such supplemental indenture as permitted in Section 3.01 (and if such Events of Default are to be for the benefit of less than all series of Securities, stating that such Events of Default are being included solely for the benefit of such series, and to specify the rights and remedies of the Trustees and the Holders of such Securities in connection therewith); or

 

(5)                                 to add to or change any of the provisions of this Indenture to provide that Bearer Securities may be registrable as to principal, to change or eliminate any restrictions on the payment of principal of or any premium or interest on Bearer Securities, to permit Bearer Securities to be issued in exchange for Registered Securities, to permit Bearer Securities to be issued in exchange for Bearer Securities of other authorized denominations or to permit or facilitate the issuance of Securities in uncertificated form; provided that any such action shall not adversely affect the interests of the Holders of Securities of any series or any related coupons in any material respect; or

 

(6)                                 to change or eliminate any of the provisions of this Indenture; provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or

 

(7)                                 to establish the form or terms of Securities of any series as permitted by Sections 2.01 and 3.01; or

 

(8)                                 to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the

 

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administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.10; or

 

(9)                                 to close this Indenture with respect to the authentication and delivery of additional series of Securities; or

 

(10)                          to cure any ambiguity or to correct or supplement any provision contained herein or in any indenture supplemental hereto which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture or to conform the terms hereof, as amended and supplemented, that are applicable to the Securities of any series to the description of the terms of such Securities in the offering memorandum, prospectus supplement or other offering document applicable to such Securities at the time of initial sale thereof; or

 

(11)                          to make any change in any series of Securities that does not adversely affect in any material respect the rights of the Holders of such Securities; or

 

(12)                          to add to or change or eliminate any provision of this Indenture as shall be necessary or desirable in accordance with any amendments to the Trust Indenture Act; or

 

(13)                          to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Sections 4.01, 14.02 and 14.03; provided that any such action shall not adversely affect the interests of the Holders of Securities of such series and any related coupons or any other series of Securities in any material respect; or

 

(14)                          to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualifications of this Indenture under any applicable law of the United States and Canada or of any province or territory thereof to the extent they do not conflict with the applicable law of the United States heretofore or hereafter enacted.

 

SECTION 9.02                                   Supplemental Indentures with Consent of Holders.

 

Except as provided in Section 9.01 and this Section 9.02, with the consent of the Holders of not less than a majority in principal amount of all Outstanding Securities affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustees, the Company, when authorized by or pursuant to a Board Resolution, and the Trustees may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture which affect such series of Securities or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security of such series,

 

(1)                                 change the Stated Maturity of the principal of, premium (if any) or any installment of interest (if any) on any Security of such series, or reduce the principal amount thereof, premium (if any) or the rate of interest (if any) thereon, or reduce the amount of the principal of an Original Issue Discount Security of such series that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 5.02 or the amount thereof provable in bankruptcy pursuant to Section 5.04, or adversely affect any right of repayment at the option of any Holder of any Security of such series, or change any Place of Payment where, or the Currency in which, any

 

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Security of such series or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or repayment at the option of the Holder, on or after the Redemption Date or Repayment Date, as the case may be), or adversely affect any right to convert or exchange any Security as may be provided pursuant to Section 3.01 herein, or

 

(2)                                 reduce the percentage in principal amount of the Outstanding Securities of such series required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture which affect such series or certain defaults applicable to such series hereunder and their consequences provided for in this Indenture, or reduce the requirements of Section 15.04 for quorum or voting with respect to Securities of such series, or

 

(3)                                 modify any of the provisions of this 9.02 Section, Section 5.13 or Section 10.09, except to increase any such percentage or to provide that certain other provisions of this Indenture which affect such series cannot be modified or waived without the consent of the Holder of each Outstanding Security of such series.

 

A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.  Any such supplemental indenture adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture, or modifying in any manner the rights of the Holders of Securities of such series, shall not affect the rights under this Indenture of the Holders of Securities of any other series.

 

It shall not be necessary for any Act of Holders under this 9.02 Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

 

SECTION 9.03                                   Execution of Supplemental Indentures.

 

In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustees shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture.  Each Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects such Trustee’s own rights, duties or immunities under this Indenture or otherwise.

 

SECTION 9.04                                   Effect of Supplemental Indentures.

 

Upon the execution of any supplemental indenture under this Article Nine, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

 

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SECTION 9.05                                   Conformity with Trust Indenture Legislation.

 

Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of Trust Indenture Legislation as then in effect.

 

SECTION 9.06                                   Reference in Securities to Supplemental Indentures.

 

Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article Nine may, and shall if required by the Trustees, bear a notation in form approved by the Trustees as to any matter provided for in such supplemental indenture.  If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustees and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustees in exchange for outstanding Securities of such series.

 

SECTION 9.07                                   Notice of Supplemental Indentures.

 

Promptly after the execution by the Company and the Trustees of any supplemental indenture pursuant to the provisions of Section 9.02, the Company shall give notice thereof to the Holders of each outstanding Security affected, in the manner provided for in Section 1.07, setting forth in general terms the substance of such supplemental indenture.

 

ARTICLE TEN
COVENANTS

 

SECTION 10.01                            Payment of Principal, Premium and Interest.

 

The Company covenants and agrees for the benefit of the Holders of each series of Securities and any related coupons that it will duly and punctually pay the principal of, premium (if any) and interest (if any), on the Securities of that series in accordance with the terms of the Securities, any coupons appertaining thereto and this Indenture.  Unless otherwise specified as contemplated by Section 3.01 with respect to any series of Securities, any interest installments due on Bearer Securities on or before Maturity shall be payable only upon presentation and surrender of the several coupons for such interest installments as are evidenced thereby as they severally mature.

 

SECTION 10.02                            Maintenance of Office or Agency.

 

(1)                                 If the Securities of a series are issuable as Registered Securities, the Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange, where Securities of that series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable, and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served and, if the Securities of a series are also issuable as Bearer Securities, where Bearer Securities of that series and related coupons may be presented or surrendered for payment in the circumstances described in Subsection 10.02(3).

 

(2)                                 If Securities of a series are issuable as Bearer Securities, the Company will maintain (A) subject to any laws or regulations applicable thereto, in a Place of Payment for that series which is located outside the United States, an office or agency where Securities of that series and related coupons may be presented and surrendered for payment; provided,

 

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however, that, if the Securities of that series are listed on any securities exchange located outside the United States and such securities exchange shall so require, the Company will maintain a Paying Agent for the Securities of that series in any required city located outside the United States so long as the Securities of that series are listed on such exchange and (B) subject to any laws or regulations applicable thereto, in a Place of Payment for that series located outside the United States an office or agency where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange, where Securities of that series that are convertible and exchangeable may be surrendered for conversion or exchange, as applicable, and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served.

 

(3)                                 The Company will give prompt written notice to the Trustees of the location, and any change in the location, of such office or agency.  If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustees with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Offices of the Trustees, except that Bearer Securities of any series and the related coupons may be presented and surrendered for payment at the offices specified in the Security and the Company hereby appoints the same as its agents to receive such respective presentations, surrenders, notices and demands.

 

(4)                                 Unless otherwise specified with respect to any Securities pursuant to Section 3.01, no payment of principal, premium or interest on Bearer Securities shall be made at any office or agency of the Company in the United States or by check mailed to any address in the United States or by transfer to an account maintained with a bank located in the United States; provided, however, that, if the Securities of a series are payable in Dollars, payment of principal of, premium (if any) and interest (if any), on any Bearer Security shall be made at the office of the Company’s Paying Agent in The City of New York, if (but only if) payment in Dollars of the full amount of such principal, premium or interest, as the case may be, at all offices or agencies outside the United States maintained for such purpose by the Company in accordance with this Indenture is illegal or effectively precluded by exchange controls or other similar restrictions.

 

(5)                                 The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in accordance with the requirements set forth above for Securities of any series for such purposes.  The Company will give prompt written notice to the Trustees of any such designation or rescission and of any change in the location of any such other office or agency.  Unless otherwise specified with respect to any Securities as contemplated by Section 3.01 with respect to a series of Securities, the Company hereby initially appoints the U.S. Trustee at its Corporate Trust Office as Paying Agent in such city and as its agent to receive all such presentations, surrenders, notices and demands.

 

(6)                                 Unless otherwise specified with respect to any Securities pursuant to Section 3.01, if and so long as the Securities of any series (i) are denominated in a Currency other than Dollars or (ii) may be payable in a Currency other than Dollars, or so long as it is required under any other provision of the Indenture, then the Company will maintain with

 

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respect to each such series of Securities, or as so required, at least one Exchange Rate Agent.

 

SECTION 10.03                            Money for Securities Payments to Be Held in Trust.

 

If the Company shall at any time act as its own Paying Agent with respect to any series of Securities and any related coupons, it will, on or before each due date of the principal of, premium (if any) or interest (if any) on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.01 for the Securities of such series and except, if applicable, as provided in Sections 3.12(b), 3.12(d) and 3.12(e)) sufficient to pay the principal of, premium (if any) or interest (if any) on Securities of such series so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustees of its action or failure so to act.

 

Whenever the Company shall have one or more Paying Agents for any series of Securities and any related coupons, it will, prior to or on each due date of the principal of, premium (if any) or interest (if any) on any Securities of that series, deposit with a Paying Agent a sum (in the Currency described in the preceding paragraph) sufficient to pay the principal, premium (if any) or interest (if any) so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is a Trustee) the Company will promptly notify the Trustees of its action or failure so to act.

 

The Company will cause each Paying Agent (other than the Trustees) for any series of Securities to execute and deliver to the Trustees an instrument in which such Paying Agent shall agree with the Trustees, subject to the provisions of this 10.03 Section, that such Paying Agent will:

 

(1)                                 hold all sums held by it for the payment of the principal of, premium (if any) and interest (if any) on Securities of such series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided;

 

(2)                                 give the Trustees notice of any default by the Company (or any other obligor upon the Securities of such series) in the making of any payment of principal of, premium (if any) or interest (if any) on the Securities of such series; and

 

(3)                                 at any time during the continuance of any such default, upon the written request of the Trustees, forthwith pay to the Trustees all sums so held in trust by such Paying Agent.

 

The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustees all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustees upon the same trusts as those upon which sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustees, such Paying Agent shall be released from all further liability with respect to such sums.

 

Except as provided in the Securities of any series, any money deposited with the Trustees or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium (if any) or interest (if any) on any Security of any series, or any coupon appertaining thereto, and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security or coupon shall thereafter, as an unsecured general creditor,

 

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look only to the Company for payment thereof, and all liability of the Trustees or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustees or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.

 

SECTION 10.04                                                    Statement as to Compliance.

 

The Company shall deliver to the Trustees, on or before 120 days after the end of the Company’s fiscal year, an Officer’s Certificate stating that a review of the activities of the Company during such fiscal year has been made under the supervision of the signing Officer with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to such Officer, that the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred and is continuing, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or propose to take with respect thereto).  The Company shall deliver to the Trustees upon demand evidence in such form as the Trustees may require as to compliance by the Company with any condition or covenant of the Company set out herein relating to any action required or permitted to be taken by the Company under this Indenture or as a result of any obligation imposed by this Indenture.  For purposes of this Section 10.04, such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture.

 

SECTION 10.05                                                    Payment of Taxes and Other Claims.

 

The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Company or upon the income, profits or property of the Company, and (2) all material lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon any property or assets of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings.

 

SECTION 10.06                                                    Corporate Existence.

 

Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights (charter and statutory) and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right or franchise if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company.

 

SECTION 10.07                                                    Waiver of Certain Covenants.

 

The Company may, with respect to any series of Securities, omit in any particular instance to comply with any term, provision or condition which affects such series set forth in Sections 10.06 and 10.07, or, as specified pursuant to Section 3.01(19) for Securities of such series, in any covenants of the Company added to this Article Ten pursuant to Section 3.01(19) in connection with Securities of such series, if before the time for such compliance the Holders of at least a majority in principal amount of all Outstanding Securities of any series, by Act of such Holders, waive such compliance in such instance

 

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with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustees to Holders of Securities of such series in respect of any such term, provision or condition shall remain in full force and effect.

 

ARTICLE ELEVEN
REDEMPTION OF SECURITIES

 

SECTION 11.01                                                    Applicability of Article.

 

Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with the terms of such Securities and (except as otherwise specified as contemplated by Section 3.01 for Securities of any series) in accordance with this Article Eleven.

 

SECTION 11.02                                                    Election to Redeem; Notice to Trustees.

 

The election of the Company to redeem any Securities shall be evidenced by or pursuant to a Board Resolution.  In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustees), notify the Trustees of such Redemption Date and of the principal amount of Securities of such series to be redeemed and shall deliver to the Trustees such documentation and records as shall enable the Trustees to select the Securities to be redeemed pursuant to Section 11.03.  In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish to the Trustees an Officer’s Certificate evidencing compliance with such restriction.

 

SECTION 11.03                                                    Selection by Trustees of Securities to Be Redeemed.

 

If less than all the Securities of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustees, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustees shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal of Securities of such series; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Security not redeemed to less than the minimum authorized denomination for Securities of such series established pursuant to Section 3.01.

 

The Trustees shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.

 

For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed.

 

SECTION 11.04                                                    Notice of Redemption.

 

Except as otherwise specified as contemplated by Section 3.01, notice of redemption shall be given in the manner provided for in Section 1.07 not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed.  Failure to give notice in the manner provided in Section 1.07 to the Holder of any Securities designated for redemption as a whole or in part,

 

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or any defect in the notice to any such Holder, shall not affect the validity of the proceedings for the redemption of any other Securities or portion thereof.

 

All notices of redemption shall state:

 

(1)                                 the Redemption Date,

 

(2)                                 the Redemption Price and the amount of accrued interest to the Redemption Date payable as provided in Section 11.06, if any,

 

(3)                                 if less than all the Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Securities to be redeemed,

 

(4)                                 in case any Security is to be redeemed in part only, the notice which relates to such Security shall state that on and after the Redemption Date, upon surrender of such Security, the Holder will receive, without charge, a new Security or Securities of authorized denominations for the principal amount thereof remaining unredeemed,

 

(5)                                 that on the Redemption Date, the Redemption Price and accrued interest (if any) to the Redemption Date payable as provided in Section 11.06 will become due and payable upon each such Security, or the portion thereof, to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date,

 

(6)                                 the Place or Places of Payment where such Securities, together in the case of Bearer Securities with all coupons appertaining thereto, if any, maturing after the Redemption Date, are to be surrendered for payment of the Redemption Price and accrued interest (if any),

 

(7)                                 that the redemption is for a sinking fund, if such is the case,

 

(8)                                 that, unless otherwise specified in such notice, Bearer Securities of any series, if any, surrendered for redemption must be accompanied by all coupons maturing subsequent to the Redemption Date or the amount of any such missing coupon or coupons will be deducted from the Redemption Price unless security or indemnity satisfactory to the Company, the Trustees and any Paying Agent is furnished, and

 

(9)                                 if Bearer Securities of any series are to be redeemed and any Registered Securities of such series are not to be redeemed, and if such Bearer Securities may be exchanged for Registered Securities not subject to redemption on such Redemption Date pursuant to Section 3.05 or otherwise, the last date, as determined by the Company, on which such exchanges may be made.

 

Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustees in the name and at the expense of the Company.

 

SECTION 11.05                                                    Deposit of Redemption Price.

 

Prior to any Redemption Date, the Company shall deposit with a Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in

 

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Section 10.03) an amount of money in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.01 for the Securities of such series and except, if applicable, as provided in Sections 3.12(b), 3.12(d) and 3.12(e)) sufficient to pay the Redemption Price of, and accrued interest (if any) on, all the Securities which are to be redeemed on that date.

 

SECTION 11.06                                                    Securities Payable on Redemption Date.

 

Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.01 for the Securities of such series and except, if applicable, as provided in Sections 3.12(b), 3.12(d) and 3.12(e)) (together with accrued interest (if any) to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest (if any)) such Securities shall, if the same were interest-bearing, cease to bear interest and the coupons for such interest appertaining to any Bearer Securities so to be redeemed, except to the extent provided below, shall be void.  Upon surrender of any such Security for redemption in accordance with said notice, together with all coupons, if any, appertaining thereto maturing after the Redemption Date, such Security shall be paid by the Company at the Redemption Price, together with accrued interest (if any), to the Redemption Date; provided, however, that installments of interest on Bearer Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 10.02) and, unless otherwise specified as contemplated by Section 3.01, only upon presentation and surrender of coupons for such interest; provided further that installments of interest on Registered Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant record dates according to their terms and the provisions of Section 3.07.

 

If any Bearer Security surrendered for redemption shall not be accompanied by all appurtenant coupons maturing after the Redemption Date, such Security may be paid after deducting from the Redemption Price an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustees if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless.  If thereafter the Holder of such Security shall surrender to the Trustees or any Paying Agent any such missing coupon in respect of which a deduction shall have been made from the Redemption Price, such Holder shall be entitled to receive the amount so deducted; provided, however, that interest represented by coupons shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 10.02) and, unless otherwise specified as contemplated by Section 3.01, only upon presentation and surrender of those coupons.

 

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium (if any) shall, until paid, bear interest from the Redemption Date at the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) set forth in such Security.

 

SECTION 11.07                                                    Securities Redeemed in Part.

 

Any Security which is to be redeemed only in part (pursuant to the provisions of this Article Eleven or of Article Twelve) shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustees so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustees duly executed by, the Holder thereof or such Holder’s attorney duly authorized in writing), and the Company shall execute, and the applicable Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same

 

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series, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.

 

ARTICLE TWELVE
SINKING FUNDS

 

SECTION 12.01                                                    Applicability of Article.

 

Retirements of Securities of any series pursuant to any sinking fund shall be made in accordance with the terms of such Securities and (except as otherwise specified as contemplated by Section 3.01 for Securities of any series) in accordance with this Article Twelve.

 

The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a “mandatory sinking fund payment,” and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an “optional sinking fund payment”.  If provided for by the terms of Securities of any series, the cash amount of any mandatory sinking fund payment may be subject to reduction as provided in Section 12.02.  Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series.

 

SECTION 12.02                                                    Satisfaction of Sinking Fund Payments with Securities.

 

Subject to Section 12.03, in lieu of making all or any part of any mandatory sinking fund payment with respect to any Securities of a series in cash, the Company may at its option (1) deliver to the Trustees Outstanding Securities of a such series (other than any previously called for redemption) theretofore purchased or otherwise acquired by the Company together in the case of any Bearer Securities of such series with all un-matured coupons appertaining thereto, and/or (2) receive credit for the principal amount of Securities of such series which have been previously delivered to the Trustees by the Company or redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any mandatory sinking fund payment with respect to the Securities of the same series required to be made pursuant to the terms of such Securities as provided for by the terms of such series; provided, however, that such Securities have not been previously so credited.  Such Securities shall be received and credited for such purpose by the Trustees at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such mandatory sinking fund payment shall be reduced accordingly.

 

SECTION 12.03                                                    Redemption of Securities for Sinking Fund.

 

Not less than 60 days prior to each sinking fund payment date for any series of Securities, the Company will deliver to the Trustees an Officer’s Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.01 for the Securities of such series and except, if applicable, as provided in Sections 3.12(b), 3.12(d) and 3.12(e)) and the portion thereof, if any, which is to be satisfied by delivering or crediting Securities of that series pursuant to Section 12.02 (which Securities will, if not previously delivered, accompany such certificate) and whether the Company intends to exercise its right to make a permitted optional sinking fund payment with respect to such series.

 

Such certificate shall be irrevocable and upon its delivery the Company shall be obligated to make the cash payment or payments therein referred to, if any, on or before the next succeeding sinking

 

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fund payment date.  In the case of the failure of the Company to deliver such certificate, the sinking fund payment due on the next succeeding sinking fund payment date for that series shall be paid entirely in cash and shall be sufficient to redeem the principal amount of such Securities subject to a mandatory sinking fund payment without the option to deliver or credit Securities as provided in Section 12.02 and without the right to make any optional sinking fund payment, if any, with respect to such series.

 

Not more than 60 days before each such sinking fund payment date the Trustees shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 11.03 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 11.04.  Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 11.06 and 11.07.

 

Prior to any sinking fund payment date, the Company shall pay to the Trustees or a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) in cash a sum equal to any interest that will accrue to the date fixed for redemption of Securities or portions thereof to be redeemed on such sinking fund payment date pursuant to this 12.03 Section.

 

Notwithstanding the foregoing, with respect to a sinking fund for any series of Securities, if at any time the amount of cash to be paid into such sinking fund on the next succeeding sinking fund payment date, together with any unused balance of any preceding sinking fund payment or payments for such series, does not exceed in the aggregate $100,000, the Trustees, unless requested by the Company, shall not give the next succeeding notice of the redemption of Securities of such series through the operation of the sinking fund.  Any such unused balance of moneys deposited in such sinking fund shall be added to the sinking fund payment for such series to be made in cash on the next succeeding sinking fund payment date or, at the request of the Company, shall be applied at any time or from time to time to the purchase of Securities of such series, by public or private purchase, in the open market or otherwise, at a purchase price for such Securities (excluding accrued interest and brokerage commissions, for which the Trustees or any Paying Agent will be reimbursed by the Company) not in excess of the principal amount thereof.

 

ARTICLE THIRTEEN
REPAYMENT AT OPTION OF HOLDERS

 

SECTION 13.01                                                    Applicability of Article.

 

Repayment of Securities of any series before their Stated Maturity at the option of Holders thereof shall be made in accordance with the terms of such Securities and (except as otherwise specified as contemplated by Section 3.01 for Securities of any series) in accordance with this Article Thirteen.

 

SECTION 13.02                                                    Repayment of Securities.

 

Securities of any series subject to repayment in whole or in part at the option of the Holders thereof will, unless otherwise provided in the terms of such Securities, be repaid at a price equal to the principal amount thereof, together with interest (if any) thereon accrued to the Repayment Date specified in or pursuant to the terms of such Securities.  The Company covenants that, with respect to such Securities, on or before the Repayment Date it will deposit with a Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money in the Currency in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.01 for the Securities of such series and except, if applicable, as provided in Sections 3.12(b), 3.12(d) and 3.12(e)) sufficient to pay the principal (or, if so provided by the

 

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terms of the Securities of any series, a percentage of the principal) of and (except if the Repayment Date shall be an Interest Payment Date) accrued interest (if any) on, all the Securities or portions thereof, as the case may be, to be repaid on such date.

 

SECTION 13.03                                                    Exercise of Option.

 

Securities of any series subject to repayment at the option of the Holders thereof will contain an “Option to Elect Repayment” form on the reverse of such Securities.  To be repaid at the option of the Holder, any Security so providing for such repayment, with the “Option to Elect Repayment” form on the reverse of such Security duly completed by the Holder (or by the Holder’s attorney duly authorized in writing), must be received by the Company at the Place of Payment therefor specified in the terms of such Security (or at such other place or places which the Company shall from time to time notify the Holders of such Securities) not earlier than 45 days nor later than 30 days prior to the Repayment Date.  If less than the entire principal amount of such Security is to be repaid in accordance with the terms of such Security, the principal amount of such Security to be repaid, in increments of the minimum denomination for Securities of such series, and the denomination or denominations of the Security or Securities to be issued to the Holder for the portion of the principal amount of such Security surrendered that is not to be repaid, must be specified.  The principal amount of any Security providing for repayment at the option of the Holder thereof may not be repaid in part if, following such repayment, the unpaid principal amount of such Security would be less than the minimum authorized denomination of Securities of the series of which such Security to be repaid is a part.  Except as otherwise may be provided by the terms of any Security providing for repayment at the option of the Holder thereof, exercise of the repayment option by the Holder shall be irrevocable unless waived by the Company.

 

SECTION 13.04                                                    When Securities Presented for Repayment Become Due and Payable.

 

If Securities of any series providing for repayment at the option of the Holders thereof shall have been surrendered as provided in this Article Thirteen and as provided by or pursuant to the terms of such Securities, such Securities or the portions thereof, as the case may be, to be repaid shall become due and payable and shall be paid by the Company on the Repayment Date therein specified, and on and after such Repayment Date (unless the Company shall default in the payment of such Securities on such Repayment Date) such Securities shall, if the same were interest- bearing, cease to bear interest and the coupons for such interest appertaining to any Bearer Securities so to be repaid, except to the extent provided below, shall be void.  Upon surrender of any such Security for repayment in accordance with such provisions, together with all coupons, if any, appertaining thereto maturing after the Repayment Date, the principal amount of such Security so to be repaid shall be paid by the Company, together with accrued interest (if any) to the Repayment Date; provided, however, that coupons whose Stated Maturity is on or prior to the Repayment Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 10.02) and, unless otherwise specified pursuant to Section 3.01, only upon presentation and surrender of such coupons; provided further that, in the case of Registered Securities, installments of interest (if any) whose Stated Maturity is on or prior to the Repayment Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.07.

 

If any Bearer Security surrendered for repayment shall not be accompanied by all appurtenant coupons maturing after the Repayment Date, such Security may be paid after deducting from the amount payable therefor as provided in Section 13.02 an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustees if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless.  If thereafter the Holder of such Security shall surrender to the Trustees

 

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or any Paying Agent any such missing coupon in respect of which a deduction shall have been made as provided in the preceding sentence, such Holder shall be entitled to receive the amount so deducted; provided, however, that interest represented by coupons shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 10.02) and, unless otherwise specified as contemplated by Section 3.01, only upon presentation and surrender of those coupons.

 

If any Security surrendered for repayment shall not be so repaid upon surrender thereof for repayment, the principal amount and premium (if any) shall, until paid, bear interest from the Repayment Date at the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) set forth in such Security.

 

SECTION 13.05                                                    Securities Repaid in Part.

 

Upon surrender of any Registered Security which is to be repaid in part only, the Company shall execute and the applicable Trustee shall authenticate and deliver to the Holder of such Security, without service charge and at the expense of the Company, a new Registered Security or Securities of the same series, of any authorized denomination specified by the Holder, in an aggregate principal amount equal to and in exchange for the portion of the principal of such Security so surrendered which is not to be repaid.

 

ARTICLE FOURTEEN
DEFEASANCE AND COVENANT DEFEASANCE

 

SECTION 14.01                                                    Company’s Option to Effect Defeasance or Covenant Defeasance.

 

Except as otherwise specified as contemplated by Section 3.01 for Securities of any series, the provisions of this Article Fourteen shall apply to each series of Securities, and the Company may, at its option, effect defeasance of the Securities of or within a series under Section 14.02, or covenant defeasance of or within a series under Section 14.03 in accordance with the terms of such Securities and in accordance with this Article Fourteen.

 

SECTION 14.02                                                    Defeasance and Discharge.

 

Upon the Company’s exercise of the above option applicable to this Section 14.02 with respect to any Securities of or within a series, the Company shall be deemed to have been discharged from its obligations with respect to such Securities and any related coupons on the date the conditions set forth in Section 14.04 are satisfied (hereinafter, “defeasance”).  For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and any related coupons, which shall thereafter be deemed to be “Outstanding” only for the purposes of Section 14.05 and the other Sections of this Indenture referred to in (A) and (B) below, and to have satisfied all of its other obligations under such Securities and any related coupons and this Indenture insofar as such Securities and any related coupons are concerned (and the Trustees, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder:  (A) the rights of Holders of such Securities and any related coupons to receive, solely from the trust fund described in Section 14.04 and as more fully set forth in such Section, payments in respect of the principal of, premium (if any) and interest (if any) on such Securities and any related coupons when such payments are due, (B) the Company’s obligations with respect to such Securities under Sections 3.05, 3.06, 10.02 and 10.03, (C) the rights, powers, trusts, duties and immunities of the Trustees hereunder and (D) this Article Fourteen.  Subject to compliance with this Article Fourteen, the Company may exercise its option under this Section 14.02 notwithstanding the prior exercise of its option under Section 14.03 with respect to such Securities and any related coupons.

 

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SECTION 14.03                                                    Covenant Defeasance.

 

Upon the Company’s exercise of the above option applicable to this Section 14.03 with respect to any Securities of or within a series, the Company shall be released from its obligations under Sections 10.05 and 10.06, and, if specified pursuant to Section 3.01, its obligations under any other covenant, with respect to such Securities and any related coupons on and after the date the conditions set forth in Section 14.04 are satisfied (hereinafter, “covenant defeasance”), and such Securities and any related coupons shall thereafter be deemed not to be “Outstanding” for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed “Outstanding” for all other purposes hereunder.  For this purpose, such covenant defeasance means that, with respect to such Securities and any related coupons, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under clauses (4) or (7) of Section 5.01 or otherwise but, except as specified above, the remainder of this Indenture and such Securities and any related coupons shall be unaffected thereby.

 

SECTION 14.04                                                    Conditions to Defeasance or Covenant Defeasance.

 

The following shall be the conditions to application of either Section 14.02 or Section 14.03 to any Securities of or within a series and any related coupons:

 

(1)                                 The Company shall irrevocably have deposited or caused to be deposited with either Trustee (or another trustee satisfying the requirements of Section 6.08 who shall agree to comply with the provisions of this Article Fourteen applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities and any related coupons, (A) an amount (in such Currency in which such Securities and any related coupons are then specified as payable at Stated Maturity), or (B) Government Obligations applicable to such Securities (determined on the basis of the Currency in which such Securities are then specified as payable at Stated Maturity) which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment of principal of and premium (if any) and interest (if any) under such Securities and any related coupons, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustees, to pay and discharge, and which shall be applied by the Trustees (or another trustee satisfying the requirements of Section 6.08 who shall agree to comply with the provisions of this Article Fourteen) to pay and discharge, (i) the principal of, premium (if any) and interest (if any) on such Securities and any related coupons on the Stated Maturity (or Redemption Date, if applicable) of such principal of, premium (if any) or installment of interest (if any), (ii) any mandatory sinking fund payments or analogous payments applicable to such Securities and any related coupons on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities and any related coupons, and (iii) all amounts due the Trustees under Section 6.07; provided that the Trustees shall have been irrevocably instructed to apply such money or the proceeds of such Government Obligations to said payments with respect to such Securities and any related coupons.  Before such a deposit, the Company may give to the Trustees, in accordance with Section 11.02, a notice of its election to redeem all or any portion of such Securities

 

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at a future date in accordance with the terms of such Securities and Article Eleven hereof, which notice shall be irrevocable.  Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing.

 

(2)                                 No Default or Event of Default with respect to such Securities or any related coupons shall have occurred and be continuing on the date of such deposit or, insofar as clauses (5) and (6) of Section 5.01 are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period).

 

(3)                                 Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default or an Event of Default under, this Indenture or any default under any material agreement or instrument to which the Company is a party or by which it is bound.

 

(4)                                 In the case of an election under Section 14.02, the Company shall have delivered to the Trustees an Opinion of Counsel in the United States stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of execution of this Indenture, there has been a change in the applicable United States federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities and any related coupons will not recognize income, gain or loss for United States federal income tax purposes as a result of such defeasance and will be subject to United States federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred.

 

(5)                                 In the case of an election under Section 14.03, the Company shall have delivered to the Trustees an Opinion of Counsel in the United States to the effect that the Holders of such Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of such covenant defeasance and will be subject to United States federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred.

 

(6)                                 The Company shall have delivered to the Trustees an Opinion of Counsel in Canada or a ruling from the Canada Revenue Agency to the effect that the Holders of such Securities will not recognize income, gain or loss for Canadian federal, provincial or territorial income tax or other tax purposes as a result of such defeasance or covenant defeasance, as applicable, and will be subject to Canadian federal, provincial or territorial income tax and other tax on the same amounts, in the same manner and at the same times as would have been the case had such defeasance or covenant defeasance, as applicable, not occurred (and for the purposes of such opinion, such Canadian counsel shall assume that Holders of such Securities include Holders who are not resident in Canada).

 

(7)                                 The Company is not an “insolvent person” within the meaning of the Bankruptcy and Insolvency Act (Canada) on the date of such deposit or at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period).

 

(8)                                 Notwithstanding any other provisions of this Section 14.04, such defeasance or covenant defeasance shall be effected in compliance with any additional or substitute terms, conditions or limitations in connection therewith pursuant to Section 3.01.

 

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(9)                                 The Company shall have delivered to the Trustees an Officer’s Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for, relating to either the defeasance under Section 14.02 or the covenant defeasance under Section 14.03 (as the case may be), have been complied with.

 

SECTION 14.05                                                    Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.

 

Subject to the provisions of the last paragraph of Section 10.03, all money and Government Obligations (or other property as may be provided pursuant to Section 3.01) (including the proceeds thereof) deposited with a Trustee (or another trustee satisfying the requirements of Section 6.08 who shall agree to comply with the provisions of this Article Fourteen) pursuant to Section 14.04 in respect of such Securities and any related coupons shall be held in trust and applied by such Trustee, in accordance with the provisions of such Securities and any related coupons and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent), to the Holders of such Securities and any related coupons of all sums due and to become due thereon in respect of principal, premium (if any) and interest (if any) on such Securities but such money need not be segregated from other funds except to the extent required by law.

 

Unless otherwise specified with respect to any Security pursuant to Section 3.01, if, after a deposit referred to in Section 14.04(1) has been made, (a) the Holder of a Security in respect of which such deposit was made is entitled to, and does, elect pursuant to Section 3.12(b) or the terms of such Security to receive payment in a Currency other than that in which the deposit pursuant to Section 14.04(1) has been made in respect of such Security, or (b) a Conversion Event occurs as contemplated in Section 3.12(d) or 3.12(e) or by the terms of any Security in respect of which the deposit pursuant to Section 14.04(1) has been made, the indebtedness represented by such Security and any related coupons shall be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal of, premium (if any) and interest (if any) on such Security as they become due out of the proceeds yielded by converting (from time to time as specified below in the case of any such election) the amount or other property deposited in respect of such Security into the Currency in which such Security becomes payable as a result of such election or Conversion Event based on the applicable Market Exchange Rate for such Currency in effect on the third Business Day prior to each payment date, except, with respect to a Conversion Event, for such Currency in effect (as nearly as feasible) at the time of the Conversion Event.

 

The Company shall pay and indemnify such Trustee against any tax, fee or other charge imposed on or assessed against the Government Obligations deposited pursuant to Section 14.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of such Securities and any related coupons.

 

Anything in this Article Fourteen to the contrary notwithstanding, such Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Obligations (or other property and any proceeds therefrom) held by it as provided in Section 14.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to such Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance, as applicable, in accordance with this Article Fourteen.

 

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SECTION 14.06                                                    Reinstatement.

 

If a Trustee or any Paying Agent is unable to apply any money in accordance with Section 14.05 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company’s obligations under this Indenture and such Securities and any related coupons shall be revived and reinstated as though no deposit had occurred pursuant to Section 14.02 or 14.03, as the case may be, until such time as such Trustee or Paying Agent is permitted to apply all such money in accordance with Section 14.05; provided, however, that if the Company makes any payment of principal of, premium (if any) or interest (if any) on any such Security or any related coupon following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities and any related coupons to receive such payment from the money held by such Trustee or Paying Agent.

 

ARTICLE FIFTEEN
MEETINGS OF HOLDERS OF SECURITIES

 

SECTION 15.01                                                    Purposes for Which Meetings May Be Called.

 

If Securities of a series are issuable as Bearer Securities, a meeting of Holders of Securities of such series may be called at any time and from time to time pursuant to this Article Fifteen to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities of such series.

 

SECTION 15.02                                                    Call, Notice and Place of Meetings.

 

(1)                                 The Trustees may at any time call a meeting of Holders of Securities of any series for any purpose specified in Section 15.01, to be held at such time and at such place in The City of New York, in Vancouver or in London as the Trustees shall determine.  Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided for in Section 1.07, not less than 21 nor more than 180 days prior to the date fixed for the meeting.

 

(2)                                 In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% in principal amount of the Outstanding Securities of any series shall have requested the Trustees to call a meeting of the Holders of Securities of such series for any purpose specified in Section 15.01, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustees shall not have made the first publication of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in The City of New York, in Vancouver or in London for such meeting and may call such meeting for such purposes by giving notice thereof as provided in paragraph (1) of this Section 15.02.

 

SECTION 15.03                                                    Persons Entitled to Vote at Meetings.

 

To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (1) a Holder of one or more Outstanding Securities of such series, or (2) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of such series by such Holder of Holders.  The only Persons who shall be entitled to be present or to speak at any meeting of

 

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Holders of Securities of any series shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustees and their counsel and any representatives of the Company and its counsel.

 

SECTION 15.04                                                    Quorum; Action.

 

The Persons entitled to vote a majority in principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series; provided, however, that, if any action is to be taken at such meeting with respect to a consent or waiver which this Indenture expressly provides may be given by the Holders of not less than a specified percentage in principal amount of the Outstanding Securities of a series, the Persons entitled to vote such specified percentage in principal amount of the Outstanding Securities of such series shall constitute a quorum.  In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dissolved.  In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chair of the meeting prior to the adjournment of such meeting.  In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chair of the meeting prior to the adjournment of such adjourned meeting.  Notice of the reconvening of any adjourned meeting shall be given as provided in Section 15.02(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened.  Notice of the reconvening of any adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Outstanding Securities of such series which shall constitute a quorum.

 

Subject to the foregoing, at the reconvening of any meeting adjourned for lack of a quorum the Persons entitled to vote 25% in principal amount of the Outstanding Securities at the time shall constitute a quorum for the taking of any action set forth in the notice of the original meeting.

 

Except as limited by the proviso to Section 9.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of not less than a majority in principal amount of the Outstanding Securities of such series who have casted their votes; provided, however, that, except as limited by the proviso to Section 9.02, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of not less than such specified percentage in principal amount of the Outstanding Securities of such series.

 

Any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section 15.04 shall be binding on all the Holders of Securities of such series and the related coupons, whether or not present or represented at the meeting.

 

Notwithstanding the foregoing provisions of this Section 15.04, if any action is to be taken at a meeting of Holders of Securities of any series with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal amount of all Outstanding Securities affected thereby, or of the Holders of such series and one or more additional series:

 

(i)                                     there shall be no minimum quorum requirement for such meeting; and

 

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(ii)                                  the principal amount of the Outstanding Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under this Indenture.

 

SECTION 15.05                                                    Determination of Voting Rights; Conduct and Adjournment of Meetings.

 

(1)                                 Notwithstanding any provisions of this Indenture, the Trustees may make such reasonable regulations as they may deem advisable for any meeting of Holders of Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as they shall deem appropriate.  Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 1.05 and the appointment of any proxy shall be proved in the manner specified in Section 1.05 or by having the signature of the person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 1.05 to certify to the holding of Bearer Securities.  Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 1.05 or other proof.

 

(2)                                 The Trustees shall, by an instrument in writing appoint a temporary chair of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 15.02(b), in which case the Company or the Holders of Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chair.  A permanent chair and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting.

 

(3)                                 At any meeting each Holder of a Security of such series or proxy shall be entitled to one vote for each $1,000 principal amount of Outstanding Securities of such series held or represented by him (determined as specified in the definition of “Outstanding” in Section 1.01); provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chair of the meeting to be not Outstanding.  The chair of the meeting shall have no right to vote, except as a Holder of a Security of such series or a proxy.

 

(4)                                 Any meeting of Holders of Securities of any series duly called pursuant to Section 15.02 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting; and the meeting may be held as so adjourned without further notice.

 

SECTION 15.06                                                    Counting Votes and Recording Action of Meetings.

 

The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers, if any, of the Outstanding Securities of such series held or represented by them.  The permanent chair of the meeting

 

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shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting.  A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities of any series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 15.02 and, if applicable, Section 15.04.  Each copy shall be signed and verified by the affidavits of the permanent chair and secretary of the meeting and one such copy shall be delivered to the Company, and another to the Trustees to be preserved by the Trustees, the latter to have attached thereto the ballots voted at the meeting.  Any record so signed and verified shall be conclusive evidence of the matters therein stated.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written.

 

 

CURALEAF HOLDINGS, INC.

 

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

 

                                                                 ,

 

as U.S. Trustee

 

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

 

                                                                 ,

 

as Canadian Trustee

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

Authorized Signing Officer

 

 

 

 

By:

 

 

Name:

 

 

Title:

Authorized Signing Officer

 

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EXHIBIT A-1

 

FORM OF CERTIFICATE TO BE GIVEN BY
PERSON ENTITLED TO RECEIVE BEARER SECURITY
OR TO OBTAIN INTEREST PAYABLE PRIOR
TO THE EXCHANGE DATE

 

CERTIFICATE

 

CURALEAF HOLDINGS, INC.
     % Notes due                   

 

This is to certify that as of the date hereof, and except as set forth below, the above-captioned Securities held by you for our account (i) are owned by any person(s) that is not a citizen or resident of the United States; a corporation or partnership (including any entity treated as a corporation or partnership for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia unless, in the case of a partnership, United States Treasury Regulations provide otherwise; any estate whose income is subject to United States federal income tax regardless of its source; or a trust if (A) a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust or (B) it was in existence on August 20, 1996 and has a valid election in effect under applicable United States Treasury Regulations to be treated as a United States person (“United States persons(s)”), (ii) are owned by United States person(s) that are (a) foreign branches of United States financial institutions (financial institutions, as defined in United States.  United States Treasury Regulation Section 1.165-12(c)(1)(v) are herein referred to as “financial institutions”) purchasing for their own account or for resale, or (b) United States person(s) who acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise Curaleaf Holdings, Inc. or its agent that such financial institution will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the United States Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) are owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in United States Treasury Regulation Section 1.163-5(c)(2)(i)(D)(7)), and, in addition, if the owner is a United States or foreign financial institution described in clause (iii) above (whether or not also described in clause (i) or (ii)), this is to further certify that such financial institution has not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.

 

As used herein, “United States” means the United States of America (including the states and the District of Columbia); and its “possessions” include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.

 

We undertake to advise you promptly in writing on or prior to the date on which you intend to submit your certification relating to the above-captioned Securities held by you for our account in accordance with your operating procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date.

 

This certificate excepts and does not relate to U.S. $                     of such interest in the above-captioned Securities in respect of which we are not able to certify and as to which we understand an

 

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exchange for an interest in a permanent global security or an exchange for and delivery of definitive Securities (or, if relevant, collection of any interest) cannot be made until we do so certify.

 

We understand that this certificate may be required in connection with certain tax legislation in the United States.  If administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any interested party in such proceedings.

 

Dated:

 

 

 

 

 

[To be dated no earlier than the 15th day prior to (i) the Exchange Date or (ii) the relevant Interest Payment Date occurring prior to the Exchange Date, as applicable]

 

 

 

 

 

 

 

 

 

 

 

 

 

[Name of Person Making Certification]

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

 

Title:

 

 

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EXHIBIT A-2

 

FORM OF CERTIFICATE TO BE GIVEN BY THE DEPOSITARY
IN CONNECTION WITH THE EXCHANGE OF A PORTION OF A
TEMPORARY GLOBAL SECURITY OR TO OBTAIN INTEREST
PAYABLE PRIOR TO THE EXCHANGE DATE

 

CERTIFICATE

 

CURALEAF HOLDINGS, INC.
     % Notes due

 

This is to certify that based solely on written certifications that we have received in writing or by electronic transmission from each of the persons appearing in our records as persons entitled to a portion of the principal amount set forth below (our “Member Organizations”) substantially in the form attached hereto, as of the date hereof, U.S. $                 principal amount of the above-captioned Securities (i) is owned by any person(s) that is not a citizen or resident of the United States; a corporation or partnership (including any entity treated as a corporation or partnership for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia unless, in the case of a partnership, United States Treasury Regulations provide otherwise; any estate whose income is subject to United States federal income tax regardless of its source; or a trust if (A) a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust or (B) it was in existence on August 20, 1996 and has a valid election in effect under applicable United States Treasury Regulations to be treated as a United States person (“United States person(s)”), (ii) is owned by United States person(s) that are (a) foreign branches of United States financial institutions (financial institutions, as defined in United States Treasury Regulation Section 1.165-12(c)(1)(v) are herein referred to as “financial institutions”) purchasing for their own account or for resale, or (b) United States person(s) who acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (a) or (b), each such financial institution has agreed, on its own behalf or through its agent, that we may advise Curaleaf Holdings, Inc. or its agent that such financial institution will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in United States Treasury Regulation Section 1.163-5(c)(2)(i)(D)(7)) and, to the further effect, that financial institutions described in clause (iii) above (whether or not also described in clause (i) or (ii)) have certified that they have not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.

 

As used herein, “United States” means the United States of America (including the states and the District of Columbia); and its “possessions” include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.

 

We further certify that (i) we are not making available herewith for exchange (or, if relevant, collection of any interest) any portion of the temporary global Security representing the above-captioned Securities excepted in the above-referenced certificates of Member Organizations and (ii) as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith for exchange (or, if relevant, collection of any interest) are no longer true and cannot be relied upon as of the date hereof.

 

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We understand that this certification is required in connection with certain tax legislation in the United States.  If administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any interested party in such proceedings.

 

Dated:

 

 

 

 

 

[To be dated no earlier than the 15th day prior to (i) the Exchange Date or (ii) the relevant Interest Payment Date occurring prior to the Exchange Date, as applicable]

 

 

 

 

 

 

 

 

 

 

 

 

 

[INSERT NAME OF DEPOSITARY]

 

 

 

 

 

 

 

 

 

 

By:

 

 

 

Name:

 

 

 

Title:

 

 

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