Description of the business: MUST READ4.1(b) – Narrative Description of GLH’s Business
GLH was incorporated in Canada on April 8, 2014 and commenced active business operations in August of 2014. GLH’s primary objective is to be the leading cultivator, grower and extractor of cannabis oil products in the State of Oregon. GLH intends to expand into other states that have legalized the use of cannabis with a view to becoming a leader in the industry.
Organization
GLH is a vertically integrated business that cultivates and grows cannabis plants, extracts oil from the cannabis plant, prepares and packages the oils into various products for medicinal use and sells these cannabis oil based products along with the cannabis flower that it cultivates through both a wholesale distribution network and its own state-licensed retail dispensary. GLH has successfully merged the industry culture of cannabis growers with the corporate culture of financial, operational, marketing and R&D disciplines in order to build a scalable business with corporate governance and a divisional organization. GLH, inclusive of its subsidiaries, has a total of 52 full time employees. Don Robinson and Brian Gentry serve as GLH’s CEO and CFO, respectively. Moshe Bar is CEO of GLH’s Israeli subsidiary, Greenpoint Science Ltd. (“GPS”), through which all R&D activity is conducted. Andy Hartogh is the President of GLH’s main operation subsidiary, GPO, and Mr. Hartogh along with Chris Miller oversee the company’s current cultivation operations. Ryan Acheson oversees the GLH’s retail operations through its fully licensed dispensary which is held through a wholly owned subsidiary, Left Coast Connections, Inc. Beau Whitney serves as GPO’s compliance officer, Tim Fitzpatrick heads operations, Bliss Dake is in charge of marketing and Adreas Met heads up GPO’s wholesale sales efforts.
Production & Sales - Cultivation
GLH operates its cultivation business through its wholly owned subsidiary, GPO. Currently, GPO may cultivate up to a maximum of 320 mature cannabis plants. GPO is permitted under Oregon state law to cultivate and grow cannabis plants by registered patients designating employees of GPO as their dedicated grower and to grow marijuana on their behalf. Each employee of GPO that is designated as a grower by a patient is permitted to possess six immature cannabis plants, 18 mature cannabis plants and 1.5 pounds of usable marijuana per patient. One person may be designated as a grower by up to four patients. GPO has agreed to provide each of the patients that have designated GPO’s employees as their grower with 20 ounces of cannabis flower per month at no charge. In return, each patient has agreed to sign over all of the remainder of their allotment of cannabis to the grower who can then sell it to a licensed dispensary. Each employee of GPO that has been designated as a grower, sells the excess cannabis that has been signed over by the patient to the grower on behalf of GPO and all money from the sale of cannabis is turned over to GPO.
GPO currently operates its cultivation business in a 29,000 square foot fully functional grow facility. The cultivation business is overseen by Andy Hartogh, who has 10 years of experience in growing cannabis. Currently, 22 patients have designated five employees of GPO as their growers, allowing GPO employees to possess an aggregate of 133 immature plants, 400 mature plants and 25 pounds of usable marijuana. All employees of GPO that have been designated by patients as a grower have entered into non-competition agreements which contractually prevent these employees from growing cannabis for the same patients if they cease to be employed by GPO for five years.
The major stages in the cannabis cultivation process are cloning, vegetation, flowering, curing and trimming. The entire process lasts from 100 to 130 days. However, GPO’s production is intentionally staggered such that plants are ready for harvest every 14 – 21 days. Each mature plant is bar-coded and tracked in the inventory tracking system and is internally audited on a regular basis throughout the growth cycle. The plants are tracked from room to room and are also weighed and tracked once harvested and ready for sale.
On average, GPO’s cultivation operations currently yields approximately 40 lbs. of cannabis flower and 40 lbs. of cannabis leaves and small flowers (“Trim”) per month. This increases to an estimated 640 lb of cannabis flower and an equal amount of Trim when 320 plants are harvested in October 2015 with much improved yields. The cannabis flower is sold directly to patients through GLH’s licensed dispensary or to other dispensaries through its wholesale distribution network. All of the Trim from GLH’s cultivation operations is used for oil extraction.
Over the next year, GPO intends to expand its breeding, cloning and commercial production operations in its 96 acre property. Management expects that the expansion of GPO’s cultivation facilities will result in increased sales of cannabis flower while also increasing the amount of Trim it can supply itself for its oil extraction business. Management believes that after the new cultivation facility is fully operational, GPO should be self-reliant on the supply of its own Trim and will no longer need to purchase Trim from third-parties for its oil extraction business. See “Production & Sales – Oil Extraction”, below.
The objective of the GPO grow operations is to continue to develop proprietary expertise in the area of cannabis cultivation, to supply the GPO processing facility with Trim and to provide a revenue stream through the sale of cannabis flowers through the Oregon’s licensed medical dispensary system.
Production & Sales - Oil Extraction
Cannabis oil is extracted from cannabis Trim, which is comprised of the leaves and stems of the cannabis plant as well as cannabis flower that would otherwise be unusable. While GLH uses the Trim from its own cultivation operations for oil extraction, GLH must also purchase additional Trim as the size of its current cultivation operation is not yet large enough to supply all of the Trim required for its oil extraction business.
Management believes that there is a growing trend amongst its patients towards the use of cannabis oil over the flower. Cannabis oil can be vaporized and patients can inhale the vapours or oil can be used in edibles and ingested. This may provide a healthier and safer option to patients over smoking the flower.
Unlike GLH, most cannabis growers are solely focussed on the cultivation and sale of the cannabis flower which has various applications for patients in its raw form. Trim is generally unusable by patients in its raw form. For growers in Oregon that are focussed only on the sale of the cannabis flower, Trim is a waste product. Most of the Trim used in GLH’s oil extraction business is acquired from other Oregon cannabis growers that would otherwise dispose of its Trim as waste. However, Oregon state law prohibits a grower from acquiring Trim directly from other growers. Rather, growers are required to sell their Trim only to a licensed dispensary and the employees of GPO who have been designated as growers are only permitted to purchase Trim from a licensed dispensary on behalf of GPO. GLH acquires and warehouses Trim for its oil extraction business through its licensed dispensary owned by its wholly owned subsidiary, Left Coast Connections, Inc. Employees of GPO who are designated growers acquire the Trim on behalf of GPO from GLH’s wholly owned licensed dispensary
The trimming process involves removing small leaves away from the flower or bud. Both the flowers and the trimmings are weighed and tracked in the GPO inventory tracking system. The Trim is then transferred to the GPO processing facility and the flowers are transferred to medical dispensaries for sale directly to patients.
The desirable cannabinoids that are found in marijuana plants are mostly concentrated in the mature cannabis flowers, but they are also found in the leaves and stems. By using extraction methods on these ‘leftover’ parts, GPO is able to produce cannabis oils, hash and edibles, etc. (all the while controlling the flavours and potency of these medicines).
Until such time as GPO becomes self-reliant on its own Trim, GPO must purchase Trim from third parties. GPO has introduced a policy for Trim buying. The price GPO pays for Trim varies based on various factors, including the quality and the amount of cannabis oil GPO extracts from the Trim. Regardless of the fact that Trim has very little utility in its raw form to end-user patients, Trim is nonetheless still considered to be “usable marijuana” under Oregon State law.
Currently, GPO uses two separate extraction methods for extracting cannabis oil; carbon dioxide extraction and hydro-carbon extraction.
Carbon Dioxide Extraction
When high pressure is applied to CO2, it becomes a liquid that is capable of working as a solvent, stripping away cannabinoids and essential oils from plant material. CO2 extraction involves warming carbon dioxide and then pumping it across plant material through the extractor at a precise pressure. The carbon dioxide in this condition is condensed to a liquid which strips the cannabinoids and oils from the plant material. With release of the pressure, the carbon dioxide escapes in its natural gaseous form, leaving the pure essential oil behind. The advantage of using CO2 to extract the cannabis oil is that there are no solvent residues left behind, and the resulting product is pure. Key variables in determining the levels of tetrahydrocannabinol (“THC”) and cannabidol (“CBD”) are timing, pressure and temperature.
At GLH the CO2 process starts the same as all extractions with the selection of Trim. The CO2 extraction process does not require the highest quality of Trim to achieve a desirable product. Because CO2 is not such a harsh solvent and will not extract as many non-desirable properties from plant material. CO2 extracted products are winterized to remove any remaining nondesirable properties such as chlorophyll, lipids, waxes and fats from the plant.
The dry plant material should contain minimal moisture to be free of sticking stems and leafs or any other product other than sugar leaf or flowers. At this point the product is referred to as sugar Trim and is now ready to be tested for mold, mildew, potency and pesticides. The sugar Trim is pulverized to a uniform and consistent grain with no identifiable piece of the plant.
The product has to settle and is divided into 12 pound batches. Twelve pounds is the maximum 24 hour throughput of the 20 liter hi flow machine. Following this, the materials column of the extractor is loaded with the 12 pounds in an evenly dense distribution. Once the column is filled it is sealed and heated to 120°F at 1,700-2,000 psi and extracted at a rate of 20 liters every 100 minutes during 24 hours.
After the product has been extracted it is removed from the separator. At this point the product has been converted from sugar trim into base oil or dabble oil. The oil is now tested for potency and pesticides. Once the water has been removed, the product is entered onto a hot plate or a rotary evaporator to remove the remaining water at a temperature below 110°F.
After the product has been tested for moisture it moves into the winterization process where the product is blended with organic grape seed alcohol at 100°F for 120 minutes. Thereafter the product is frozen at -100°F for 24 to 48 hours. The product is then heated to 100°F and gently poured into a 2,000 milliliter vacuum assisted Bchner funnel to filter out the lipid, waxes and fats that are captured during winterization.
Winterization uses alcohol (preferably pure organic ethyl alcohol) as a solvent to strip cannabis oil of its lipids, waxes and fats from trichrome and essential oils. After washing the concentrate, the remaining alcohol is evaporated off, leaving behind a golden cannabis oil. Further processing via heat, agitation, or vacuum pressure will aid in removing any residual alcohol from the oil, which is essential prior to smoking, as well as result in different textures (shatter, budder, or oil).
Once the filtering is completed, extra alcohol is run through the funnel to ensure that only pure white wax is left in the filter. After this the concentrate and alcohol solution are discharged and separated. The recovery process occurs at -29 inches of mercury and approximately 80°F for a period of 6 to 8 hours. The alcohol is recovered using a 22 liter distiller, a common condenser and a 10 liter recovery flask.
After the alcohol has been removed the product is entered onto a hotplate for standard de-gassing and removal of any alcohol that may have been left
This leaves a winterized product that is ready to be used in disposable pens, cartridges and other delivery systems. The product that was a basic dab oil is now converted into a winterized oil. At this point this product is tested for potency, pesticides and residual solvents by an independent third party lab licensed by the State. Once tested, stickers are added to the packaging and the product is ready for distribution.
Currently, GPO has five CO2 extraction machines operating at full capacity seven days a week. A CO2 extraction machine operated by GLH has capacity to process approximately 12 pounds of Trim per day for conversion into cannabis oil. Currently 10 pounds of Trim per day are loaded into each machine and the yield is approximately 10% of the weight of the Trim that is input. A CO2 extraction machine has the capacity to produce approximately 450 grams of CO2 based cannabis oil per day. With five machines in operation GPO’s production output is approximately 2,250 grams of cannabis oil per day. Management believes that there is sufficient demand for GPO’s oil products to operate six more machines. Provided that GPO can source additional Trim, management believes that the addition of six more CO2 extraction machines will allow GPO to increase its output of cannabis oil by 450 grams per day per machine. Once all eleven machines are operational before the end of 2015, management believes GPO will have the capacity to produce approximately 4,950 grams of cannabis oil per day.
Hydrocarbon Extraction
Hydrocarbon or Hydro-carbon/Propane extraction uses non-polar hydrocarbon as a solvent. Hydro-carbon is especially well-suited for stripping cannabis buds or Trim of their cannabinoids, tarpins, and other essential oils while leaving behind the majority of unwanted chlorophyll and plant waxes. The solvent washes over the plant material and is then purged off from the resulting solution using a variety of techniques and variables such as heat, vacuum and agitation. These post-extraction processes also determine what the final texture of the product is, whether it be budder, shatter, or a more traditional sticky cannabis oil. Routinely testing at over 60% tetrahydrocannabinol (“THC”), Hydro-carbon is the most popular choice for “dabbing”, when properly-made, hydro-carbon extracted cannabis oil offers a very potent, direct, and flavourful method of ingesting cannabis.
The Hydro-carbon process, unlike the CO2 process requires much higher quality Trim due to the harsh solvent factor involved with Hydro-carbon/Propane. Low quality Trim results in a poor quality finished product.
GLH uses two hydrocarbon extractors. The sub-zero 5 pounds single pass extraction machine and a Precisions Extractions XPS1 recalculating extractor. Both machines share a similar preparation. After the plant material is entered into the materials tube, the material are frozen for two hours at -110°F. The subzero extraction tube outside jacket is packed with dry ice and mixed with alcohol for approximately 30-60 minutes. This process is not required on the XPS1 because a cryogenic chiller cools the system. The lipids, waxes and fats are frozen through this process with no need for additional winterization.
Subsequently the tube is filled with Hydro-carbon and Propane and the gas extracts the desirable components of the cannabis, a process which takes 30 to 60 minutes. The oil produced through hydro-carbon extraction is known as hydro-carbon or "Hydro-carbon Oil". After obtaining hydro-carbon through this method, the oil will be vacuum purged in a vacuum chamber to separate the cannabis oil from any remaining hydro-carbon gas. The vacuum oven is heated to release the Hydro-carbon and Propane, leaving behind only the extract. This "purging" process, depending on duration of exposure to vacuum and heat, and will give the hydro-carbon characteristic textures, such as wax, crumble, shatter and butter.
This extract is vacuumed for 3 to 5 days until the product is tested and confirmed as hydrocarbon free. Once the product is free of hydro-carbon it is packaged and distributed.
GPO operates two hydro-carbon extraction machines for the processing and production of hydrocarbon extracted cannabis oil. The input capacity of the two machines is 15 pounds of Trim per day per machine which yields approximately 1.5 pounds or 680 grams of hydro-carbon extracted cannabis oil per day. Currently the two hydro-carbon machines operate four runs per day and produce approximately 900 grams of hydro-carbon oil per day.
Production & Sales - Research and Development
Management believes that research and development is a key factor that will position GLH as a leader in the cannabis industry. In January 2015, GLH commenced R&D operations through its wholly owned Israeli subsidiary, Green Point Science Ltd. GLH’s R&D program is operated under the leadership of Dr. Moshe Bar, a former member of the global vegetable R&D leadership team at Syngenta, the Swiss based global seed company
GLH’s R&D key strategic objectives are:
(a) To develop new innovative product lines, based on a holistic breeding approach and an integrated technology;
(b) To focus on key market/segment: breeding by design (strains targeting specific illnesses, target THC and CBD levels); and
(c) To create an IP portfolio around variety, trait (research) and crop modeling (Agronomy)
GLH’s R&D is based on three pillars:
(a) Breeding: Genetic factors are the main attribute which controls the plant’s cannabinoid profile. This creates opportunities for breeding by design. Breeding by design is breeding to achieve specific chemical genotypes, accomplished by:
i. Using state of the art breeding tools to speed up the breeding process and thus shorten time to market;
ii. Striving for crop uniformity with higher potential yields;
iii. Building a portfolio that supports a product profile and specific market needs. focusing on the ratio between CBD and THC;
iv. Developing new varieties with heterosis effect and different profile between THC and CBD;
v. Breeding pure female lines; and
vi. Developing new varieties from clones and seeds using propagation methods and secure IP for breeding methodology and germ plasmas.
(b) Agronomy: The goal is to secure the quality and quantity of commercial cultivation in a sustainable way in order to maximize profitability by:
i. Moving from warehouse growing to greenhouse cultivation;
ii. Designing an efficient grow facility equipped with the latest growing technologies and techniques;
iii. Using biological products/crop program to control disease and pest; and
iv. Reducing the input for each gram of product (electric energy, temperature control, disease and pest control).
(c) Quality control: The goal is to secure the quality of products year round coming from a cross growing area/cycle. Quality consistency is assured by active ingredient content and the ratio between THC and CBD, as well as a range of other ingredients by:
i. Developing homogeneous genetic materials;
ii. Implementing a protocol; from growing through harvesting to storage and product manufacturing; and
iii. Strictly adhering to GLH’s Standard Operating Procedures (SOP).
Products & Services – Products
GLH produces and distributes two main types of products; cannabis flower and cannabis oils. All of GLH’s products are independently lab tested and certified before being packaged and labelled with detailed information about the levels of THC and CBD contained in each product.
THC is the main cannabinoid found in the cannabis plant and is responsible for the majority of the plant’s psychoactive properties. Studies have shown that THC has many medical benefits, including analgesic properties and its tendency to increase appetite. CBD is gaining popularity as the primary therapeutic cannabinoid for a variety of diseases, such as autism, epilepsy and other nerve-related conditions. Cannabidol is generally the second-most common cannabinoid found in cannabis, after THC. CBD is becoming highly sought after for medical purposes, despite the cannabinoid being nearly bred out of modern cannabis in the hunt for the higher THC strains. Now that studies have demonstrated the medical importance of CBD in certain circumstances, many cannabis cultivators and strain breeders now pride themselves on their high CBD-to-THC ratios.
Cannabis used in making medicinal cannabis oils and edibles requires decarboxylation. THCA (tetrahydrocannabinol acid) is the biosynthetic precursor of THC. It is found abundantly in growing and harvested cannabis. Contrast this with the notion that very little to none of the THC cannabinoid is found in growing or harvested plants. Research has shown THCA to have some neurone-protective and anti-inflammatory effects but it does not produce the psychoactive effect that makes you feel “high” like THC does
Decarboxylation occurs when carboxylic acids lose a carbon atom from a carbon chain effectively releasing carbon dioxide (CO2), thus converting THCA to THC. This happens naturally (but very, very slowly) during the drying process; it could take years to complete converting THCA to THC this way. Fortunately, a heat source or flame causes the decarboxylation to happen rapidly, which explains why smoking it exposes the converted THC.
Nearly all modern cannabis strains are hybridized in some form or another; the energetic, sativa and the relaxing, sedative indica sides of the cannabis spectrum or the in-between options. Most dispensaries will organize their shelf in terms of indica, hybrid, and sativa to help patients understand how a given variety will affect them.
GLH’s CO2 oil products are sold under the brand name Golden XTRX™ through a number of delivery systems; e-pens, cartridges and dabs.
Rather than combusting the cannabis product (whether it be flowers, hash, or oil), a vaporizer heats it just enough so that the cannabinoids activate, vaporize, and can then be inhaled. This method is preferable for those with breathing conditions, or those who simply do not want to actually smoke anything but still require the direct and immediate relief that inhalation provides compared to edible consumption. A popular variation on the vaporizer that has taken the cannabis (and nicotine) market by storm is the pen vaporizer, also known as an “e-vape.
The vape-pen is a small, portable vaporizer that uses either pre-filled concentrate cartridges or has a chamber to load your own concentrates or flower.
Dabbing refers to dropping concentrates onto a hot surface (nail, skillet, etc.) and inhaling the resulting vapor via a “rig,” which is usually made of glass and sends the vapor through water.
Hydro-carbon is sold under the name Proper. They are sold in one gram cartridges as crumble and shatter. Hydro-carbon is also sold in bulk in slab format
BHO generally comes in two forms, shatter and wax (or crumble). Shatter is a texture of hash oil and refers to the transparent, shelf-stable oil which breaks into pieces rather than bending. The most popular choices of hydro-carbon concentrates on the market are either shatter or wax, which are on opposite ends of the spectrum when it comes to texture. Shatter tends to have a consistency ranging from sticky sap to a very stable, hard resin at room temperature and can have an appearance anywhere from a dark brown to nearly translucent. Wax on the other hand, tends to be completely dry and crumbly and is sometimes referred to as “honeycomb” because of its resemblance.
Products & Services - Sales, Marketing and Distribution
Dispensary Sales
GLH owns a fully licensed dispensary under Oregon law through its wholly owned subsidiary, Left Coast Connections, Inc. (“LCC”). LCC is fully licensed to sell a wide range of cannabis products directly to registered patients. LCC sells the cannabis flower and cannabis oil produced by GPO along with third party cultivators and producers. LLC opened and became fully operational on April 7, 2015. The dispensary is only permitted to sell to patients (or their caregivers) that are registered under the Oregon Medical Marijuana Program and who hold proof of their registered status. However, on October 1, 2015 recreational sales of flower will be permitted in the medical dispensaries on a temporary basis through December 31, 2016 while the full roll out of the recreational program is implemented. Quantities will be limited to a quarter ounce per day per customer. Cannabis oil will not be available for recreational purchase, but management believes that recreational sales of oil will commence in 2016.
Wholesale Sales to Other Dispensaries
GPO employs nine sales representatives who sell GPO’s cannabis products to third party dispensaries. They sell useable marijuana in the form of flower or cannabis oil products. GPO’s current sales and marketing efforts is and has been focused on immediate opportunities in the medicinal market. Management intends to expand its sales and marketing efforts as recreational use becomes legalized in Oregon.
GPO sells its products both on credit terms and for cash on delivery to 200 dispensaries in the state of Oregon. GPO has stringent policies and processes in place to ensure that all cash from product sales in properly accounted for and that cash collections from consignment sales are being are monitored at all times. The chart below illustrates the sales, collections and cash management processes.
The primary sales and marketing goals for the medicinal market in Oregon is to increase awareness of GPO’s product line and product offering, turning initial trials of GPO’s products into repeat purchases, introducing new products based on internal market research of patient wants and needs, advertising and consumer promotions. Management’s strategy to increase sales growth and market share gains in the Oregon medicinal market include:
(a) Achieving distribution of all product lines in every dispensary in the State of Oregon;
(b) New product development through R&D efforts and introduction of new products;
(c) Advertising in print, radio, celebrity endorsements, and social media;
(d) Building business to business relationships to supply other manufacturers of other cannabis products with oils and concentrates produced by GPO, and
(e) Leveraging Left Coast Connections ‘retail sales directly to patients to understand emerging trends and consumer preferences.
Market – Oregon
As at July 1, 2015, there were 71,094 registered patients and 35,400 caregivers registered under the Oregon Medical Marijuana Program (“OMMP”). Only those patients that are registered under the OMMP may legally possess and consume cannabis in the State of Oregon and only patients (or caregivers on their behalf) may purchase cannabis within the limits prescribed by law. There are 1,698 Oregon-licensed physicians with current OMMP patients. As at June 12, 2015 there are 130 licensed dispensaries in the State of Oregon permitted to sell cannabis products to registered patients or their caregivers. According to market research, registered medicinal marijuana patients use on average the equivalent of 17 grams of cannabis flower per month, which is more than recreational users consume according to a publication by Dr. Seth Crawford in the Humboldt Journal of Social Relations. One study estimates that recreational cannabis users buy approximately 6.75 ounces of cannabis flower per year, while registered patients buy 14 ounces per year. At a price of US$145 per ounce, management estimates that the medical marijuana market in Oregon has current annual revenues of US$145 million.
On Tuesday, November 4, 2014, Oregon voters passed “Measure 91”, known as the “Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act”, requiring the Oregon state government to promulgate rules by July 1, 2015 for the legal recreational possession, use, and cultivation of marijuana by adults 21 and older. Under the new state laws to be introduced allowing recreational use of cannabis, adults 21 years and older will be allowed to possess up to eight ounces of marijuana and grow up to four marijuana plants. Purchases from licensed dispensaries will be limited for recreational users to a quarter ounce per visit.