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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-56626

 

 

BLUM HOLDINGS, INC.

 
 

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

93-3735199

 
 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

3242 S. Halladay Street, Suite 202

Santa Ana, California92705

(Address of principal executive offices) (Zip Code)

 

888-909-5564

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

 
 

Common Stock, par value $0.001

 

BLMH

 

OTCQB

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ☐ No ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large Accelerated Filer

Accelerated Filer

 
 

Non-accelerated Filer

Smaller reporting company

 
   

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. 

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No ☒

 

As of June 30, 2023, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting stock held by non-affiliates (based on the closing sale price of the registrant’s Common Stock on the OTC Market Group Inc.’s OTCQB tier, and for the purpose of this computation only, on the assumption that all of the Registrant’s directors and officers are affiliates), was $12,806,404.

 

As of April 10, 2024, there were 8,499,105 shares outstanding, 1,461,997 shares of common stock issuable upon the exercise of all our outstanding warrants and 369,301 shares of common stock issuable upon the exercise of all vested options.

 

Documents Incorporated by Reference:

 

None

 



 

 

 

 

BLUM HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED December 31, 2023

 

TABLE OF CONTENTS

 

   

Page

 

PART I

 
     

Item 1.

Business

4

Item 1A.

Risk Factors

6

Item 1B.

Unresolved Staff Comments

23

Item 1C. Cybersecurity 22

Item 2.

Properties

24

Item 3.

Legal Proceedings

24

Item 4.

Mine Safety Disclosures

24

     
 

PART II

 
     

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

25

Item 6.

[Reserved]

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

52

Item 8.

Financial Statements and Supplementary Data

52

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

52

Item 9A.

Controls and Procedures

52

Item 9B.

Other Information

54

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

54

     
 

PART III

 
     

Item 10.

Directors, Executive Officers and Corporate Governance

55

Item 11.

Executive Compensation

59

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

65

Item 13.

Certain Relationships and Related Transactions, and Director Independence

68

Item 14.

Principal Accounting Fees and Services

70

     
 

PART IV

 
     

Item 15.

Exhibits and Financial Statement Schedules

71

Item 16.

Form 10-K Summary.

74

Signatures

75

 

 

 

2

 

 

Explanatory Note

General

 

References in this document to “we”, “us”, “our”, “the Company”, or “Blüm” are intended to mean Blum Holdings, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis. Blüm is filing this Annual Report on Form 10-K for the year ended December 31, 2023 (this “Report,” “Form 10-K,” or “Annual Report”). Effective January 12, 2024, Unrivaled Brands, Inc. (“Unrivaled”) completed a corporate reorganization (the “Reorganization”) pursuant to which Blum Holdings, Inc. became the publicly-traded holding company and Unrivaled survived the merger as a wholly-owned subsidiary of Blum Holdings, Inc. This Form 10-K contains Unrivaled’s audited financial statements for the year ended December 31, 2023, as well as restates certain financial information and related footnote disclosures in Unrivaled’s previously issued unaudited interim financial statements included in Unrivaled’s Quarterly Report on Form 10-Q for the quarterly periods ended June 30, 2023 and September 30, 2023, filed with the SEC on August 14, 2023 and November 14, 2023 (collectively, the “Affected Periods”)

 

Background of Restatement

 

On April 12, 2024, the Company’s management, concluded that Unrivaled’s previously issued unaudited interim financial statements included in Unrivaled’s Quarterly Report on Form 10-Q for the Affected Periods (“Original Quarterly Reports”) should be restated and no longer be relied upon due to misstatements in (i) income taxes payable and accumulated deficit on Unrivaled’s consolidated balance sheet as of June 30, 2023 and September 30, 2023 and (ii) gain on disposal of assets on the Company’s consolidated statements of operations for the three and six months ended June 30, 2023 and three and nine months ended September 30, 2023. As such, the Company is restating the Company’s financial statements for the Affected Periods in this Form 10-K.

 

The restatement does not have an impact on the Company’s cash position.

 

The financial information that has been previously filed or otherwise reported for the Affected Periods is superseded by the information in this Form 10-K, and the financial statements and related financial information contained in the Original Quarterly Reports should no longer be relied upon. On April 15, 2024, the Company filed a Current Report on Form 8-K disclosing the Audit Committee’s conclusion that the unaudited interim financial statements for the Affected Periods should no longer be relied upon.

 

Internal Control Considerations

 

In connection with the restatement, management has re-evaluated the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting as of June 30, 2023, and September 30, 2023. The Company’s management has concluded that, in light of the misstatement described above, and the filing of the Original Quarterly Reports, a material weakness exists in the Company’s internal control over financial reporting and that the Company’s disclosure controls and procedures were not effective. For a discussion of management’s consideration of our disclosure controls and procedures, internal controls over financial reporting, and the material weaknesses identified, see Part II, Item 9A, “Controls and Procedures” of this Form 10-K.

 

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which provides a safe harbor for forward-looking statements made by us. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends, and other information, may be forward-looking statements. Words such as might, will, may, should, estimates, expects, continues, contemplates, anticipates, projects, plans, potential, predicts, intends, believes, forecasts, future, and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that managements expectations, beliefs, estimates, and projections will occur or can be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

 

There are a number of risks, uncertainties, and other important factors, many of which are beyond our control, that could cause actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. Such risks, uncertainties, and other important factors that could cause actual results to differ include, among others, the risk, uncertainties and factors set forth under Item 1A. Risk Factors in this Annual Report on Form 10-K and in other filings we make from time to time with the U.S. Securities and Exchange Commission (SEC).

 

We caution you that the risks, uncertainties, and other factors set forth in our periodic filings with the SEC may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that: (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of the report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise.

 

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

 

3

 

 

PART I

 

ITEM 1. BUSINESS

 

References in this document to we, us, our, the Company, or Blüm are intended to mean Blum Holdings, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.

 

Effective January 12, 2024, Unrivaled Brands, Inc. completed a reverse stock split of its common stock at a 1-for-100 ratio (the Reverse Stock Split). Accordingly, all share and per share amounts for all periods presented in this Current Report on Form 10-K have been adjusted retroactively, where applicable, to reflect this Reverse Stock Split and adjustment of the preferred stock conversion ratios.

 

Company Overview

 

Blum Holdings, Inc. is a holding company with the following subsidiaries:

 

  Unrivaled Brands, Inc., a Nevada corporation (“Unrivaled”)
  Black Oak Gallery, a California corporation (“Black Oak” or “Blüm Oakland”)
 

Blüm San Leandro, a California corporation (“Blüm San Leandro”)

  2705 PFC, LLC, a Nevada limited liability company
 

3242 Enterprises, Inc., a California corporation (“The Spot”)
  3242 Holdings, LLC, a Nevada limited liability company
 

Halladay Holding, LLC, a California limited liability company (“Halladay”)

 

People's First Choice, LLC, a California limited liability company (“Blüm OC”)

 

People's Costa Mesa, LLC, a California limited liability company

 

IVXX Gardens I, Inc., a California corporation

 

Our corporate headquarters are located at 3242 S. Halladay Street, Suite 202, Santa Ana, California 92705 and our telephone number is (888) 909-5564. Our website addresses are as follows: www.blumholdings.com, www.letsblum.com and www.thespotforyou.com. We have included our website addresses in this Annual Report solely as an inactive textual references. No information available on or through our websites shall be deemed to be incorporated into this Annual Report on Form 10-K. Our common stock, par value $0.001 (the “Common Stock”), is quoted on the OTC Markets Group, Inc.’s OTCQB tier under the symbol “BLMH.”  Prior to February 12, 2024, our Common Stock was quoted on the OTCQB under the symbol “UNRV.” Our Annual Reports on Form 10-K,  Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a), 14, and 15(d) of the Exchange Act may be accessed through the SEC’s Interactive Data Electronic Applications system at https://www.sec.gov.

 

Our Business

 

Blum Holdings, Inc. is a cannabis company with operations in retail and distribution throughout California, with an emphasis on providing the highest quality of medical and adult use cannabis products. The Company is home to Korova, a brand of high potency products across multiple product categories, currently available in California. The Company operates Blüm OC, a premier cannabis dispensary in Orange County, California. The Company also owns dispensaries in California which operate as The Spot in Santa Ana, Blüm in Oakland, and Blüm in San Leandro.

 

The Company was originally incorporated as “Private Secretary, Inc.” on July 22, 2008 in the State of Nevada. On January 27, 2012, the Company filed an amendment to its Articles of Incorporation changing its name to “Terra Tech Corp.” Effective July 7, 2021, the Company changed its corporate name from “Terra Tech Corp.” to “Unrivaled Brands, Inc.” in connection with the Company’s acquisition of UMBRLA, Inc. Effective January 12, 2024, Unrivaled completed a corporate reorganization (the “Reorganization”) pursuant to which Blum Holdings, Inc. became the publicly-traded holding company and Unrivaled survived the merger as a wholly-owned subsidiary of Blum Holdings, Inc. After the Reorganization, the Company continues to engage in the business conducted by it prior to the Reorganization, and all of its contractual, employment and other business relationships have generally continued unaffected by the Reorganization.

 

Our Operations

 

We are organized into two reportable segments:

 

 

Cannabis Retail – Includes cannabis-focused retail, both physical stores and non-store front delivery

 

Cannabis Distribution – Includes cannabis distribution operations

 

Either independently or in conjunction with third parties, we operate medical marijuana retail and adult use dispensaries and distribution facilities in California.

 

Human Capital

 

As of December 31, 2023, we had 149 employees. Our employees are the heart of our Company. In a rapidly evolving industry, it is imperative that we attract, develop and retain top talent on an ongoing basis. To do this, we seek to make the Company an inclusive, diverse and safe workplace, with meaningful compensation and opportunities for career growth.

 

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Recent Developments

 

Refer to “Fiscal Year 2023 Highlights” in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.

 

The risks and uncertainties regarding the future of our business due to regulatory uncertainty, combined with our historical lack of profitability, have raised substantial doubt as to our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern.

 

Marijuana Industry Overview

 

As of December 2023, there are a total of 38 states, plus the District of Columbia, that have passed legislation related to medicinal cannabis. Of these states, 24, plus the District of Columbia, have legalized recreational cannabis. These state laws are in direct conflict with the United States Federal Controlled Substances Act (21 U.S.C. § 811) (“CSA”). The CSA classifies cannabis as a Schedule I controlled substance, which is viewed as having a high potential for abuse and has no currently-acceptable use for medical treatment.

 

Although the possession, cultivation, and distribution of cannabis for medical and adult use is permitted in California, cannabis is illegal under federal law. We believe we operate our business in compliance with applicable state laws and regulations. Any changes in federal, state or local law enforcement regarding cannabis may affect our ability to operate our business. Strict enforcement of federal law regarding cannabis would likely result in the inability to proceed with our business plans, could expose us to potential criminal liability, and could subject our properties to civil forfeiture. Any changes in banking, insurance or other business services may also affect our ability to operate our business.

 

Our Marijuana Dispensaries, Cultivation and Manufacturing Operations

 

Blüm Oakland

 

On April 1, 2016, we acquired Black Oak Gallery, which operates a medical and adult use marijuana dispensary in Oakland, California under the name “Blüm”. Blüm opened its retail storefront in Oakland, California in November 2012.

 

Blüm Oakland sells a combination of our own cultivated products as well as high quality name-brand products from outside suppliers. In addition to multiple grades of medical and adult use marijuana, Blüm sells the following: (i) edibles, which include cannabis-infused baked goods, chocolates, and candies, (ii) cannabis-infused topical products, such as lotions, massage oils and balms, (iii) clones of marijuana plants, and (iv) numerous kinds of cannabis concentrates, such as hash, shatter and wax. Blüm Oakland’s location consists of a retail dispensary storefront, a distribution area and a gated 20-car capacity parking lot with armed security.

 

Blüm San Leandro

 

We incorporated Blüm San Leandro on October 14, 2016, which is a medical and adult use marijuana dispensary and delivery service in San Leandro, California originally operating under the name “Silverstreak”. Blüm San Leandro has received the necessary governmental approvals and permitting to operate a medical and adult use marijuana dispensary and as well as a distribution facility in San Leandro, California. The San Leandro dispensary opened on January 11, 2019. In June 2022, the San Leandro dispensary was temporarily closed and reopened under new management in December 2022 under the name “Blüm”.

 

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Blüm OC

 

On November 22, 2021, the Company acquired People’s First Choice, which owns and operates one of the most successful dispensaries in Orange County, California, regularly servicing upwards of 800 customers each day. In December 2023, the dispensary was renamed to Blüm OC. The Company has entered into agreements to acquire and operate additional People's dispensaries in Riverside, California and Costa Mesa, California. 

 

The Spot

 

On July 1, 2021, the Company acquired UMBRLA, Inc. which operated The Spot dispensary in Santa Ana, California and owned the Korova brand intellectual property. The Spot sells a combination of high-quality name-brand products from outside suppliers. In addition to multiple grades of medical and adult use marijuana, Blüm sells the following: (i) edibles, which include cannabis-infused baked goods, chocolates, and candies, (ii) cannabis-infused topical products, such as lotions, massage oils and balms, and (iii) numerous kinds of cannabis concentrates, such as hash, shatter, and wax. On February 18, 2024, The Spot closed its doors for in-store shopping and continued offering cannabis delivery.

 

Oakland Cultivation

 

In October 2022, the Company ceased operations its cultivation facility located in Oakland, California. In October 2023, the Company entered into a management services agreement with a third-party to manage and operate the cultivation facility.

 

We leased 13,000 square feet of industrial space on over 30,000 square feet of land in Oakland’s industrial corridor where we operated a cannabis cultivation facility. In January 2024, the Company sold its equity interests in the licensed cultivation entity. As of December 31, 2023, the Company no longer has cultivation operations in California.

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before deciding to purchase, hold, or sell our common stock, you should carefully consider the risks described below in addition to the cautionary statements and risks described elsewhere and the other information contained in this Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these known or unknown risks or uncertainties actually occur, our business, financial condition, results of operations and/or liquidity could be seriously harmed, which could cause our actual results to vary materially from recent results or from our anticipated future results. In addition, the trading price of our common stock could decline due to any of these known or unknown risks or uncertainties, and you could lose all or part of your investment. An investment in our securities is speculative and involves a high degree of risk. You should not invest in our securities if you cannot bear the economic risk of your investment for an indefinite period of time and cannot afford to lose your entire investment. See also Cautionary Note Concerning Forward-Looking Statements.

 

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Summary of Risk Factors

 

Our business is subject to numerous risks and uncertainties, discussed in more detail in the following section. These risks include, among others, the following key risks:

 

Risks Relating to Our Business, Financial Position and Industry

 

 

We have had significant changes to our operations, which may make it difficult for investors to predict future performance based on current operations.

 

We have incurred significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flow.

 

We will likely need additional capital to sustain our operations and will likely need to seek further financing, which we may not be able to obtain on acceptable terms, or at all. If we fail to raise additional capital, as needed, our ability to implement our business model and strategy could be compromised.

  We have entered into binding term sheets with third parties and cannot assure you that any anticipated arrangements under such term sheets will lead to definitive agreements. If we are unable to complete these arrangements in a timely manner and on terms favorable to us, our business may be adversely affected.
 

We face intense competition and many of our competitors have greater resources that may enable them to compete more effectively.

  The effects of war, acts of terrorism, threat of terrorism, or other types of violence, could adversely affect our business.
 

If we fail to protect our intellectual property, our business could be adversely affected.

 

Although we believe that our products and processes do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on our business.

 

Our trade secrets may be difficult to protect.

 

Our business, financial condition, results of operations, and cash flow may in the future be negatively impacted by challenging global economic conditions.

 

Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.

 

We may not be able to effectively manage our growth or improve our operational, financial, and management information systems, which would impair our results of operations.

 

If we are unable to continually innovate and increase efficiencies, our ability to attract new customers may be adversely affected.

 

We are dependent on the popularity of consumer acceptance of our product lines.

 

A drop in the retail and/or wholesale prices of medical and adult use marijuana products may negatively impact our business.

 

Federal regulation and enforcement may adversely affect the implementation of cannabis laws and regulations may negatively impact our revenues and profits.

 

We could be found to be violating laws related to cannabis.

 

Variations in state and local regulation, and enforcement in states that have legalized cannabis, may restrict cannabis-related activities, which may negatively impact our revenues and prospective profits.

 

Prospective customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of federal or state enforcement of laws prohibiting possession and sale of medical or recreational marijuana.

 

Marijuana remains illegal under federal law.

  Increased attention to climate change and ESG matters may adversely impact our business.
 

We are not able to deduct some of our business expenses.

 

We may not be able to attract or retain a majority of independent directors.

 

We may not be able to successfully execute on our merger and acquisition strategy.

 

Laws and regulations affecting the medical and adult use marijuana industry are constantly changing, which could detrimentally affect our cultivation, production and dispensary operations

 

We may not obtain the necessary permits and authorizations to operate the medical and adult use marijuana business.

 

If we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.

 

We may have difficulty accessing the service of banks, which may make it difficult for us to operate.

 

Litigation may adversely affect our business, financial condition, and results of operations.

 

Our insurance coverage may be inadequate to cover all significant risk exposures.

 

We may become subject to legal proceedings and liability if our products are contaminated.

 

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Some of our lines of business rely on our third-party service providers to host and deliver services and data, and any interruptions or delays in these hosted services, security or privacy breaches, or failures in data collection could expose us to liability and harm our business and reputation.

 

Disruptions to cultivation, manufacturing and distribution of cannabis in California may negatively affect our access to products for sale at our dispensaries.

 

High tax rates on cannabis and compliance costs in California may limit our customer base.

 

Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

 

Inadequate funding for the Department of Justice (DOJ) and other government agencies could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

California’s Phase-In of Laboratory Testing Requirements could impact the availability of the products sold in our dispensary.

 

There is uncertainty related to the regulation of vaporization products and certain other consumption accessories. Increased regulatory compliance burdens could have a material adverse impact on our business development efforts and our operations.

 

The scientific community has not yet extensively studied the long-term health effects of the use of vaporizer products.

 

If product liability lawsuits are brought against us, we will incur substantial liabilities.

 

Unionization of employees could have a material adverse impact on our business.

 

Inadequate funding for state and local regulatory agencies and the effects of COVID-19 could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

Competition from Synthetic Production and Technological Advances could adversely impact our profitability.

 

There are risks inherent in an Agricultural Business.

 

We may suffer from Unfavorable Publicity or Consumer Perception.

 

Our independent registered public accounting firm's report for the year ended December 31, 2023 is qualified as to our ability to continue as a going concern.

  The processes undertaken to effect the restatement may not have been adequate to identify and correct all errors in our historical financial statements and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement.
 

The Company has identified material weaknesses in its internal control over financial reporting and may identify additional material weaknesses in the future that may cause them to fail to meet its reporting obligations or result in material misstatements of its financial statements. If the Company fails to remediate any material weaknesses or if the Company fails to establish and maintain effective control over financial reporting, its ability to accurately and timely report its financial results could be adversely affected.

 

Risks Related to an Investment in Our Securities

 

 

We expect to experience volatility in the price of our Common Stock, which could negatively affect stockholders’ investments.

 

Our Common Stock is categorized as “penny stock,” which may make it more difficult for investors to sell their shares of Common Stock due to suitability requirements.

 

Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock, which could depress the price of our Common Stock.

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
 

We may issue additional shares of Common Stock or preferred stock in the future, which could cause significant dilution to all stockholders.

 

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.
 

Because we do not intend to pay any cash dividends on our Common Stock, our stockholders will not be able to receive a return on their shares unless they sell them.

 

Failure to execute our strategies could result in impairment of goodwill or other intangible assets, which may negatively impact profitability.

  If our acquired intangible assets become impaired in the future, we may incur significant impairment charges.

 

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Risks Relating to Our Business, Financial Position and Industry

 

We have had significant changes to our operations, which may make it difficult for investors to predict future performance based on current operations.

 

We have had significant changes to our operations which changes the relevance of our historical performance upon which investors may base an evaluation of our potential future performance. In particular, we may not be able to sell cannabis products in a manner that enables us to be profitable and meet customer requirements, obtain the necessary permits and/or achieve certain milestones to develop our dispensary businesses, enhance our line of cannabis products, develop and maintain relationships with key manufacturers and strategic partners to extract value from our intellectual property, raise sufficient capital in the public and/or private markets, or respond effectively to competitive pressures. As a result, there can be no assurance that we will be able to develop or maintain consistent revenue sources, or that our operations will be profitable and/or generate positive cash flow.

 

Any forecasts we make about our operations may prove to be inaccurate. We must, among other things, determine appropriate risks, rewards, and level of investment in our product lines, respond to economic and market variables outside of our control, respond to competitive developments and continue to attract, retain, and motivate qualified employees. There can be no assurance that we will be successful in meeting these challenges and addressing such risks and the failure to do so could have a materially adverse effect on our business, results of operations, and financial condition. Our prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in the early stage of development. As a result of these risks, challenges, and uncertainties, the value of our stockholder's investment could be significantly reduced or completely lost.

 

We have incurred significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flow

 

We have incurred significant losses in prior periods. For the year ended December 31, 2023, we incurred a net loss of $14.13 million and, as of that date, we had an accumulated deficit of $454.18 million. For the year ended December 31, 2022, we incurred a net loss of $188.93 million and, as of that date, we had an accumulated deficit of $440.05 million. Any losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flow.

 

We will likely need additional capital to sustain our operations and will likely need to seek further financing, which we may not be able to obtain on acceptable terms, or at all. If we fail to raise additional capital, as needed, our ability to implement our business model and strategy could be compromised.

 

We have limited capital resources and operations. To date, our operations have been funded primarily from the proceeds of debt and equity financings. We expect to require substantial capital in the near future to fund our future operations. We may not be able to obtain additional financing on terms acceptable to us, or at all. In particular, because marijuana is illegal under federal law, we may have difficulty attracting investors.

 

Even if we obtain financing for our near-term operations, we expect that we will require additional capital thereafter. Our capital needs will depend on numerous factors including: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot provide assurance that we will be able to obtain capital in the future to meet our needs.

 

As of December 31, 2023, we had $0.86 million of cash and cash equivalents. We maintain our cash and cash equivalents with high quality, accredited financial institutions. However, some of these accounts at times exceed federally insured limits, and, while we believe that we are not exposed to significant credit risk due to the financial strength of these depository institutions or investments, the failure or collapse of one or more of these depository institutions or default on these investments could materially adversely affect our ability to recover these assets and/or materially harm our financial condition.

 

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership held by our existing stockholders will be reduced and our stockholders may experience significant dilution. In addition, new securities may contain rights, preferences, or privileges that are senior to those of our Common Stock. If we raise additional capital by incurring debt, this will result in increased interest expense. If we raise additional funds through the issuance of securities, market fluctuations in the price of our shares of Common Stock could limit our ability to obtain equity financing.

 

We cannot provide any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. If we are unable to raise capital when needed, our business, financial condition, and results of operations would be materially adversely affected, and we could be forced to reduce or discontinue our operations.

 

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We have entered into binding term sheets with third parties and cannot assure you that any anticipated arrangements under such term sheets will lead to definitive agreements. If we are unable to complete these arrangements in a timely manner and on terms favorable to us, our business may be adversely affected.

 

We have engaged in negotiations with a number of third parties and have agreed to terms regarding settlement of litigation in which the Company is involved and restructuring of certain debt. We may be unable to negotiate final terms in a timely manner, or at all, and there is no guarantee that the terms of any final, definitive, binding agreement will be the same or similar to those currently contemplated in the term sheets. Final terms may be less favorable to us than those set forth in the term sheets. Delays in negotiating final, definitive, binding agreements could slow the Company’s development, divert management’s attention from other matters, result in wasted resources, and cause the Company to consume capital significantly faster than it currently anticipates.

 

We face intense competition and many of our competitors have greater resources that may enable them to compete more effectively.

 

The industries in which we operate in general are subject to intense and increasing competition from other companies as well as from the illicit market. Some of our competitors may have greater capital resources, facilities, and diversity of product lines, which may enable them to compete more effectively in this market. Our competitors may devote their resources to developing and marketing products that will directly compete with our product lines. Illicit market participants divert customers away through product offerings, price point, anonymity and convenience. Due to this competition, there is no assurance that we will not encounter difficulties in obtaining revenues and market share or in the positioning of our products. Additionally, as the number of available licenses increase in the markets in which we operate, additional competition and increased product availability may result in competitors undercutting our prices. From time to time, we may need to reduce our prices in response to competitive and customer pressures and to maintain our market share, which could materially reduce our revenues. There are no assurances that competition in our respective industries will not lead to reduced prices for our products. If we are unable to successfully compete with existing companies and new entrants to the market, this will have a negative impact on our business and financial condition.

 

The effects of war, acts of terrorism, threat of terrorism, or other types of violence, could adversely affect our business.

 

Some of our stores are located in areas with a high amount of foot traffic. Any threat of terrorist attacks or actual terrorist events, or other types of violence, such as shootings or riots, could lead to lower consumer traffic and a decline in sales. Decreased sales could have a material adverse effect on our business, financial condition and results of operations.

 

If we fail to protect our intellectual property, our business could be adversely affected.

 

Our viability will depend, in part, on our ability to develop and maintain the proprietary aspects of our intellectual property to distinguish our products from our competitors’ products. We rely on copyrights, trademarks, trade secrets, and confidentiality provisions to establish and protect our intellectual property. We may not be able to enforce some of our intellectual property rights because cannabis is illegal under federal law.

 

Any infringement or misappropriation of our intellectual property could damage its value and limit our ability to compete. We may have to engage in litigation to protect the rights to our intellectual property, which could result in significant litigation costs and require a significant amount of our time. In addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside the United States, which could make it easier for competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by us.

 

Competitors may also harm our sales by designing products that mirror our products or processes that do not infringe on our intellectual property rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our intellectual property rights, our competitiveness could be impaired, which would limit our growth and future revenue.

 

We may also find it necessary to bring infringement or other actions against third parties to seek to protect our intellectual property rights. Litigation of this nature, even if successful, is often expensive and time-consuming to prosecute and there can be no assurance that we will have the financial or other resources to enforce our rights or be able to enforce our rights or prevent other parties from developing similar products or processes or designing around our intellectual property.

 

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Although we believe that our products and processes do not and will not infringe or violate the intellectual property rights of others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on our business.

 

We are not aware of any infringement by us of any person’s or entity’s intellectual property rights. In the event that products we sell or processes we employ are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our products or processes or obtain a license for the manufacture and/or sale of such products or processes or cease selling such products or employing such processes. In such event, we may not be able to modify our products or secure a license in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business.

 

We may not have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. If our products or processes are deemed to infringe or likely to infringe upon the patents or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business and our financial condition.

 

Our trade secrets may be difficult to protect.

 

Our success depends upon the skills, knowledge, and experience of our scientific and technical personnel, our consultants and advisors, as well as our licensors and contractors. Because we operate in several highly competitive industries, we rely in part on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality or non-disclosure agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers, and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties, confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property, and we enter into assignment agreements to perfect our rights.

 

These confidentiality, inventions, and assignment agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets could also be independently discovered by competitors, in which case we would not be able to prevent the use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive, and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.

 

Our business, financial condition, results of operations, and cash flow may in the future be negatively impacted by challenging global economic conditions, including negative impacts from continued inflation.

 

Future disruptions and volatility in global financial markets and declining consumer and business confidence could lead to decreased levels of consumer spending. These macroeconomic developments could negatively impact our business, which depends on the general economic environment and levels of consumer spending. As a result, we may not be able to maintain our existing customers or attract new customers, or we may be forced to reduce the price of our products. Additionally, continued upward rate of inflation could negatively impact any future profits that we might generate from our business. When the rate of inflation rises, the operational costs of running our Company also increases, such as labor costs, raw materials, and public utilities, thus affecting our ability to provide our products at competitive prices. An increase in the rate of inflation could force our customers to search for other products, causing us to lose business and revenue. We are unable to predict the likelihood of the occurrence, duration, or severity of such disruptions in the credit and financial markets and adverse global economic conditions. Any general or market-specific economic downturn could have a material adverse effect on our business, financial condition, results of operations, and cash flow.

 

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Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.

 

Our future success largely depends upon the continued services of our executive officers and management team. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any of our executive officers joins a competitor or forms a competing company, we may lose some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and results of operations, and thereby an investment in our stock.

 

Our continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need to hire and retain additional personnel as our business grows. There can be no assurance that we will be able to attract or retain highly qualified personnel. We face significant competition for skilled personnel in our industries. In particular, if the marijuana industry continues to grow, demand for personnel may become more competitive. This competition may make it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may not be able to effectively manage or grow our business, which could adversely affect our financial condition or business. As a result, the value of your investment could be significantly reduced or completely lost.

 

We may not be able to effectively manage our growth or improve our operational, financial, and management information systems, which would impair our results of operations.

 

In the near term, we intend to expand the scope of our operations activities significantly. If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on our business operations, finances, management, and other resources. The factors that may place strain on our resources include, but are not limited to, the following:

 

 

The need for continued development of our financial and information management systems;

 

The need to manage strategic relationships and agreements with manufacturers, customers, and partners; and

 

Difficulties in hiring and retaining skilled management, technical, and other personnel necessary to support and manage our business.

 

Additionally, our strategy envisions a period of rapid growth that may impose a significant burden on our administrative and operational resources. Our ability to effectively manage growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage, and retain qualified management and other personnel. There can be no assurance that we will be successful in recruiting and retaining new employees or retaining existing employees.

 

Our management may not be able to manage this growth effectively. Our failure to successfully manage growth could result in our sales not increasing commensurately with capital investments or otherwise materially adversely affecting our business, financial condition, or results of operations.

 

If we are unable to continually innovate and increase efficiencies, our ability to attract new customers may be adversely affected.

 

In the area of innovation, we must be able to develop new technologies and products that appeal to our customers. This depends, in part, on the technological and creative skills of our personnel and on our ability to protect our intellectual property rights. We may not be successful in the development, introduction, marketing, and sourcing of new technologies or innovations, that satisfy customer needs, achieve market acceptance, or generate satisfactory financial returns.

 

We depend on the popularity of consumer acceptance of our product lines.

 

Our ability to generate revenue and be successful in the implementation of our business plan is dependent on consumer acceptance and demand of our product lines. Acceptance of our products will depend on several factors, including availability, cost, ease of use, familiarity of use, convenience, effectiveness, safety, and reliability. If customers do not accept our products, or if we fail to meet customers’ needs and expectations adequately, our ability to continue generating revenues could be reduced.

 

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A drop in the retail price of medical and adult use marijuana products may negatively impact our business.

 

The demand for our products depends in part on the price of commercially grown marijuana. Fluctuations in economic and market conditions that impact the prices of commercially grown marijuana, such as increases in the supply of such marijuana and the decrease in the price of products using commercially grown marijuana, could cause the demand for marijuana products to decline, which would have a negative impact on our business.

 

Federal regulation and enforcement may adversely affect the implementation of cannabis laws and regulations may negatively impact our revenues and profits.

 

Currently, the CSA prohibits the manufacture, distribution, dispensation, and possession of cannabis. Unless Congress amends the CSA to alter the Schedule I status of cannabis, for which there can be no assurance, federal authorities may enforce current federal law, and we may be deemed to be producing, cultivating, or dispensing marijuana in violation of federal law. Active enforcement of the current federal regulatory position on cannabis may therefore indirectly and adversely affect our revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain.

 

We could be found to be violating laws related to cannabis.

 

Currently, the CSA prohibits the manufacture, distribution, dispensation, and possession of cannabis. Unless Congress amends the CSA to alter the Schedule I status of cannabis, for which there can be no assurance federal authorities may enforce current federal law, including the CSA in appropriate circumstances. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain. Because we cultivate, produce, sell and distribute marijuana, there is a risk that we will be deemed to facilitate the selling or distribution of medical marijuana in violation of federal law. Active enforcement of the CSA on cannabis may, hence cause a direct and adverse effect on our subsidiaries’ businesses, or intended businesses, and on our revenue and prospective profits.

 

Variations in state and local regulation, and enforcement in states that have legalized cannabis, may restrict cannabis-related activities, which may negatively impact our revenues and prospective profits.

 

Individual state and local laws do not always conform to the federal standard or to other states’ laws. A number of states have decriminalized marijuana to varying degrees, other states have created exemptions specifically for medical cannabis, and several have both decriminalization and medical laws. As of December 2022, 21 states and the District of Columbia have legalized the recreational use of cannabis. Variations exist among states that have legalized, decriminalized, or created medical marijuana exemptions. For example, certain states have limits on the number of marijuana plants that can be homegrown. In most states, the cultivation of marijuana for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical marijuana needing care or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of marijuana may indirectly and adversely affect our business and our revenue and profits.

 

If we are unable to obtain and maintain the permits and licenses required to operate our business in compliance with state and local regulations in California, we may experience negative effects on our business and results of operations.

 

Prospective customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of federal or state enforcement of laws prohibiting possession and sale of medical or recreational marijuana.

 

Our website is visible in jurisdictions where medicinal and adult use of marijuana is not permitted and, as a result, we may be found to be violating the laws of those jurisdictions.

 

Marijuana remains illegal under federal law.

 

Marijuana is a Schedule I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed with our business plan, especially in respect of our marijuana cultivation, production and dispensaries. In addition, our assets, including real property, cash, equipment and other goods, could be subject to asset forfeiture because marijuana is still federally illegal.

 

13

 

Increased attention to climate change and ESG matters may adversely impact our business.

 

We are subject to a variety of risks arising from environmental, social and governance (“ESG”) matters. ESG matters include increasing attention to climate change, climate risk, expectations on companies to address climate change, hiring practices, the diversity of the work force, racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business, and investor and societal expectations regarding ESG matters and disclosures.

 

Risks arising from ESG matters may adversely affect, among other things, reputation and the market price of our stock. Further, we may be exposed to negative publicity based on the identity and activities of those we do business with and the public’s view of the approach and performance of our customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. Our relationships and reputation with our existing and prospective customers and third parties with which we do business could be damaged if we were to become the subject of any such negative publicity.

 

This, in turn, could have an adverse effect on our ability to attract and retain customers and employees and could have a negative impact on the market price for our stock. Investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may result in adverse effects on the market price of our stock to the extent investors determine we have not made sufficient progress on ESG matters.

 

In addition, customers, employees, regulators and suppliers have also been focused on ESG matters. Companies that do not adapt to or comply with ESG expectations and standards, or that are perceived to have not responded appropriately to the growing concern regarding ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and other adverse consequences. To the extent ESG matters negatively impact our reputation, we may not be able to compete as effectively to recruit or retain employees, which may adversely affect our operations.

 

Further, growing public concern about climate change has resulted in the increased focus of local, state, regional, national and international regulatory bodies on greenhouse gas emissions and climate change issues. Policy changes and changes in federal, state and local legislation and regulations based on concerns about climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of "green" building codes, could result in increased capital expenditures on our existing properties (for example, to improve their energy efficiency) without a corresponding increase in revenue, resulting in adverse impacts to our results of operations.

 

14

 

We are not able to deduct some of our business expenses.

 

Section 280E of the Internal Revenue Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing us 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 nondeductible expenses is to its total revenues. Therefore, our marijuana business may be less profitable than it could otherwise be.

 

We may not be able to attract or retain a majority of independent directors.

 

Our board of directors is currently comprised of a majority of independent directors. However, through much of our history our board was not comprised of a majority of independent directors. We may in the future desire to list our common stock on The New York Stock Exchange (“NYSE”) or The NASDAQ Stock Market (“NASDAQ”), both of which require that a majority of our board be comprised of independent directors. We may have difficulty attracting and retaining independent directors because, among other things, we operate in the marijuana industry, and as a result we may be delayed or prevented from listing our common stock on the NYSE or NASDAQ.

 

We may not be able to successfully execute on our merger and acquisition strategy.

 

Our business plan depends in part on merging with or acquiring other businesses in the marijuana industry. The success of any acquisition will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses, and to retain their customers. Any acquisition may result in diversion of management’s attention from other business concerns, and such acquisition may be dilutive to our financial results and/or result in impairment charges and write-offs. We might also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction.

 

Although we expect to realize strategic, operational and financial benefits as a result of our acquisitions, we cannot predict whether and to what extent such benefits will be achieved. There are significant challenges to integrating an acquired operation into our business.

 

Any future acquisition could involve other risks, including the assumption of unidentified liabilities for which we, as a successor owner, may be responsible. These transactions typically involve a number of risks and present financial and other challenges, including the existence of unknown disputes, liabilities, or contingencies and changes in the industry, location, or regulatory or political environment in which these investments are located, that our due diligence review may not adequately uncover and that may arise after entering into such arrangements.

 

Laws and regulations affecting the medical and adult use marijuana industry are constantly changing, which could detrimentally affect our cultivation, production and dispensary operations.

 

Local, state, and federal medical and adult use marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and result in a material adverse effect on certain aspects of our planned operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to certain aspects of our cultivation, production and dispensary businesses, and our business of selling cannabis products. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

We may not obtain the necessary permits and authorizations to operate our medical and adult use marijuana businesses.

 

We may not be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations for our cultivation, production and dispensary businesses, or may only be able to do so at great cost. In addition, we may not be able to comply fully with the wide variety of laws and regulations applicable to the medical and adult use marijuana industry. Failure to comply with or to obtain the necessary licenses, permits, authorizations, or accreditations could result in restrictions on our ability to operate the medical and adult use marijuana business, which could have a material adverse effect on our business.

 

15

 

If we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.

 

Our participation in the medical and adult use marijuana industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities against us. Litigation, complaints, and enforcement actions could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability, and growth prospects. We have not been, and are not currently, subject to any material litigation, complaint, or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority.

 

We may have difficulty accessing the service of banks, which may make it difficult for us to operate.

 

Since the use of marijuana is illegal under federal law, many banks will not accept for deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. The inability to open or maintain bank accounts may make it difficult for us to operate our medical and adult use marijuana businesses. If any of our bank accounts are closed, we may have difficulty processing transactions in the ordinary course of business, including paying suppliers, employees and landlords, which could have a significant negative effect on our operations.

 

Litigation may adversely affect our business, financial condition, and results of operations.

 

From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business and the results of our operations.

 

Our insurance coverage may not cover all significant risk exposures.

 

We will be exposed to liabilities that are unique to the products we provide. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. In particular, we have had difficulty obtaining insurance because we operate in the marijuana industry. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition, and results of operations. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

 

We may become subject to legal proceedings and liability if our products are contaminated.

 

We source some of our products from third-party suppliers. Although we verify that the products we receive from third-party suppliers are adequately tested, we may not identify all contamination in those products. Possible contaminates include pesticides, molds and fungus. If any of our products harm a customer, they may sue us in addition to the supplier, and we may not have adequate insurance to cover any such claims, which could result in a negative effect on our results of operations.

 

Some of our lines of business rely on our third-party service providers to host and deliver services and data, and any interruptions or delays in these hosted services, security or privacy breaches, or failures in data collection could expose us to liability and harm our business and reputation.

 

Some of our lines of business and services, including our dispensaries, rely on services hosted and controlled directly by third-party service providers. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. If our business relationship with a third-party provider of hosting or software services is negatively affected, or if one of our service providers were to terminate its agreement with us, we might not be able to deliver access to our data, which could subject us to reputational harm and cause us to lose customers and future business, thereby reducing our revenue.

 

16

 

We hold large amounts of customer data, some of which is hosted in third-party facilities. A security incident at those facilities or ours may compromise the confidentiality, integrity or availability of customer data. Unauthorized access to customer data stored on our computers or networks may be obtained through break-ins, breaches of our secure network by an unauthorized party, employee theft or misuse or other misconduct. It is also possible that unauthorized access to customer data may be obtained through inadequate use of security controls by customers. Accounts created with weak passwords could allow cyber-attackers to gain access to customer data. If there were an inadvertent disclosure of customer information, or if a third party were to gain unauthorized access to the information we possess on behalf of our customers, our operations could be disrupted, our reputation could be damaged and we could be subject to claims or other liabilities. In addition, such perceived or actual unauthorized disclosure of the information we collect or breach of our security could damage our reputation, result in the loss of customers and harm our business.

 

Because of the large amount of data we collect and manage using our hosted solutions, it is possible that hardware or software failures or errors in our systems (or those of our third-party service providers) could result in data loss or corruption, cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant or cause us to fail to meet committed service levels. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors, including access to the Internet, the failure of our network or software systems or security breaches. In addition, computer viruses or other malware may harm our systems, causing us to lose data, and the transmission of computer viruses or other malware could expose us to litigation. We may also find, on occasion, that we cannot deliver data and reports in near real time because of a number of factors, including failures of our network or software. If we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could lose customers, or we could be found liable for damages or incur other losses.

 

Loss of access to our data could have a negative impact on our business and results of operations. In particular, the states in which we operate require that we maintain certain information about our customers and transactions. If we fail to maintain such information, we could be in violation of state laws.

 

Disruptions to cultivation, manufacturing and distribution of cannabis in California may negatively affect our access to products for sale at our dispensaries.

 

California laws and regulations require us to purchase products only from licensed vendors and through licensed distributors. To date, a relatively small number of licenses have been issued in California to cultivate, manufacture and distribute cannabis products. We have obtained a license to distribute products from our cultivation and manufacturing facilities to our dispensaries, however we currently do not cultivate and manufacture enough of our own products to satisfy customer demand. In addition, we carry products cultivated and manufactured by third parties. As a result, if an insufficient number of cultivators, manufacturers and distributors are able to obtain licenses our ability to purchase products and have them delivered to our dispensaries may be limited and may impact our sales.

 

High tax rates on cannabis and compliance costs in California may limit our customer base.

 

The States of California impose excise tax on products sold at licensed cannabis dispensaries. Local jurisdictions typically impose additional taxes on cannabis products. In addition, we incur significant costs complying with state and local laws and regulations. As a result, products sold at our dispensaries will likely cost more than similar products sold by unlicensed vendors and we may lose market share to those vendors.

 

Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

 

The Tax Cuts and Jobs Act, or the Tax Act, was enacted on December 22, 2017, and contains many changes to U.S. federal tax laws. The Tax Act requires complex computations that were not previously provided for under U.S. tax law and significantly revised the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. As of December 31, 2023, the Company has completed its accounting for the tax effects of the 2017 Tax Act. However, additional guidance may be issued by the Internal Revenue Service, the Department of the Treasury, or other governing body that may significantly differ from our interpretation of the law, which may result in a material adverse effect on our business, cash flow, results of operations or financial conditions.

 

17

 

Inadequate funding for the DOJ and other government agencies could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

In an effort to provide guidance to federal law enforcement, the DOJ has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011, in a memorandum from Deputy Attorney General James Cole on August 29, 2013, and in a memorandum from Attorney General Jefferson Sessions on January 4, 2018. Each memorandum provides that the DOJ is committed to the enforcement of the CSA but, the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.

 

The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits. Furthermore, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including California, from implementing their own laws that authorized the use, distribution, possession, or cultivation of medical marijuana. If a prolonged government shutdown occurs, it could enable the DOJ to enforce the CSA in states that have laws legalizing medical marijuana.

 

Californias Phase-In of Laboratory Testing Requirements could impact the availability of the products sold in our dispensaries.

 

Beginning July 1, 2018, cannabis goods must meet all statutory and regulatory requirements. A licensee can only sell cannabis goods that have been tested by a licensed testing laboratory and have passed all statutory and regulatory testing requirements. In order to be sold, cannabis goods harvested or manufactured prior to January 1, 2018, must be tested by a licensed testing laboratory and must comply with all testing requirements in section 5715 of the Bureau of Cannabis Control (“BCC”) regulations. Cannabis goods that do not meet all statutory and regulatory requirements must be destroyed in accordance with the rules pertaining to destruction.

 

There is uncertainty related to the regulation of vaporization products and certain other consumption accessories. Increased regulatory compliance burdens could have a material adverse impact on our business development efforts and our operations.

 

There is uncertainty regarding whether and in what circumstances federal, state, or local regulatory authorities will seek to develop and enforce regulations relative to vaporizer hardware and accessories that can be used to vaporize cannabis and/or tobacco. Further, it remains to be seen whether current or future regulations relating to tobacco vaporization products would also apply to cannabis vaporization products and related consumption accessories.

 

There has been increasing activity on the federal, state, and local levels with respect to scrutiny of vaporizer products. Federal, state, and local governmental bodies across the United States have indicated that vaporization products and certain other consumption accessories may become subject to new laws and regulations at the state and local levels. For example, in September 2019, the Administration announced a plan to ban the sale of most flavored e-cigarettes nationwide. At the state level, over 25 states have implemented statewide regulations that prohibit vaping in public places.

 

In January 2015, the California Department of Health declared electronic cigarettes and certain other vaporizer products a health threat that should be strictly regulated like tobacco products, and in September 2019, California’s governor issued an executive order on vaping, focused on enforcement and disclosure. Many states, provinces, and some cities have passed laws restricting the sale of electronic cigarettes and certain other tobacco vaporizer products. Some cities have also implemented more restrictive measures than their state counterparts, such as San Francisco, which in June 2018, approved a new ban on the sale of flavored tobacco products, including vaping liquids and menthol cigarettes. In August 2020, California prohibited the sale of most flavored tobacco products, including menthol cigarettes.

 

The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating cannabis vaporization products or consumption accessories could limit our ability to sell such products, result in additional compliance expenses, and require us to change our labeling and methods of distribution, any of which could have a material adverse effect on our business, results of operations and financial condition.

 

18

 

The scientific community has not yet extensively studied the long-term health effects of the use of vaporizer products.

 

Cannabis vaporizers and related products were recently developed and therefore the scientific community has not had a sufficient period of time to study the long-term health effects of their use. If the scientific community were to determine conclusively that use of any or all of these products poses long-term health risks, market demand for these products and their use could materially decline. Such a determination could also lead to litigation and significant regulation. Loss of demand for our product, product liability claims, and increased regulation stemming from unfavorable scientific studies on these products could have a material adverse effect on our business, results of operations, and financial condition.

 

If product liability lawsuits are brought against us, we will incur substantial liabilities.

 

We face an inherent risk of product liability. For example, we could be sued if any product we sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts.

 

Furthermore, vaporizer products and other similar consumption product manufacturers, suppliers, distributors, and sellers have recently become subject to litigation. While we have not been a party to any product liability litigation, several lawsuits have been brought against other manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. We may be subject to similar claims in the future relating to vaporizer products that we sell. We may also be named as a defendant in product liability litigation against one of our suppliers by association, including in class action lawsuits. In addition, we may see increasing litigation over our vaporizer products or the regulation of our products as the regulatory regimes surrounding these products develop. If such lawsuits are filed against us in the future, we could incur substantial costs, including costs to defend the cases and possible damages awards.

 

If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit sales of our products. Even a successful defense of these hypothetical future cases would require significant financial and management resources. If we are unable to successfully defend these hypothetical future cases, we could face at least the following potential consequences:

 

 

decreased demand for our products;

 

injury to our reputation;

 

costs to defend the related litigation;

 

a diversion of management’s time and our resources;

 

substantial monetary awards to users of our products;

 

product recalls or withdrawals;

 

loss of revenue; and

 

a decline in our stock price.

 

In addition, while we continue to take what we believe are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.

 

Unionization of employees could have a material adverse impact on our business.

 

Employees in our Blüm Oakland and Blüm San Leandro facilities are unionized. We could face an increased risk of work stoppages and higher labor costs wherever labor is organized. If additional employees at our dispensaries, production or cultivation facilities were to unionize, our relationship with our employees could be adversely affected. 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.

 

Inadequate funding for state and local regulatory agencies and the effects of COVID-19 could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

We operate in a highly regulated industry and rely on state and local regulatory agencies to issue licenses to operate our business and, in some cases, approve transfers of ownership interests in the event we intend to dispose of assets. Since the onset of the COVID-19 pandemic, many state and local regulatory agencies have been operating at reduced capacity which has resulted in delayed approvals of transfers of ownership interests.

 

19

 

Competition from synthetic production and technological advances could adversely impact our profitability.

 

The pharmaceutical industry may attempt to dominate the cannabis industry, and in particular, legal cannabis, through the development and distribution of synthetic products which emulate the effects and treatment of organic cannabis. If they are successful, the widespread popularity of such synthetic products could change the demand, volume and profitability of the cannabis industry. This could materially adversely affect the ability of the Company to secure long-term profitability and success through the sustainable and profitable operation of its business.

 

There are risks inherent in an agricultural business.

 

Medical and adult-use cannabis is an agricultural product. There are risks inherent in the cultivation business, such as insects, plant diseases and similar agricultural risks. Although the products are usually grown indoors or in green houses under climate-controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on the production of the products and, consequentially, on the business, financial condition and operating results of the Company.

 

We may suffer from unfavorable publicity or consumer perception.

 

The legal cannabis industry in the U.S. is at an early stage of its development. Cannabis has been, and is expected to continue to be, a controlled substance. Consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of cannabis are mixed and evolving. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for cannabis and on the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity, reports or other media attention regarding cannabis in general, or associating the consumption of cannabis with negative effects or events, could have such a material adverse effect.

 

Our independent registered public accounting firm's report for the year ended December 31, 2023 is qualified as to our ability to continue as a going concern.

 

Due to the uncertainty of our ability to meet our current operating and capital expenses, in our audited annual financial statements as of and for the year ended December 31, 2023, our independent registered public accounting firm included a note to our financial statements regarding concerns about our ability to continue as a going concern. Recurring losses from operations raise substantial doubt about our ability to continue as a going concern. The presence of the going concern note to our financial statements may have an adverse impact on the relationships we are developing and plan to develop with third parties as we continue the commercialization of our products and could make it challenging and difficult for us to raise additional financing, all of which could have a material adverse impact on our business and prospects and result in a significant or complete loss of your investment.

 

The Company has identified material weaknesses in its internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet the reporting obligations or result in material misstatements of our financial statements. If the Company fails to remediate any material weaknesses or if the Company fails to establish and maintain effective control over financial reporting, its ability to accurately and timely report its financial results could be adversely affected.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. The Company has identified material weaknesses pertaining to its primary user access controls and review of transactions and account reconciliations. The Company plans to implement measures designed to improve our internal control over financial reporting to remediate such material weaknesses, which will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.

 

20

 

If management is unable to further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, the Company’s ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject it to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in the financial statements and adversely impact the stock price. If the Company is unable to assert that its internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of the financial reports, the market price of the shares could be adversely affected and the Company could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

Furthermore, the Company cannot assure you that the measures it has taken to date, and actions it may take in the future, will be sufficient to remediate the control deficiencies that led to the material weakness in its internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. The current controls and any new controls that management develops may become inadequate because of changes in conditions in the business. Further, weaknesses in the disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm the Company’s operating results or cause the Company to fail to meet its reporting obligations and may result in a restatement of the financial statements for prior periods.

 

Risks Related to an Investment in Our Securities

 

We expect to experience volatility in the price of our Common Stock, which could negatively affect stockholders investments.

 

The trading price of our Common Stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. All of these factors could adversely affect our stockholders' ability to sell their shares of Common Stock or, if they are able to sell their shares, to sell their shares at a price that they determine to be fair or favorable.

 

Our Common Stock may be categorized as penny stock, which may make it more difficult for investors to sell their shares of Common Stock due to suitability requirements.

 

Our Common Stock may be categorized as “penny stock.” The SEC has adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The price of our Common Stock is significantly less than $5.00 per share and may therefore be considered a “penny stock.” This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer buying our securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks. These rules may restrict the ability and/or willingness of brokers or dealers to buy or sell our Common Stock, either directly or on behalf of their clients, may discourage potential stockholders from purchasing our Common Stock, or may adversely affect the ability of stockholders to sell their shares.

 

Financial Industry Regulatory Authority (FINRA) sales practice requirements may also limit a stockholders ability to buy and sell our Common Stock, which could depress the price of our Common Stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may limit investors' ability to buy and sell our shares of Common Stock, have an adverse effect on the market for our shares of Common Stock, and thereby depress our price per share of Common Stock.

 

21

 

Our voting control is concentrated.

 

Our Chief Executive Officer controls a significant amount of the voting power of our capital stock due to (i) his ownership of approximately 15% of the outstanding Common Stock, (ii) his ownership of approximately 25% of the Company’s outstanding Series V Preferred Stock, which vote in a number equal to two times the number of shares of the Common Stock into which such shares of Series V Preferred Stock are then convertible, and (iii) the fact that he has voting power over an additional approximately 75% of the Series V Preferred Stock owned by others due to such other owners executing Voting Agreements which provide Mr. Carrillo with their voting rights with respect to the Series V Preferred Stock owned by them. As a result, Mr. Carrillo potentially has the ability to control the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any arrangement or sale of all or substantially all of our assets. Certain other of our executive officers own, in the aggregate, approximately 1% of the outstanding shares of Common Stock and approximately 8% of the outstanding shares of Series V Preferred Stock.

 

This concentrated control could delay, defer, or prevent a change of control, arrangement, or merger involving sale of all or substantially all of our assets that our other stockholders may support. Conversely, this concentrated control could allow Mr. Carrillo and certain of our other executive officers to consummate such a transaction our other stockholders do not support.

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

 

Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

 

In addition, as permitted by Section 145 of the DGCL, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:

 

 

we will indemnify our directors and officers for serving us in those capacities to the fullest extent permitted by Delaware law;

 

we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law;

 

we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification;

 

we will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors ;

 

the rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and

 

we may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

 

We may issue additional shares of Common Stock or preferred stock in the future, which could cause significant dilution to all stockholders.

 

Our Certificate of Incorporation authorize the issuance of up to 990,000,000 shares of Common Stock and 50,000,000 shares of preferred stock, with a par value of $0.001 per share. As of April 10, 2024, we had 8,499,105 shares of Common Stock outstanding, 14,071,431 shares of Series V Preferred Stock outstanding, and no shares of Series N Preferred Stock outstanding. We may issue additional shares of Common Stock or preferred stock in the future in connection with a financing or an acquisition. Such issuances may not require the approval of our stockholders. In addition, certain of our outstanding rights to purchase additional shares of Common Stock or securities convertible into our Common Stock are subject to full-ratchet anti-dilution protection, which could result in the right to purchase significantly more shares of Common Stock being issued or a reduction in the purchase price for any such shares or both. Any issuance of additional shares of our Common Stock, or equity securities convertible into our Common Stock, including but not limited to, preferred stock, warrants, and options, will dilute the percentage ownership interest of all stockholders, may dilute the book value per share of our Common Stock, and may negatively impact the market price of our Common Stock.

 

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

 

Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or prevent a change in control of our Company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

 

 

authorizing our board of directors to issue preferred stock with voting or other rights or preferences that could discourage a takeover attempt or delay changes in control;

 

limiting the persons who may call special meetings of stockholders; and

 

requiring advance notification of stockholder nominations and proposals.

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, the provisions of Section 203 of the Delaware General Corporate Law (“DGCL”) govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of directors.

 

These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and under Delaware law, together with the voting control possessed by our founders, could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions.

 

22

 

Because we do not intend to pay any cash dividends on our Common Stock, our stockholders will not be able to receive a return on their shares unless they sell them.

 

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Declaring and paying future dividends, if any, will be determined by our board of directors, based upon earnings, financial condition, capital resources, capital requirements, restrictions in our Certificate of Incorporation, contractual restrictions, and such other factors as our board of directors deems relevant. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.

 

Failure to execute our strategies could result in impairment of goodwill or other intangible assets, which may negatively impact profitability.

 

As of December 31, 2023, we had goodwill of $3.59 million and other intangible assets of $1.36 million, which represented 15% of our total assets. As of December 31, 2022, we have goodwill of $3.59 million and other intangible assets of $2.86 million, which represented 16% of our total assets. We evaluate goodwill for impairment on an annual basis or more frequently if impairment indicators are present based upon the fair value of each reporting unit. We assess the impairment of other intangible assets on an annual basis, or more frequently if impairment indicators are present, based upon the expected future cash flows of the respective assets. These valuations include management’s estimates of sales, profitability, cash flow generation, capital structure, cost of debt, interest rates, capital expenditures, and other assumptions. Significant negative industry or economic trends, disruptions to our business, inability to achieve sales projections or cost savings, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets or in entity structure, and divestitures may adversely impact the assumptions used in the valuations. If the estimated fair value of our reporting units changes in future periods, we may be required to record an impairment charge related to goodwill or other intangible assets, which would reduce earnings in such period.

 

If our acquired intangible assets become impaired in the future, we may incur significant impairment charges.

 

At least annually, or whenever events or circumstances arise indicating impairment may exist, we review goodwill for impairment as required by generally accepted accounting principles in the United States. Long-lived assets other than goodwill and indefinite-lived intangible assets, held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

 

In the future, we may need to further reduce the carrying amount of goodwill and incur additional non-cash charges to our results of operations. Such charges could have the effect of reducing goodwill with a corresponding impairment expense and may have a material effect upon our reported results. The additional expense may reduce our reported profitability or increase our reported losses in future periods and could negatively affect the value of our securities, our ability to obtain other sources of capital, and may generally have a negative effect on our future operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 1C. CYBERSECURITY

 

Risk Management

 

The Company has established protocols for evaluating, identifying, and mitigating significant risks stemming from cybersecurity threats. These protocols are integrated into the Company's overarching risk management framework, including potential risks arising from the utilization of third-party service providers. Furthermore, the Company has instituted monitoring procedures to proactively address and minimize risks associated with data breaches or security breaches originating from external sources. Periodically, the Company may enlist the expertise of third-party consultants, legal advisors, and audit firms to assess and fortify its risk management systems, as well as to manage and resolve specific cybersecurity incidents, as deemed necessary.

 

Governance

 

Under our enterprise risk management initiative, the Board of Directors (“Board”) and the Audit Committee engage in regular discussions with our senior management team, including the Chief Executive Officer, Chief Financial Officer, and Chief Legal Officer, to manage cybersecurity threats. The Board and Audit Committee are promptly briefed on any cybersecurity incident surpassing predetermined reporting thresholds, receiving continuous updates until resolution.

 

Cybersecurity threats represent a paramount concern for the Company. Our information systems department collaborates closely with senior management to implement a comprehensive program aimed at safeguarding our information systems and promptly responding to cybersecurity incidents, adhering to established incident response and recovery protocols. Cross-functional teams are deployed across the organization to address and mitigate cybersecurity threats, with senior management overseeing prevention, detection, and remediation efforts in real-time, reporting significant developments to the Board and Audit Committee as necessary.

 

For the fiscal year ending December 31, 2023, no cybersecurity threats were identified that significantly impacted or are expected to significantly impact our business strategy, financial performance, or financial position. However, despite the robust capabilities, processes, and security measures in place, there exists the possibility of undetected vulnerabilities or misjudged risks. While our preventive measures aim to mitigate cybersecurity incidents, absolute security cannot be guaranteed, necessitating ongoing vigilance and adaptability in addressing potential risks.

 

23

 

ITEM 2. PROPERTIES

 

A summary of the offices and properties that we lease or own are presented in the table below. Each of our facilities is considered to be in good condition, adequate for its purpose, and suitably utilized according to the individual nature and requirements of the relevant operations.

 

           

Base

 

Lease

 

Lease

       

Own or

 

Monthly

 

Begin

 

End

Purpose

 

Location

 

Lease

 

Rent

 

Date

 

Date

                     

Cultivation Facility*

 

Oakland, CA

 

Lease

 

$ 28,384

 

1/1/2017

 

12/31/2024

Dispensary (Blüm Oakland)/Distribution Facility

 

Oakland, CA

 

Lease

 

$ 35,436

 

4/1/2016

 

3/31/2026

Dispensary (Blüm San Leandro)

 

San Leandro, CA

 

Lease

 

$ 28,384

 

1/1/2017

 

12/31/2024

Dispensary (Blüm OC)

 

Santa Ana, CA

 

Lease

 

$ 56,160

 

9/1/2021

 

3/1/2025

Dispensary (People's Costa Mesa)

 

Costa Mesa, CA

 

Lease

 

$ 62,131

 

9/1/2021

 

6/1/2036

Dispensary (People's DTLA)

 

Los Angeles, CA

 

Lease

 

$ 62,348

 

9/1/2021

 

10/31/2026

Corporate Headquarters and Dispensary (The Spot)

 

Santa Ana, CA

 

Own

           

 

* Indicates property related to discontinued operations.

 

ITEM 3. LEGAL PROCEEDINGS

 

See "Note 22  Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Part II of this Annual Report on Form 10-K, which is incorporated herein by reference.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

24

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our Common Stock is quoted on the OTC Markets Group, Inc.’s OTCQB tier under the symbol “BLMH.” Prior to February 12, 2024, our Common Stock was quoted on the OTCQB under the symbol “UNRV.” On April 10, 2024, the closing bid price on the OTC Markets Group, Inc.’s OTCQB tier for our Common Stock was $0.77.

 

Holders

 

As of April 10, 2024, there were 8,499,105 shares of Common Stock issued and outstanding (excluding shares of Common Stock issuable upon conversion of all of our warrants and options) held by approximately 261 stockholders of record.

 

Dividends

 

We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future. There are no restrictions in our Certificate of Incorporation or Bylaws that prevent us from declaring dividends. However, the terms of any future debt agreements or other contractual obligations may preclude us from paying dividends. As a result, capital appreciation, if any, of our shares of common stock will be your sole source of gain for the foreseeable future.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

On January 12, 2016, we adopted the 2016 Equity Incentive Plan (the “2016 Plan”), and our stockholders approved the 2016 Plan at our annual meeting of stockholders that was held on September 26, 2016. Pursuant to the terms of the 2016 Plan, the maximum number of shares of Common Stock available for the grant of awards under the 2016 Plan shall not exceed 2,000,000. During the years ended December 31, 2016, 2017, and 2018, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 1,300, 2,100, and 2,000 shares of Common Stock, respectively. The options have exercise prices of $254.00 to $504.00 per share, and generally vest quarterly over a three-year period.

 

On December 11, 2018, the Company’s board of directors approved the 2018 Equity Incentive Plan. On June 20, 2019, the Company adopted the Amended and Restated 2018 Equity Incentive Plan (the “2018 Plan”), and our stockholders approved the 2018 Plan at our annual meeting of stockholders that was held September 23, 2019. Pursuant to the terms of the 2018 Plan, the maximum number of shares of Common Stock available for the grant of awards under the 2018 Plan shall not exceed 13,000,000 shares. On February 14, 2020, the board of directors approved an amendment (the “Plan Amendment”) to the Company’s Amended and Restated 2018 Equity Incentive Plan to increase the number of shares available for issuance thereunder by 28,980,000 shares of Common Stock for a total of 43,980,000 shares of Common Stock, plus the number of shares, not to exceed 2,000,000 shares, that may become available under the Company’s 2016 Equity Incentive Plan after termination of awards thereunder, subject to adjustment in accordance with the terms of the Plan. During the years ended December 31, 2022 and 2021, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 589,800 and 250,100 shares of Common Stock, respectively. The options have exercise prices of $7.00 to $26.00 per share, and generally vest quarterly over a three-year period. During the year ended December 31, 2023, the Company granted ten-year options to executives and employees totaling 192,442, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 192,442 shares of Common Stock. The options have an exercise price of $1.00 and vest immediately on the grant date.

 

During the year ended December 31, 2018, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 3,500 shares of Common Stock that were not subject to the 2016 Equity Incentive Plan or the 2018 Equity Incentive Plan. The options have exercise prices of $202.00 per share, and generally vest quarterly over a three-year period.

 

25

 

On May 15, 2019, UMBRLA, Inc. approved the 2019 Equity Incentive Plan (the “UMBRLA Plan”). The UMBRLA Plan was subsequently amended by shareholder consents dated effective March 11, 2020 and November 2, 2020. Pursuant to the terms of the UMBRLA Plan as amended, the maximum number of shares of Common Stock available for the grant of awards under the UMBRLA Plan is 55,000,000 shares. At the time the acquisition of UMBRLA, Inc. completed, UMBRLA, Inc. had granted ten-year options to employees, directors, officers, and consultants totaling 539,570 shares. Immediately after the acquisition of UMBRLA, Inc. by the Company, those shares were assumed by the Company and will be honored in equivalent shares of Common Stock which equivalency equals an aggregate 830,171 shares. The options have exercise prices of $13.00 to $19.00, and with limited exceptions, vest in equal monthly installments over a four-year period, with the first one-quarter of the award vesting on the first anniversary following the vesting start date.

 

   

Equity Compensation Plan Information

 
                   

Number of

 
                   

Securities

 
                   

Remaining

 
                   

Available for

 
                   

Future

 
           

Range of

   

Issuance

 
           

Weighted-

   

Under

 
   

Number of

   

Average

   

Equity

 
   

Securities to be

   

Exercise

   

Compensation

 
   

Issued Upon

   

Price of

   

Plans

 
   

Exercise of Outstanding

   

Outstanding

   

Excluding

 
   

Options,

   

Options,

   

Securities

 
   

Warrants and

   

Warrants

   

Reflected in

 

Plan Category

 

Rights

   

and Rights

   

Column (a))

 
   

(a)

   

(b)

   

(c)

 

Equity Compensation Plans Approved By Security Holders

    368,351     $ 1.00 - 438.00       100,608,074  

Equity Compensation Plans Not Approved By Security Holders

    950       202.00        

Total

    369,301     $ 1.00 - 438.00       100,608,074  

 

Penny Stock Regulations

 

The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our Common Stock may fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1.00 million (excluding primary residence), or annual incomes exceeding $0.20 million individually, or $0.30 million, together with their spouse).

 

For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our Common Stock and may affect the ability of investors to sell their Common Stock in the secondary market.

 

Recent Sales of Unregistered Securities

 

In January 2023, the Company entered into Securities Purchase Agreements with certain investors, including Sabas Carrillo, the Company’s Chief Executive Officer, Patty Chan, the Company’s Chief Financial Officer, James Miller, the Company's Chief Operating Officer, and Robert Baca, the Company’s Chief Legal Officer. Pursuant to the Securities Purchase Agreement ("SPA"), the Company issued (i) 14,071,431 shares of Series V Preferred Stock at $0.14 per share which is equal to the closing share price of our Common Stock on December 30, 2022 on an as-converted-to-common stock-basis of one-tenth (1/10th) of a share of Common Stock for each one share of Series V Preferred Stock or $1.40 per share of Common Stock and (ii) 703,572 warrants to purchase up to 703,572 of Common Stock with an exercise price of $2.80 or equivalent to two times the as-converted-to-common stock purchase price of $1.40. The Company received total gross proceeds of $1.97 million from the private placement transaction.

 

During the year ended December 31, 2023, the Company issued 961,783 shares of the common stock to Adnant, LLC under the performance bonus award pursuant to the Original Adnant Letter dated August 12, 2022 and the A&R Engagement Letter dated June 30, 2023.

 

During the year ended December 31, 2023, the Company issued 759,403 shares of common stock to Brick City Productions, Inc. pursuant to the Management Services Agreement dated December 28, 2022.

 

ITEM 6. [RESERVED]

 

None.

 

26

 

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K beginning on page F-1. The following discussion contains forward-looking statements that involve risks and uncertainties. Investors should not place undue reliance on these forward-looking statements. These forward-looking statements are based on current expectations and actual results could differ materially from those discussed herein. Factors that could cause or contribute to the differences are discussed in Item 1A, Risk Factors and elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those predicted in these forward-looking statements, and the events anticipated in the forward-looking statements may not actually occur. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results or to reflect the occurrence of unanticipated events, unless required by applicable laws or regulations.

 

COMPANY OVERVIEW

 

Our Business

 

The Company is a cannabis company with retail, manufacturing, distribution, and cultivation operations throughout California, with an emphasis on providing the highest quality of medical and adult use cannabis products. The Company is home to Korova, a brand of high potency products across multiple product categories. The Company operates Blüm OC, a premier cannabis dispensary in Orange County, California, regularly servicing upwards of 800 customers each day. The Company also owns dispensaries in California which operate as The Spot in Santa Ana, Blüm in Oakland, and Blüm in San Leandro. As of December 31, 2023, the Company had 149 employees.

 

We are organized into two reportable segments:

 

Cannabis Retail – Includes cannabis-focused retail, both physical stores and non-store front delivery

Cannabis Distribution – Includes cannabis distribution operations

 

Either independently or in conjunction with third parties, we operate medical marijuana retail and adult use dispensaries, cultivation and manufacturing facilities in California.

 

Our corporate headquarters are located at 3242 S. Halladay St, Suite 202, Santa Ana, California 92705 and our telephone number is (888) 909-5564. Our website address is as follows: www.blumholdings.com. No information available on or through our websites shall be deemed to be incorporated into this Form 10-Q. Our common stock, par value $0.001 (the “Common Stock”), is quoted on the OTC Markets Group, Inc’s OTCQB tier under the symbol “BLMH.”

 

Corporate Reorganization

 

On January 12, 2024, Unrivaled Brands, Inc. ("UNRV") completed its previously announced corporate reorganization pursuant to the Reorganization Agreement, by and among Unrivaled Brands, Inc., Blum Holdings, Inc., and Blum Merger Sub, Inc ("Merger Sub"). The Reorganization Agreement provided for the merger of UNRV and Merger Sub, with UNRV surviving the merger as a wholly-owned subsidiary of Blüm. The Reorganization Agreement was approved and adopted by the stockholders of UNRV at its annual meeting of stockholders held on December 5, 2023. At the effective time of the Reorganization, all of the issued and outstanding shares of UNRV’s common stock, par value $0.001 per share were converted automatically on a one-for-one basis into shares of Blüm’s common stock, par value $0.001 per share, and all of the issued and outstanding shares of UNRV’s classes of preferred stock, par value $0.001 per share, were converted automatically on a one-for-one basis into shares of Blüm’s respective classes of preferred stock, par value $0.001 per share. On February 12, 2024, the Company began trading as "BLMH" on the OTCQB.

 

Effective January 12, 2024, the Company completed a reverse stock split of its common stock at a 1-for-100 ratio. Accordingly, all share and per share amounts for all periods presented in this Current Report on Form 10-K have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

 

Fiscal Year 2023 Highlights

 

Executive-Led Private Placement

 

In January 2023, the Company entered into Securities Purchase Agreements with certain investors, including Sabas Carrillo, the Company’s Chief Executive Officer, Patty Chan, the Company’s Chief Financial Officer, James Miller, the Company's Chief Operating Officer, and Robert Baca, the Company’s Chief Legal Officer. Pursuant to the SPA, the Company issued (i) 14,071,431 shares of Series V Preferred Stock at $0.14 per share which is equal to the closing share price of common stock on December 30, 2022 on an as-converted-to-common stock-basis of one-tenth (1/10th) of a share of common stock for each one share of Series V Preferred Stock or $1.40 per share of common stock and (ii) 703,572 warrants to purchase up to 703,572 of common stock with an exercise price of $2.80 or equivalent to two times the as-converted-to-common stock purchase price of $1.40. The Company received total gross proceeds of $1.97 million from the private placement transaction.

 

27

 

Settlement of People's Litigation & Amendments of Related Promissory Notes

 

On March 6, 2023, the Company entered into a binding settlement term sheet (“Settlement Term Sheet”) to resolve pending litigation matters with People’s California, LLC, subject to final documentation. Upon execution of the binding term sheet, the parties agreed to inform the court of the settlement and request a stay of all pending litigation.

 

As a result of the Settlement Term Sheet, the parties agreed to amend the terms of the secured promissory note dated November 22, 2021 (“Original Note”) wherein the Original Note was amended and restated into two secured promissory notes: a $3.00 million note ("$3M Note") and a $20.00 million note ("Settlement Note"). The $3M Note accrues simple interest at 10.0% annually, interest payable monthly in cash, and principal is due 180 days after effective date of the Settlement Term Sheet. Refer to “Note 13  Notes Payable” of the Consolidated Financial Statements for further information on the Settlement Term Sheet dated March 6, 2023.

 

On May 17, 2023, the Company amended the Settlement Term Sheet wherein the maturity date of the $3M Note was extended to December 6, 2023 and payments of the $5.00 million portion of the Up-front Settlement was extended through September 6, 2023, with $0.80 million being due and paid in cash on May 18, 2023. In addition, the Company shall make an additional $2.20 million principal repayment on or before September 6, 2023. Monthly interest payments were amended to provide the Company with the option to pay 50% of interest in the form of registered shares of Common Stock. Refer to “Note 13  Notes Payable” of the Consolidated Financial Statements for additional details.

 

Amendment of Promissory Notes Related to Silverstreak Acquisition

 

On March 23, 2023, the Company entered into a binding term sheet to settle an aggregate of $3.02 million of the promissory notes dated October 1, 2021 related to the acquisition of Silverstreak Solutions, Inc. in the original amount of $4.50 million. The Company and the noteholders agreed to reduce the total amount of principal and interest owed to $1.25 million, payable over 60 months, and bearing interest at a rate of 10.0% per annum.

 

Settlement of Mystic Holdings Litigation

 

On September 12, 2023, the Company announced the resolution of outstanding litigation with Mystic Holdings, Inc. ("Mystic"). The settlement grants Unrivaled up to two seats on the board of directors of Mystic in addition to its 5.5% of shares of Mystic common stock and 9.7% of Series A Preferred shares of Mystic which grant 1,100-to-1 voting rights and which convert on a 1-to-1 basis to Mystic common stock. The parties have agreed to explore opportunities for mutual collaboration and growth.

 

Amendment of Senior Convertible Promissory Notes & Settlement of Related Litigation

 

On November 15, 2023, the Company entered into a binding settlement term sheet for the senior convertible promissory notes issued in connection with the Securities Purchase Agreement dated January 25, 2021. Pursuant to the settlement, the Company agreed to pay the principal balance of $3.25 million on or before May 15, 2024 and the lender agreed to waive all accrued interest and penalties. In addition, the binding term sheet settles a related motion for summary judgement brought by certain of the investors. Refer to “Note 22 - Commitments and Contingencies” regarding the litigation between Dominion Capital LLC and M2B Funding Corp. vs Unrivaled Brands, Inc.

 

Cultivation Operations

 

In October 2023, the Company entered into a management services agreement with a third-party to manage and operate the Company’s cultivation facility in Oakland, California which had been non-operational since October 2022.

 

On December 15, 2023, the Company entered into a management services agreement with a third-party to manage and operate the Company's second cultivation operations in Oakland, California (the "MSA"). The agreement includes an option to purchase the licensed entity at its fair value or a negotiated price. In conjunction with the MSA, the parties entered into a binding letter of intent to sell 100% of the stock and assets of the licensed entity which was completed on January 28, 2024 for a purchase price of $1.40 million.

 

Accordingly, the Company’s cultivation operations were classified as discontinued operations during the fiscal fourth quarter of 2023. As a result, assets and liabilities allocable to the cultivation operations were classified as held for sale in the Consolidated Balance Sheets for all periods presented. Discontinued operations are presented separately from continuing operations in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for all periods presented.

 

28

 

Management Changes

 

On June 5, 2023, the Company announced the resignation of two of its board members, Nicholas Kovacevich and Eric Baum, effective July 1, 2023.

 

On June 12, 2023, the Company appointed Patty Chan as its Chief Financial Officer. Ms. Chan previously served as the Company’s Interim Chief Financial Officer since September 2022. Effective June 26, 2023, Chris Rivera was appointed as Interim Chief Financial Officer during Ms. Chan’s parental leave through November 2023.

 

On June 30, 2023, the Company’s board of directors (the “Board”) appointed Sabas Carrillo, the Chief Executive Officer, as Chairman of the Board and James Miller, the Chief Operating Officer, as a director on the Board, effective July 1, 2023. Mr. Carrillo has served as a member of the Board since December 2022.

 

On June 30, 2023, the Company amended and restated its engagement letter (“A&R Engagement Letter”) with Adnant, LLC (“Adnant”) dated August 12, 2022 pursuant to which Adnant will continue to provide certain executive level consulting and related business support and services through September 30, 2023. Effective April 1, 2023, as compensation for such services, Adnant is entitled to receive a monthly flat fee of $0.20 million. Adnant has the option to convert accrued and unpaid service fees into shares of common stock of the Company. In addition to the monthly fee described above, a Performance Bonus Award of $2.50 million shall be payable to Adnant in shares of the Company’s common stock (“Performance Bonus Award Shares”) based upon the achievement of the Performance Bonus Award Objectives set forth in the A&R Engagement Letter and the continued performance of Adnant towards obtaining such Performance Bonus Award Objectives. A transaction bonus award of $1.25 million is also available to Adnant subject to a change of control event approved by the Company’s Board of Directors with a value equal to or greater than $40.00 million in the aggregate. On December 29, 2023, the board of directors approved an extension of Adnant's continued services on a month-to-month basis under the terms of the A&R Engagement Letter.

 

On August 1, 2023, the Company appointed Matthew Barron to the board of directors and as a member of the audit committee of the Company.

 

Outlook
 
The Company will continue to focus on its performing assets, particularly California retail assets. In particular, the Company intends to emphasize retail business fundamentals including a robust and diverse product offering, improving inventory turn and vendor management to continue to optimize gross margins, effective marketing strategies focused on driving loyalty, reactivation of lapsed customers and new customer acquisitions. The Company remains excited as it embarks on reinvigorating the Korova brand. The Company will continue to focus on reducing and streamlining its corporate overhead and rightsizing the Company. This outlook is based on several management assumptions that are largely outside the control of the Company, including the continued overall down trending market conditions and highly promotional competitive landscape in our key markets. With a disciplined approach to analyzing retail performance and customer relationship management, a management team with extensive retail and cannabis industry and capital markets experience, deep relationships in the industry, and a commitment to investing in its team and, specifically, its company culture, the Company is encouraged that Unrivaled will emerge from its current restructuring efforts as an effective cannabis company. We will continue to seek further opportunities to expand profitability and maximize returns for its shareholders.

 

29

 

RESULTS OF OPERATIONS

 

The below table outlines our consolidated statements of operations for the three months and year ended December 31, 2023 and 2022:

 

   

Unaudited (in thousands)

   

(in thousands)

 
   

Three Months Ended December 31,

   

Year Ended December 31,

 
   

2023

   

2022

   

$ Change

   

% Change

   

2023

   

2022

   

$ Change

   

% Change

 
                                                                 

Revenue

  $ 8,095     $ 7,644     $ 451       5.9 %   $ 33,229     $ 52,015     $ (18,786 )     (36.1 )%

Cost of Goods Sold

    3,720       3,653       67       1.8 %     15,565       33,875       (18,310 )     (54.1 )%

Gross Profit

    4,375       3,991       384       9.6 %     17,664       18,140       (476 )     (2.6 )%

Gross Margin %

    54.0 %     52.2 %     1.8 %             53.2 %     34.9 %     18.3 %        
                                                                 

Operating Expenses (Income):

                                                               

Selling, General and Administrative Expenses

    9,254       4,928       4,326       87.8 %     30,263       52,684       (22,421 )     (42.6 )%

Impairment Expense

                      %           163,698       (163,698 )     (100.0 )%

Loss (Gain) on Disposal of Assets

    1,806       (15,304 )     17,110       (111.8 )%     1,607       (13,432 )     15,039       (112.0 )%

Total Operating Expenses (Income)

    11,060       (10,376 )     21,436       (206.6 )%     31,870       202,950       (171,080 )     (84.3 )%
                                                                 

Income (Loss) from Operations

    (6,685 )     14,367       (21,052 )     (146.5 )%     (14,206 )     (184,810 )     170,604       (92.3 )%

Other Income (Expense)

    346       (956 )     1,302       (136.2 )%     4,503       (1,884 )     6,387       (339.0 )%
                                                                 

Income (Loss) from Continuing Operations Before Provisions for Income Taxes

    (6,339 )     13,411       (19,750 )     (147.3 )%     (9,703 )     (186,694 )     176,991       (94.8 )%

Provision for Income Tax (Expense) Benefit for Continuing Operations

    (3,274 )     (2,802 )     (472 )     16.8 %     (4,116 )     2,784       (6,900 )     (247.8 )%
                                                                 

Net (Loss) Income from Continuing Operations

    (9,613 )     10,609       (20,222 )     (190.6 )%     (13,819 )     (183,910 )     170,091       (92.5 )%

Net Loss from Discontinued Operations

    (123 )     (7,056 )     6,933       (98.3 )%     (311 )     (4,746 )     4,435       (93.4 )%
                                                                 

Net (Loss) Income

    (9,736 )     3,553       (13,289 )     (374.0 )%     (14,130 )     (188,656 )     174,526       (92.5 )%
                                                                 

Net Income from Discontinued Operations Attributable to Non-Controlling Interest

                      %           275       (275 )     (100.0 )%
                                                                 

Net (Loss) Income Attributable to Unrivaled Brands, Inc.

  $ (9,736 )   $ 3,553     $ (13,289 )     (374.0 )%   $ (14,130 )   $ (188,931 )   $ 174,801       (92.5 )%

 

30

 

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

 

Revenue

 

Overall revenue was $33.23 million for the year ended December 31, 2023 compared to $52.02 million for the year ended December 31, 2022, a decrease of $18.79 million or 36.1%. Revenue from continuing operations in fiscal year 2023 was composed of retail revenue of $33.04 million and distribution revenue of $0.19 million. This compared to fiscal year 2022 revenue composed of retail revenue of $39.94 million and distribution revenue of $12.08 million.

 

Retail revenue for the year ended December 31, 2023 decreased compared to the same period in the prior year by $6.9 million or 17.3% due to the closure of our non-storefront delivery in Sacramento, California, the divestiture of the Downtown Los Angeles retail operations during the second quarter of 2022, and a general decline in the cannabis market since the last half of 2022. While we operated the non-storefront Sacramento retail operation and the Los Angeles retail operations during the year ended December 31, 2022, there were no operations of the same non-storefront Sacramento retail and Los Angeles retail operations during the year ended December 31, 2023, which contributed $2.29 million in revenues in the prior year.

 

Distribution revenue for the year ended December 31, 2023 decreased by $11.89 million or 98.4% compared to the same period in the prior year. During the fiscal third quarter of 2022, we eliminated third-party distribution operations in California due to underperforming margins, which contributed $11.56 million of revenue in fiscal year 2022. During the year ended December 31, 2023, the Company's cultivation operations were classified as discontinued operations and separately presented in the Consolidated Statements of Operations for all periods presented. Refer to "Note 18 - Discontinued Operations" of the notes to the Consolidated Financial Statements in Item 8 for further information.

 

Gross Profit

 

Cost of goods sold for the year ended December 31, 2023 was $15.57 million, a decrease of $18.31 million or 54.1% compared to $33.88 million for the year ended December 31, 2022. The decrease in cost of goods sold was directly impacted by the decrease in revenues for the current reporting period as compared to the prior year in addition to management's focused efforts to improve efficiencies and reduce costs.

 

Gross profit from continuing operations for the year ended December 31, 2023 was $17.66 million compared to $18.14 million for the year ended December 31, 2022, a decrease of $0.48 million or 2.6% which is generally consistent with prior year. The Company's overall gross margin improved for the year ended December 31, 2023 to 53.2% as compared to 34.9% for the same period in the prior year as the Company focused on its core assets and divested non-performing assets related to its distribution operations. Gross profit for on-going retail operations improved to 53.7% for the year ended December 31, 2023 compared to 51.0% for the same period in the prior year.

 

Selling, General & Administrative Expenses

 

Selling, general and administrative expenses for the year ended December 31, 2023 were $30.26 million compared to $52.68 million for the year ended December 31, 2022, a decrease of $22.42 million or 42.6%. As a result of the Company's restructuring plan implemented during the third fiscal quarter of 2022, the Company saw significant reductions in expenses during the year ended December 31, 2023 as compared to the same period in the prior year. Specifically, the Company saw a decrease of $6.96 million in depreciation and amortization expense, a decrease of $6.78 million in salaries and benefits, a decrease of $2.48 million in stock-based compensation, and a decrease of $2.10 million in bad debt expense. As a result of the strategic right-sizing of the Company's cannabis operations, the Company also saw a decrease of $1.57 million in rent related expenses, a decrease of $1.06 million in security fees, and a decrease of $1.68 million in licenses, fees and taxes. Management expects to continue focusing on efficiencies within its core assets and reducing non-core assets and expenditures.

 

Operating Loss

 

The Company realized an operating loss from continuing operations of $14.21 million for the year ended December 31, 2023 compared to $184.81 million for the year ended December 31, 2022, a decrease of $170.6 million or 92.3%. This improvement from the same period in the prior year was primarily attributable to the results of the Company's restructuring objectives noted above and an impairment loss of $163.70 million recognized in the year ended December 31, 2022, versus no impairment loss recognized in the current fiscal year.

 

Other Income (Expense)

 

Other income for the year ended December 31, 2023 was $4.5 million compared to other expense of $1.88 million for the year ended December 31, 2022, an improvement of $6.39 million. The change from the prior year was primarily attributable to a gain on extinguishment of debt of $5.44 million recognized during the current period.  Additionally, the improvement was also contributed by the cash receipt of $1.23 million in employer retention credits, versus no such transactions in the same period in the prior year.

 

Discontinued Operations

 

Net loss from discontinued operations was $0.31 million for the year ended December 31, 2023 compared to $4.75 million for the comparative prior period. The decrease of $4.44 million was primarily due to a decrease of $8.63 million in net income from the Company's cultivation operations. Specifically, we ceased operations at a cultivation facility in Northern California which provided no revenue in 2023 and began slowing down cultivation operations at our remaining facility in Northern California during the current year. In addition, all other entities classified as discontinued operations in prior periods were fully divested as of December 31, 2022, and as a result, the Company had no income or loss from discontinued operations for such entities during the year ended December 31, 2023.

 

31

 

Three Months Ended December 31, 2023 Compared to Three Months Ended December 31, 2022 (Unaudited)

 

Revenue

 

Overall revenue was $8.1 million for the three months ended December 31, 2023 compared to $7.64 million for the three months ended December 31, 2022, an increase of $0.45 million or 5.9%. Revenue from continuing operations in fiscal fourth quarter of 2023 was composed of retail revenue of $8.06 million and distribution revenue of $0.04 million. This compared to fiscal fourth quarter of 2022 revenue composed of retail revenue of $7.03 million and distribution revenue of $0.61 million.

 

Retail revenue for the three months ended December 31, 2023 increased by $1.02 million or 14.5% compared to the same period in the prior year.

 

Distribution revenue for the three months ended December 31, 2023 decreased by $0.57 million, or 93.5%, compared to the same period in the prior year. During fiscal year 2023, the Company scaled down its wholesale distribution operations in California and focused primarily on distribution to its own retail dispensaries.

 

Gross Profit

 

Cost of goods sold for the three months ended December 31, 2023 was $3.72 million which is generally consistent compared to $3.65 million for the three months ended December 31, 2022.

 

Gross profit from continuing operations for the three months ended December 31, 2023 was $4.38 million compared to $3.99 million for the three months ended December 31, 2022, an increase of $0.38 million or 9.6% which is generally consistent with the comparative prior quarter. The Company’s overall gross margin improved for the three months ended December 31, 2023 to 54.0% as compared to 52.2% for the three months ended December 31, 2022 as the Company focused on its core assets to maximize pricing and inventory strategy and divested non-performing assets related to its distribution operations. Gross profit for on-going retail operations improved to 54.5% for the three months ended December 31, 2023 compared to 51.5% for the same period in the prior year.

 

Selling, General & Administrative Expenses

 

Selling, general and administrative expenses for the three months ended December 31, 2023 were $9.25 million compared to $4.93 million for the three months ended December 31, 2022, an increase of $4.33 million, or 87.8%. The increase in selling, general and administrative expenses was primarily due to an increase of $2.17 million in income tax related interest and penalties and an increase of $2.17 million in professional fees related to the A&R Engagement Letter dated June 30, 2023 and an increase in legal fees related to the reorganization merger effected on January 12, 2024. Management expects to continue focusing on efficiencies within its core assets and reducing non-core assets and expenditures.

 

Operating Income (Loss)

 

The Company realized an operating loss from continuing operations of $6.69 million for the three months ended December 31, 2023 compared to an operating income from continuing operations of $14.37 million for the three months ended December 31, 2022, a decrease of $21.05 million or  146.5%. The decrease was primarily due to a gain on disposal of assets of $15.30 million related to the divestiture of non-core assets during the fiscal fourth quarter of 2022.

 

Other Income (Expense)

 

Other income for the three months ended December 31, 2023 was $0.35 million compared to other expense of $0.96 million for the three months ended December 31, 2022, a decrease of $1.3 million. The decrease in other expense was primarily attributable to a gain on extinguishment of debt of $2.42 million recognized during the fiscal fourth quarter of 2023, versus no such transaction in the same period in the prior year.

 

Discontinued Operations

 

Net loss from discontinued operations was $0.12 million for the three months ended December 31, 2023 compared to $7.06 million for the comparative prior period. The decrease of $6.93 million was primarily related to entities classified as discontinued operations in prior periods that were fully divested as of December 31, 2022, and as a result, the Company had no income or loss from discontinued operations for such entities during the three months ended December 31, 2023.

 

32

 

Three Months Ended December 31, 2023 Compared to Three Months Ended September 30, 2023 (Unaudited)

 

The below table outlines our consolidated statements of operations for the fiscal fourth quarter of 2023 compared to the fiscal third quarter of 2023:

 

   

Unaudited (in thousands)

 
   

Three Months Ended

 
   

December 31, 2023

   

September 30, 2023

   

$ Change

   

% Change

 
                                 

Revenue

  $ 8,095     $ 8,188     $ (93 )     (1.1 )%

Cost of Goods Sold

    3,720       4,021       (301 )     (7.5 )%

Gross Profit

    4,375       4,167       208       5.0 %

Gross Margin %

    54.0 %     50.9 %     3.2 %        
                                 

Operating Expenses:

                               

Selling, General & Administrative Expenses

    9,254       7,471       1,783       23.9 %

Loss on Disposal of Assets

    1,806       1,540       266       17.3 %

Total Operating Expenses, Net

    11,060       9,011       2,049       22.7 %
                                 

Loss from Operations

    (6,685 )     (4,844 )     (1,841 )     38.0 %

Other Income

    346       2,022       (1,676 )     (82.9 )%
                                 

Loss from Continuing Operations Before Provisions for Income Taxes

    (6,339 )     (2,822 )     (3,517 )     124.6 %

Provision for Income Tax Expense for Continuing Operations

    (3,274 )     (309 )     (2,965 )     959.5 %
                                 

Net Loss from Continuing Operations

    (9,613 )     (3,131 )     (6,482 )     207.0 %

Net Loss from Discontinued Operations

    (123 )     (231 )     108       (46.8 )%
                                 

Net Loss Attributable to Unrivaled Brands, Inc.

  $ (9,736 )   $ (3,362 )   $ (6,374 )     189.6

%

 

Revenue

 

Revenues for the three months ended December 31, 2023 were generally consistent with the preceding quarter ended September 30, 2023.

 

Gross Profit

 

Cost of goods sold for the three months ended December 31, 2023 was $3.72 million, a decrease of $0.3 million or 7.5% compared to $4.02 million for the three months ended September 30, 2023. The decrease in cost of goods sold was primarily due to management's continued efforts to improve efficiencies and reduce costs.

 

Gross profit from continuing operations for the three months ended December 31, 2023 was $4.38 million compared to $4.17 million for the three months ended September 30, 2023, an increase of $0.21 million or 5.0%. The increase in gross profit was primarily attributable to the decrease in cost of goods sold as described above. The Company’s overall gross margin improved for the three months ended December 31, 2023 to 54.0% as compared to 50.9% for the three months ended September 30, 2023 as the Company focused on its core assets to maximize pricing and inventory strategy and divested non-performing assets. Specifically, during the fiscal fourth quarter ended December 31, 2023, the Company entered into management services agreements for its two cultivation facilities in Oakland, California which became classified as discontinued operations.

 

Selling, General & Administrative Expenses

 

Selling, general and administrative expenses for the three months ended December 31, 2023 were $9.25 million compared to $7.47 million for the three months ended September 30, 2023, an increase of $1.78 million or 23.9%. The increase was primarily due to an increase of $2.17 million in income tax related penalties.

 

Operating Loss

 

The Company realized an operating loss from continuing operations of $6.69 million for the three months ended December 31, 2023 compared to $4.84 million for the three months ended September 30, 2023, an increase of $1.84 million or 38.0%. The  increase in operating loss from the preceding quarter was primarily due to changes in selling, general and administrative expenses as described above.

 

Other Income

 

Other income for the three months ended December 31, 2023 was $0.35 million compared to $2.02 million for the three months ended September 30, 2023, a decrease of $1.68 million or 82.9%. The decrease in other income was primarily attributable to a gain on extinguishment of debt of $2.42 million recognized during the fiscal fourth quarter of 2023, versus none in the consecutive prior quarter, as well as income from employer retention credit totaling $1.23 million received during the fiscal third quarter of 2023. In addition, the Company recognized an unrealized loss on investment of $0.67 million related to its shares in Mystic Holdings, Inc. for the three months ended December 31, 2023 versus an unrealized gain on investment of $1.33 million in the preceding quarter.

 

Discontinued Operations

 

Net loss from discontinued operations was $0.12 million for the three months ended December 31, 2023, a decrease compared to $0.23 million for the consecutive prior period as the Company winded down operations at its cultivation facilities and classified its cultivation operations as discontinued operations during the fiscal fourth quarter of 2023.

 

33

 

Non-GAAP Reconciliations

 

Non-GAAP earnings is a supplemental measure of our performance that is neither required by, nor presented in accordance with, U.S. generally accepted accounting principles (“US GAAP”). Non-GAAP earnings is not a measurement of the Company’s financial performance under US GAAP and should not be considered as alternative to net income, operating income, or any other performance measures derived in accordance with US GAAP, or as alternative to cash flows from operating activities as a measure of the Company’s liquidity. In addition, in evaluating non-GAAP earnings, you should be aware that in the future the Company will incur expenses or charges such as those added back to calculate non-GAAP earnings. The Company’s presentation of non-GAAP earnings should not be construed as an inference that its future results will be unaffected by unusual or nonrecurring items.

 

Non-GAAP earnings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company’s results as reported under US GAAP. Some of these limitations are (i) it does not reflect the Company’s cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) it does not reflect changes in, or cash requirements for, the Company’s working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and non-GAAP earnings does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in the Company's statements of cash flows, and (vi) other companies in our industry may calculate this measure differently than we do, limiting its usefulness as comparative measures.

 

The Company compensates for these limitations by providing specific information regarding the US GAAP amounts excluded from such non-GAAP financial measures. The Company further compensates for the limitations in our use of non-GAAP financial measures by presenting comparable US GAAP measures more prominently.

 

The Company believes that non-GAAP earnings facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). The Company also presents non-GAAP earnings because (i) it believes that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in the Company’s industry, (ii) the Company believes that investors will find these measures useful in assessing the Company's ability to service or incur indebtedness, and (iii) the Company uses non-GAAP earnings internally as benchmark to compare its performance to that of its competitors.

 

In the presentation of the financial results below, the Company reconciles Non-GAAP Adjusted EBITDA (Loss) Income with net loss attributable to continuing operations, the most directly comparable GAAP measure. Management believes that this presentation may be more meaningful in analyzing our income generation.

 

34

 

On a non-GAAP basis, the Company recorded Non-GAAP Adjusted EBITDA Loss of $4.33 million for the three months ended December 31, 2023 compared to Non-GAAP Adjusted EBITDA Income of $1.19 million for the three months ended December 31, 2022. For the year ended December 31, 2023, the Company recorded Non-GAAP Adjusted EBITDA Loss of $6.06 million compared to $18.3 million for the year ended December 31, 2022. The details of those expenses and non-GAAP reconciliation of these non-cash items are set forth below:

 

   

Unaudited (in thousands)

   

(in thousands)

 
   

Three Months Ended December 31,

   

Year Ended December 31,

 
   

2023

   

2022

   

2023

   

2022

 

Net (Loss) Income

  $ (9,736 )   $ 3,553     $ (14,130 )   $ (188,656 )

Less: Net Loss from Discontinued Operations, Net

    123       7,056       311       4,746  

Add (Deduct) Impact of:

                               

Interest Expense

    1,622       1,587       3,777       4,173  

Provision for Income Tax Expense (Benefit)

    3,274       2,802       4,116       (2,784 )

Depreciation Expense

    79       251       440       1,271  

Amortization of Intangible Assets

          490       1,500       7,616  

EBITDA (Loss) Income from Continuing Operations (Non-GAAP)

  $ (4,638 )   $ 15,739     $ (3,986 )   $ (173,634 )
                                 

Non-GAAP Adjustments:

                               

Stock-based Compensation Expense

    253       507       2,435       4,919  

Impairment of Assets

                      163,698  

Severance Expense for Series A Share Repurchases

          (12 )           901  

Realized Loss on Sale of Investments

                61        

Unrealized Loss (Gain) on Investments

    666       260       (667 )     (210 )

Loss (Gain) on Disposal of Assets

    1,806       (15,304 )     1,607       (13,432 )

Gain on Settlement of Liabilities

    (1 )           (70 )      

Gain on Extinguishment of Debt

    (2,415 )           (5,441 )     (542 )

Adjusted EBITDA (Loss) Income from Continuing Operations (Non-GAAP)

  $ (4,329 )   $ 1,190     $ (6,061 )   $ (18,300 )

 

35

 

LIQUIDITY AND CAPITAL RESOURCES

 

We incurred pre-tax net loss from continuing operations of $9.7 million and $186.69 million for the years ended December 31, 2023 and 2022, respectively, and have an accumulated deficit of $454.18 million and $440.05 million at December 31, 2023 and 2022, respectively. As of December 31, 2023, we had a working capital deficit of $57.86 million, including $0.86 million of cash, compared to a working capital deficit of $54.57 million, including $1.2 million of cash, as of December 31, 2022. Current assets were approximately 0.08 times current liabilities as of December 31, 2023, compared to approximately 0.08 times current liabilities as of December 31, 2022.

 

We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital through private sales of common stock, preferred stock, and debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations.

 

We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We continue to evaluate various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling common stock. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations, or if we are able to raise capital, that such capital will be available to us on acceptable terms, on an acceptable schedule, or at all.

 

The risks and uncertainties surrounding the Company’s ability to continue to raise capital and its limited capital resources raise substantial doubt as to the Company’s ability to continue as a going concern for twelve months from the issuance of these financial statements. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. For additional information on, see Item 1A – “Risk Factors in Part I of this Form 10-K.

 

Operating Activities

 

Cash used in operating activities for the year ended December 31, 2023 was $1.34 million compared to $7.95 million for the year ended December 31, 2022, a decrease of $6.61 million, or 83.2%. The decrease in cash used in operating activities was primarily due to a slowdown in cash payments of payables and accrued expenses, partly due to the lack of capital during the current year and our increased efforts to scale back on non-accretive expenditures. During fiscal year 2023, management focused on its turnaround plan to stabilize operations to put the Company on a path to profitability. Management took decisive action to preserve operating cash flow by reducing cash burn, prioritizing payments, renegotiating vendor agreements and closing underperforming business units. Management expects to see improvement in cash flow from operating activities as the Company continues to execute its strategic restructuring.

 

Investing Activities

 

Cash provided by investing activities for the year ended December 31, 2023 was $0.46 million compared to $19.73 million for the year ended December 31, 2022, a decrease of $19.27 million, or 97.7%. The decrease in cash provided by investing activities was primarily due to $20.71 million in cash proceeds from the sale of the Dyer property, the Reno dispensary and the NuLeaf joint venture in the prior year, versus no such transactions in the current year.

 

Financing Activities

 

Cash provided by financing activities for the year ended December 31, 2023 was $0.54 million compared to $17.28 million used in financing activities for the year ended December 31, 2022, a decrease of $17.81 million, or 103.1%. The decrease in cash used in financing activities for the year ended December 31, 2023 was primarily due to $21.65 million of principal repayments of debt in the prior year while the Company had minimal debt payments in the current year.

 

36

 

Results of Operations for the Three and Nine Months ended September 30, 2023 (Unaudited and As Restated)

 

The below table outlines our consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022:

 

As Restated

 

Unaudited (in thousands)

   

Unaudited (in thousands)

 
   

For the three months ended September 30,

   

For the nine months ended September 30,

 
   

2023

   

2022

   

$ Change

   

% Change

   

2023

   

2022

   

$ Change

   

% Change

 
                                                                 

Revenue

  $ 8,612     $ 9,721     $ (1,109 )     (11.4 )%   $ 26,649     $ 44,371     $ (17,722 )     (39.9 )%

Cost of Goods Sold

    4,618       9,763       (5,145 )     (52.7 )%     13,360       30,213       (16,853 )     (55.8 )%

Gross Profit

    3,994       (42 )     4,036       (9609.5 )%     13,289       14,158       (869 )     (6.1 )%

Gross Margin %

    46.4 %     (0.4 )%     46.8 %             49.9 %     31.9 %     18.0 %        
                                                                 

Operating Expenses (Income):

                                                               

Selling, General and Administrative Expenses

    7,529       12,752       (5,223 )     (41.0 )%     21,197       48,843       (27,646 )     (56.6 )%

Impairment Expense

          107,972       (107,972 )     (100.0 )%           163,698       (163,698 )     (100.0 )%

Loss (Gain) on Disposal of Assets

    1,540       1,529       11       0.7 %     1,607       1,872       (265 )     (14.2 )%

Total Operating Expenses (Income)

    9,069       122,253       (113,184 )     (92.6 )%     22,804       214,413       (191,609 )     (89.4 )%
                                                                 

Income (Loss) from Operations

    (5,075 )     (122,295 )     117,220       (95.9 )%     (9,515 )     (200,255 )     190,740       (95.2 )%

Other Income (Expense)

    2,022       (1,087 )     3,109       (286.0 )%     4,157       (928 )     5,085       (548.0 )%
                                                                 

Income (Loss) from Continuing Operations Before Provisions for Income Taxes

    (3,053 )     (123,382 )     120,329       (97.5 )%     (5,358 )     (201,183 )     195,825       (97.3 )%

Provision for Income Tax (Expense) Benefit for Continuing Operations

    (309 )     3,450       (3,759 )     (109.0 )%     (842 )     5,586       (6,428 )     (115.1 )%
                                                                 

Net (Loss) Income from Continuing Operations

    (3,362 )     (119,932 )     116,570       (97.2 )%     (6,200 )     (195,597 )     189,397       (96.8 )%

Net Loss from Discontinued Operations

          25       (25 )     (100.0 )%           3,374       (3,374 )     (100.0 )%
                                                                 

Net (Loss) Income

    (3,362 )     (119,907 )     116,545       (97.2 )%     (6,200 )     (192,223 )     186,023       (96.8 )%
                                                                 

Net Income from Discontinued Operations Attributable to Non-Controlling Interest

                      %           275       (275 )     (100.0 )%
                                                                 

Net (Loss) Income Attributable to Unrivaled Brands, Inc.

  $ (3,362 )   $ (119,907 )   $ 116,545       (97.2 )%   $ (6,200 )   $ (192,498 )   $ 186,298       (96.8 )%

 

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

 

Revenue

 

Overall revenue for the three months ended September 30, 2023 was $8.61 million compared to $9.72 million for the same period in 2022, a decrease of $1.11 million or 11.4%. During the three months ended September 30, 2023, the Company generated revenue from continuing operations of $8.61 million composed of retail revenue of $8.10 million and cultivation/distribution revenue of $0.51 million. This compared to revenue from continuing operations of $9.72 million for the quarter ended September 30, 2022, which included retail revenue of $9.25 million and cultivation/distribution revenue of $0.47 million.

 

Retail revenue for the three months ended September 30, 2023 decreased compared to the same period in the prior year by $1.15 million or 12.4% due a general decline in the cannabis market since the last half of 2022. Cultivation and distribution revenue for the three months ended September 30, 2023 was generally consistent with the same period in the prior year.

 

37

 

Gross Profit

 

Cost of goods sold for the three months ended September 30, 2023 was $4.62 million, a decrease of $5.15 million, or 52.7%, compared to $9.76 million for the three months ended September 30, 2022. The decrease in cost of goods sold was directly impacted by the decrease in revenues for the current reporting period as compared to the prior year.

 

Gross profit from continuing operations for the three months ended September 30, 2023 was $3.99 million compared to a gross profit of $(0.04) million for the three months ended September 30, 2022, an increase of $4.04 million or 9,609.5%.

 

The increase in gross profit was directly impacted by the significant inventory write down on its distribution and wholesale operations in the prior year, resulting in negative consolidated gross margins. In addition, the Company's gross margin improved for the three months September 30, 2023 to 46.4% as compared to (0.4)% for the same period in the prior year as the Company focused on its core assets to maximize pricing and inventory strategy and divested non-performing assets related to its distribution operations. Gross profit for on-going retail operations stabilized to 52.3% for the three months ended September 30, 2023 compared to 58.3% for the same period in the prior year.

 

Selling, General & Administrative Expenses

 

Selling, general and administrative expenses for the three months ended September 30, 2023 were $7.53 million, compared to $12.75 million for the three months ended September 30, 2022, a decrease of $5.22 million or 41.0%. As a result of the Company's restructuring plan implemented during the third fiscal quarter of 2022, the Company saw significant reductions in expenses during the three months ended September 30, 2023 as compared to the same period in the prior year. Specifically, the Company saw a decrease of $2.66 million in depreciation and amortization expense, a decrease of $2.26 million in facility related expenses, such as rent, utilities, repairs and maintenance, security, and insurance, and a decrease of $1.43 million in salaries and benefits. Management expects to continue focusing on efficiencies within its core assets and reducing non-core assets and expenditures.

 

Operating Loss

 

The Company realized an operating loss from continuing operations of $5.08 million for the three months ended September 30, 2023 compared to $122.30 million for the three months ended September 30, 2022, a decrease of $117.22 million or 95.9%. This improvement from the same period in the prior year was primarily attributable to the results of the Company's restructuring objectives noted above and an impairment loss of $107.97 million recognized in the three months ended September 30, 2022, versus no impairment loss recognized during the current period.

 

38

 

Other Income (Expense)

 

Other income for the three months ended September 30, 2023 of $2.02 million improved significantly compared to other expense of $1.09 million for the three months ended September 30, 2022, an improvement of $3.11 million. The improvement was due to the Company recording income from employer retention credits of $1.23 million and an unrealized gain on investment of $1.33 million for the shares in Mystic Holdings, Inc. recognized as a result of the litigation settlement during the three months ended September 30, 2023, versus no such transactions in the same period in the prior year.

 

Discontinued Operations

 

Net income from discontinued operations was nil for the three months ended September 30, 2023 compared to $0.03 million for the comparative prior period. All discontinued operations were fully divested as of December 31, 2022, and as a result, the Company had no income or loss from discontinued operations for the three months ended September 30, 2023.

 

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

 

Revenue

 

Overall revenue was $26.65 million for the nine months ended September 30, 2023 compared to $44.37 million for the same period in 2022, a decrease of $17.72 million or 39.9%. Revenue from continuing operations of $26.65 million for the nine months ended September 30, 2023 was composed of retail revenue of $24.99 million and cultivation/distribution revenue of $1.66 million. This compared to revenue from continuing operations of $44.37 million for the nine months ended September 30, 2022, which included retail revenue of $32.91 million and cultivation/distribution revenue of $11.47 million.

 

Retail revenue for the nine months ended September 30, 2023 decreased compared to the same period in the prior year by $7.92 million or 24.1% due to the closure of our non-storefront delivery in Sacramento, California, the divestiture of the Downtown Los Angeles retail operations during the second quarter of 2022, and a general decline in the cannabis market since the last half of 2022. While we operated the non-storefront Sacramento retail operation and the Los Angeles retail operations during the nine months ended September 30, 2022, there were no operations of the same non-storefront Sacramento retail and Los Angeles retail operations during the nine months ended September 30, 2023, which contributed $2.29 million in revenues in the prior year.

 

Cultivation and distribution revenue for the nine months ended September 30, 2023 decreased by $9.80 million or 85.5% compared to the same period in the prior year due the closure of all cultivation and distribution operations as part of the Company's turnaround plan, except for a cultivation facility in Northern California which remains as of September 30, 2023. Specifically, we eliminated third-party distribution operations in California which contributed $12.34 million of revenue in the same period in the prior year. We also ceased operations at a cultivation facility in Northern California which provided no revenue in 2023 and began slowing down cultivation operations at our remaining facility in Northern California, which provided $1.41 million of revenue in the current year compared to $2.39 million in the prior year.

 

Gross Profit

 

Cost of goods sold for the nine months ended September 30, 2023 was $13.36 million, a decrease of $16.85 million or 55.8% compared to $30.21 million for the nine months ended September 30, 2022. The decrease in cost of goods sold was directly impacted by the decrease in revenues for the current reporting period as compared to the prior year.

 

Gross profit from continuing operations for the nine months ended September 30, 2023 was $13.29 million compared to a gross profit of $14.16 million for the nine months ended September 30, 2022, a decrease of $0.87 million or 6.1%. The decrease in gross profit was directly impacted by the decrease in revenues for the current reporting period as compared to the prior year. However, the Company's overall gross margin improved for the nine months September 30, 2023 to 49.9% as compared to 31.9% for the same period in the prior year as the Company focused on its core assets and divested non-performing assets related to its distribution operations. Gross profit for on-going retail operations improved to 53.5% for the nine months ended September 30, 2023 compared to 50.9% for the same period in the prior year.

 

39

 

Selling, General & Administrative Expenses

 

Selling, general and administrative expenses for the nine months ended September 30, 2023 were $21.20 million, compared to $48.84 million for the nine months ended September 30, 2022, a decrease of $27.65 million or 56.6%. As a result of the Company's restructuring plan implemented during the third fiscal quarter of 2022, the Company saw significant reductions in expenses during the nine months ended September 30, 2023 as compared to the same period in the prior year. Specifically, the Company saw a decrease of $7.70 million in depreciation and amortization expense, a decrease of $5.33 million in facility related expenses, such as rent, utilities, repairs and maintenance, security, and insurance, a decrease of $7.36 million in salaries and benefits, and a decrease of $2.23 million in stock-based compensation. Management expects to continue focusing on efficiencies within its core assets and reducing non-core assets and expenditures.

 

Operating Loss

 

The Company realized an operating loss from continuing operations of $9.52 million for the nine months ended September 30, 2023 compared to $200.26 million for the nine months ended September 30, 2022, a decrease of $190.74 million or 95.2%. This improvement from the same period in the prior year was primarily attributable to the results of the Company's restructuring objectives noted above and an impairment loss of $163.70 million recognized in the nine months ended September 30, 2022, versus no impairment loss recognized in the nine months ended September 30, 2023.

 

Other Income (Expense)

 

Other income for the nine months ended September 30, 2023 was $4.16 million compared to other expense of $0.93 million for the nine months ended September 30, 2022, an improvement of $5.08 million. The change from the prior year was primarily attributable to a gain on extinguishment of debt of $3.03 million recognized during the current period. Additionally, the improvement was also contributed by the cash receipt of $1.23 million in employer retention credits and an unrealized gain on investment of $1.33 million for the shares in Mystic Holdings, Inc. recognized as a result of the litigation settlement during the nine months ended September 30, 2023, versus no such transactions in the same period in the prior year.

 

Discontinued Operations

 

Net income from discontinued operations was nil for the nine months ended September 30, 2023 compared to $3.37 million for the comparative prior period. All discontinued operations were fully divested as of December 31, 2022, and as a result, the Company had no income or loss from discontinued operations for the nine months ended September 30, 2023.

 

40

 

Three Months Ended September 30, 2023 Compared to Three Months Ended June 30, 2023

 

The below table outlines our consolidated statements of operations for the fiscal third quarter of 2023 compared to the fiscal second quarter of 2023:

 

As Restated

 

Unaudited (in thousands)

 
   

Three Months Ended

 
   

September 30, 2023

   

June 30, 2023

   

$ Change

   

% Change

 
                                 

Revenue

  $ 8,612     $ 8,797     $ (185 )     (2.1 )%

Cost of Goods Sold

    4,618       4,197       421       10.0 %

Gross Profit

    3,994       4,600       (606 )     (13.2 )%

Gross Margin %

    46.4 %     52.3 %     (5.9 )%        
                                 

Operating Expenses:

                               

Selling, General & Administrative Expenses

    7,529       8,071       (542 )     (6.7 )%

Loss on Disposal of Assets

    1,540       67       1,473       2,198.5 %

Total Operating Expenses, Net

    9,069       8,138       931       11.4 %
                                 

Loss from Operations

    (5,075 )     (3,538 )     (1,537 )     43.4 %

Other Income

    2,022       165       1,857       1,125.5 %
                                 

Loss from Continuing Operations Before Provisions for Income Taxes

    (3,053 )     (3,373 )     320       (9.5 )%

Provision for Income Tax Expense for Continuing Operations

    (309 )     125       (434 )     (347.2 )%
                                 

Net Loss Attributable to Unrivaled Brands, Inc.

  $ (3,362 )   $ (3,248 )   $ (114 )     3.5 %

 

Revenue

 

Revenues for the three months ended September 30, 2023 were generally consistent with the preceding quarter ended June 30, 2023.

 

Gross Profit

 

Cost of goods sold for the three months ended September 30, 2023 was $4.62 million, an increase of $0.42 million or 10.0%, compared to $4.20 million for the three months ended June 30, 2023. The decrease in cost of goods sold was primarily due to the improvement in efficiency and focus on cost-cutting measures at the Company's cultivation facility and its operations.

 

Gross profit from continuing operations for the three months ended September 30, 2023 was $3.99 million compared to $4.60 million for the three months ended June 30, 2023, a decrease of $0.61 million or 13.2%. The decrease in gross profit was directly impacted by the decrease gross margin from our wholesale operations which contributed to the overall decline for the three months September 30, 2023 to 46.4% as compared to 52.3% for the immediate prior quarter. Gross profit for on-going retail operations remained consistent at 52.3% for the three months ended September 30, 2023 compared to 52.9% for the preceding quarter.

 

Selling, General & Administrative Expenses

 

Selling, general and administrative expenses for the three months ended September 30, 2023 were $7.53 million, compared to $8.07 million for the three months ended June 30, 2023. The quarter-over-quarter decrease of $0.54 million or 6.7%.was primarily related to a decrease in stock-based compensation of $1.56 million for shares issued pursuant to a related party for executive-level consulting and related business support services, offset by an increase in professional fees of $0.20 million related to legal services.

 

Operating Loss

 

The Company realized an operating loss from continuing operations of $5.08 million for the three months ended September 30, 2023 compared to $3.54 million for the three months ended June 30, 2023, an increase of $1.53 million or 43.4%. The increase in operating loss from the preceding quarter was primarily due to a loss on disposal of assets related to the write off of property and equipment of $1.54 million, while in the preceding quarter, the Company recognized a loss on disposal of assets of $0.07 million for the dissolution of UMBRLA, Inc.

 

Other Income

 

Other income for the three months ended September 30, 2023 was $2.02 million compared to $0.17 million for the three months ended June 30, 2023, a increase of $1.86 million. The improvement was a result of the Company receiving cash of $1.23 million in employer retention credits and recognizing an unrealized gain on investment of $1.33 million for the shares in Mystic Holdings, Inc. recognized as a result of the litigation settlement during the three months ended September 30, 2023, while in the immediate prior quarter, no such transactions had occurred.

 

41

 

Non-GAAP Reconciliations

 

Non-GAAP earnings is a supplemental measure of our performance that is neither required by, nor presented in accordance with, U.S. generally accepted accounting principles (“US GAAP”). Non-GAAP earnings is not a measurement of the Company's financial performance under US GAAP and should not be considered as alternative to net income, operating income, or any other performance measures derived in accordance with US GAAP, or as alternative to cash flows from operating activities as a measure of the Company's liquidity. In addition, in evaluating non-GAAP earnings, you should be aware that in the future the Company will incur expenses or charges such as those added back to calculate non-GAAP earnings. The Company's presentation of non-GAAP earnings should not be construed as an inference that its future results will be unaffected by unusual or nonrecurring items.

 

Non-GAAP earnings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company's results as reported under US GAAP. Some of these limitations are (i) it does not reflect the Company's cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) it does not reflect changes in, or cash requirements for, the Company's working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and non-GAAP earnings does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in the Company's statements of cash flows, and (vi) other companies in our industry may calculate this measure differently than we do, limiting its usefulness as comparative measures.

 

The Company compensates for these limitations by providing specific information regarding the US GAAP amounts excluded from such non-GAAP financial measures. The Company further compensates for the limitations in our use of non-GAAP financial measures by presenting comparable US GAAP measures more prominently.

 

The Company believes that non-GAAP earnings facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies.

 

These potential differences may be caused by variations in capital structures (affecting interest expense) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). The Company also presents non-GAAP earnings because (i) it believes that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in the Company's industry, (ii) the Company believes that investors will find these measures useful in assessing the Company's ability to service or incur indebtedness, and (iii) the Company uses non-GAAP earnings internally as benchmark to compare its performance to that of its competitors.

 

In the presentation of the financial results below, the Company reconciles non-GAAP Adjusted EBITDA Income (Loss) with net income (loss) attributable to continuing operations, the most directly comparable GAAP measure. Management believes that this presentation may be more meaningful in analyzing our income generation.

 

On a non-GAAP basis, the Company recorded non-GAAP Adjusted EBITDA Loss of $1.20 million for the three months ended September 30, 2023 compared to $9.18 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, the Company recorded non-GAAP Adjusted EBITDA Loss of $1.64 million compared to $18.87 million for the nine months ended September 30, 2022. The details of those expenses and non-GAAP reconciliation of these non-cash items are set forth below:

 

As Restated

 

Unaudited (in thousands)

   

Unaudited (in thousands)

 
   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Net (Loss) Income

  $ (3,362 )   $ (119,907 )   $ (6,200 )   $ (192,223 )

Less: Net Loss from Discontinued Operations, Net

          (25 )           (3,374 )

Add (Deduct) Impact of:

                       

Interest Expense

    944       382       2,155       2,586  

Provision for Income Tax Expense (Benefit)

    309       (3,450 )     842       (5,586 )

Depreciation Expense

    204       879       637       2,716  

Amortization of Intangible Assets

    375       2,361       1,500       7,126  

EBITDA (Loss) Income from Continuing Operations (Non-GAAP)

  $ (1,530 )   $ (119,760 )   $ (1,066 )