The accompanying notes are and $48.13 million, respectively.
NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted integral part of the following:unaudited consolidated financial statements.
| | | | | | | | | | | |
| (in thousands) |
| June 30, 2022 | | December 31, 2021 |
| | | |
Accounts Payable | $ | 19,898 | | | $ | 16,804 | |
Tax Liabilities | 7,244 | | | 5,147 | |
Accrued Payroll and Benefits | 948 | | | 1,409 | |
Current Lease Liabilities | 1,940 | | | 3,120 | |
Other Accrued Expenses | 7,118 | | | 5,424 | |
Total Accounts Payable and Accrued Expenses | $ | 37,148 | | | $ | 31,904 | |
NOTE 119 – NOTES PAYABLEACCRUED LIABILITIES
Notes payable as of June 30, 2022 and December 31, 2021Accrued liabilities consisted of the following:
| | | | | | | | | | | |
| (in thousands) |
| June 30, 2022 | | December 31, 2021 |
Promissory note dated January 18, 2018, issued for the purchase of real property. The promissory note was collateralized by the land and building purchased and matured January 18, 2022. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter. The full principal balance and accrued interest are due at maturity. In the event of default, the note is convertible at the holder's option. | $ | — | | | $ | 6,500 | |
Promissory note dated May 4, 2020, issued to Harvest Small Business Finance, LLC, an unaffiliated third party. Loan was part of the Paycheck Protection Program ("PPP Loan") offered by the U.S. Small Business Administration. The interest rate on the note was 1.0%. The note required interest and principal payments seven months from July 2020. The note matures in February 2025. | 15 | | | 562 | |
Unsecured promissory note dated January 22, 2021, issued to Michael Nahass (a related party), which matured January 25, 2022, and bore interest at a rate of 3% per annum. | — | | | 1,050 | |
Convertible promissory note dated January 25, 2021, issued to accredited investors, which matured July 22, 2022 and bears interest at a rate of 8% per annum. The conversion price is $0.175 per share. | 3,450 | | | 3,500 | |
Promissory note dated July 27, 2021, issued to Arthur Chan which matures July 26, 2024, and bears interest at a rate of 12% per annum. | 2,500 | | | 2,500 | |
Senior Secured Promissory Note dated November 22, 2021 issued to Dominion Capital LLC, which matured on February 22, 2022 and bore interest at a rate of 12% per annum. | — | | | 2,500 | |
Unsecured promissory note without interest from a related party. The loan is paid in 20 equal installments and matured on August 1, 2022. | 60 | | | 90 | |
Promissory note dated June 1, 2020, issued as part of the Paycheck Protection Program ("PPP Loan") offered by the U.S. Small Business Administration. The interest rate on the note is 1.0%. The note matured on June 1, 2022. | 297 | | | 297 | |
Line of credit agreement entered on March 31, 2021, which matured on March 31, 2022 and bore interest of 2.9% per 30 days. | — | | | 4,500 | |
Promissory note dated October 1, 2021, issued to Sterling Harlan as part of the SilverStreak Solutions acquisition. The interest rate on the note was 3.0%. The note matured on April 1, 2022. | 2,000 | | | 2,000 | |
Promissory note dated October 1, 2021, issued to Sterling Harlan as part of the SilverStreak Solutions acquisition. The interest rate on the note is 3.0%. The note matures on October 1, 2022. | 2,500 | | | 2,500 | |
Secured promissory note dated November 22, 2021 issued to People's California, LLC, which matures on November 22, 2023 and bears interest at a rate of 8.0% per annum. Payments due include $2.00 million plus accrued interest for the first twelve months followed by payments of $1.00 million plus accrued interest until maturity. | 21,569 | | | 28,569 | |
Promissory note dated May 1, 2019, assumed by the Company on July 1, 2021 in connection with the purchase of real property, from a related party. The note matures on May 15, 2039 and bears interest at a rate of 9.89% per year. | 2,922 | | | 2,954 | |
Notes payable - promissory notes | $ | 35,313 | | | $ | 57,522 | |
Vehicle loans | 177 | | | 204 | |
Less: Short-term debt | (26,532) | | | (45,749) | |
Less: Debt discount | (1,320) | | | (1,971) | |
Net Long-Term Debt | $ | 7,638 | | | $ | 10,006 | |
During the six months ended June 30, 2022, the Company converted debt and accrued interest into 294,452 shares of the Company’s common stock. See Note 13, "Stockholders' Equity" for further information.
Series A Preferred Stock Purchase Agreement
On January 22, 2021, the Company entered into an unsecured promissory note in the amount of $1.05 million in connection with the Series A Preferred Stock Purchase Agreement with Michael A. Nahass. The promissory note bears interest at the rate of 3% and matured on or about January 25, 2022. On February 8, 2022, the Company paid the outstanding principal and interest on the $1.05 million promissory note held by Mr. Nahass. This payment satisfied the obligation and retired the note.
Debt Related to Dyer Property
On January 18, 2018, the Company entered into a $6.50 million promissory note for the purchase of land and building in Santa Ana, CA (the "Dyer Property"). On November 22, 2021, the Company issued a senior secured promissory note to Dominion Capital LLC in the amount of $2.50 million, which matured on February 22, 2022 and bore interest at a rate of 12% per annum. As a result of the sale of the Dyer Property on February 10, 2022, the Company retired a total of $9.00 million in outstanding debt related to the Dyer Property. See Note 17, "Discontinued Operations" for further information.
Forgiveness of PPP Note
On May 4, 2020, OneQor Technologies, Inc entered into a promissory note (the “PPP Note”) with Harvest Small Business Finance, LLC (the “Lender”), pursuant to which the Lender agreed to make a loan to the Company under the Paycheck Protection Program (“PPP”) offered by the U.S. Small Business Administration in a principal amount of $0.56 million. The PPP Note incurs interest at a fixed rate of 1% per annum and matured on May 4, 2022. On February 16, 2022, the Company received notice of forgiveness of approximately $0.54 million of the PPP Note. The remainder is to be paid off over the next three years.
Debt Assumed in the UMBRLA Acquisition
On July 1, 2021, upon the closing of the UMBRLA acquisition, the Company assumed a line of credit agreement with Bespoke Financial, Inc. for the lesser of a maximum draw amount of $4.50 million and a borrowing base consisting of eligible accounts receivable inventory and cash that serves as collateral. The line of credit accrues interest at a rate of 2.9% every 30 days and expires on March 31, 2022. On March 9, 2022, the Company paid the outstanding principal and interest due on the line of credit facility. The payment satisfied the obligation and retired the debt.
Amendment of People's Secured Promissory Note
On April 8, 2022, the Company and People's California, LLC agreed to amend a portion of the November 22, 2021 Closing Documents (Primary Membership Interest Purchase Agreement, Secondary Membership Interest Purchase Agreement, Secured Promissory Note, and other ancillary agreements). On April 11, 2022, the Company paid $3.00 million upon execution of the amendment and was to pay $5.00 million by June 1, 2022, or June 30, 2022 if the Company obtained debt financing approved by People’s, to satisfy all financial obligations that would be owing as of June 30, 2022. People’s declined to approve the debt financing obtained by the Company, and the Company did not make the $5.00 million payment. Management is renegotiating terms of the promissory note as of the date of these consolidated financial statements. | | | | | | | | | | | |
| (in thousands) |
| June 30, 2023 | | December 31, 2022 |
| | | |
Tax Liabilities | $ | 2,663 | | | $ | 1,018 | |
Accrued Payroll and Benefits | 602 | | | 628 | |
Accrued Interest | 1,053 | | | 2,113 | |
Other Accrued Expenses | 1,290 | | | 665 | |
Total Accrued Liabilities | $ | 5,608 | | | $ | 4,424 | |
NOTE 1210 – LEASES
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets are included in other assets while lease liabilities are a line item on the Company’s Consolidated Balance Sheets.consolidated balance sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The terms used to calculate the right-of-use assets for certain properties include the renewal options that the Company is reasonably certain to exercise.
The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. Right-of-use assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both right-of-use assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants.
The Company occupies office facilities under lease agreements that expire at various dates. In addition, office, production and transportation equipment is leased under agreements that expire at various dates. The Company does not have any significant finance leases. Total operating lease costs were $0.86 million and $1.37 million for the three months ended June 30, 2023 and 2022, respectively, and June 30, 2021 were $1.50 million and $0.34$2.47 million respectively, and for the six months ended June 30, 2023 and 2022, and June 30, 2021 were $2.71 million and $0.75 million, respectively.respectively. Short-term lease costs during the 2022 and 2021 fiscal quarters ended June 30, 2023 and 2022 were not material.
As of June 30, 20222023 and December 31, 2021, short term2022, the Company has short-term lease liabilities of $1.94$2.13 million and $3.12$2.00 million, are included in “Accounts Payable and Accrued Expenses” on the consolidated balance sheets, respectively. The table below presents total operating lease right-of-use assets and lease liabilities as of June 30, 20222023 and December 31, 2021:
| | | | | | | | | | | |
| (in thousands) |
| June 30, 2022 | | December 31, 2021 |
Operating lease right-of-use assets | $ | 16,111 | | | $ | 24,448 | |
Operating lease liabilities | $ | 16,411 | | | $ | 24,436 | |
The table below presents the maturities of operating lease liabilities as of June 30, 2022:
| | | | | |
| (in thousands) |
| Operating Leases |
2022 (remaining) | $ | 1,627 | |
2023 | 3,308 | |
2024 | 3,373 | |
2025 | 2,927 | |
2026 | 2,299 | |
Thereafter | 11,400 | |
Total lease payments | 24,934 | |
Less: discount | (8,523) | |
Total operating lease liabilities | $ | 16,411 | |
| | | | | | | | | | | |
| (in thousands) |
| June 30, 2023 | | December 31, 2022 |
Operating Lease Right-of-Use Assets | $ | 12,946 | | | $ | 13,946 | |
Operating Lease Liabilities | $ | 14,437 | | | $ | 15,084 | |
The table below presents the weighted average remaining lease term for operating leases and weighted average discount rate used in calculating operating lease right-of-use assets:
| | | | | | | | |
| Six Months Ended |
| June 30, 2022 | June 30, 2021 |
Weighted average remaining lease term (years) | 5.7 | 79.0 |
Weighted average discount rate | 11.4 | % | 11.6 | % |
| | | | | | | | | | | |
| Six Months Ended |
| June 30, 2023 | | June 30, 2022 |
Weighted Average Remaining Lease Term (Years) | 8.0 | | 5.7 |
Weighted Average Discount Rate | 11.7 | % | | 11.4 | % |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
15
NOTE 11 – NOTES PAYABLE
Notes payable as of June 30, 2023 and December 31, 2022 consisted of the following: | | | | | | | | | | | |
| (in thousands) |
| June 30, 2023 | | December 31, 2022 |
Promissory note dated May 4, 2020, issued to Harvest Small Business Finance, LLC, an unaffiliated third party. Loan was part of the Paycheck Protection Program ("PPP Loan") offered by the U.S. Small Business Administration. The interest rate on the note was 1.0%. The note required interest and principal payments seven months from July 2020. The note matures in February 2025. | $ | 14 | | | $ | 14 | |
Convertible promissory note dated January 25, 2021, issued to accredited investors, which matured July 22, 2022 and bears interest at a rate of 8.0% per annum. The conversion price is $0.175 per share. | 3,253 | | | 3,450 | |
Promissory note dated July 27, 2021, issued to Arthur Chan which matures July 26, 2024, and bears interest at a rate of 8.0% per annum. | 2,500 | | | 2,500 | |
Unsecured promissory note dated December 28, 2022 due to a related party. The interest rate on the note is 1.0% and matures on December 28, 2027. | 94 | | | 154 | |
Promissory note dated October 1, 2021, issued to Sterling Harlan as part of the SilverStreak Solutions acquisition. The interest rate on the note was 10.0%. The note matures in March 2028. | 308 | | | 2,000 | |
Promissory note dated October 1, 2021, issued to Sterling Harlan as part of the SilverStreak Solutions acquisition. The interest rate on the note was 10.0%. The note matures in March 2028. | 1,230 | | | 2,500 | |
Secured promissory notes dated March 6, 2023 issued to People's California, LLC, which matures in March 2028 and bears interest at a rate of 10.0% per annum on the first $3.00 million due in December 2023, and 5.0% per annum on the remaining balance through September 2023 and 10.0% per annum thereafter. Payment of the remaining balance is due in March 2028. | 22,200 | | | 21,569 | |
Promissory note dated May 1, 2019, assumed by the Company on July 1, 2021 in connection with the purchase of real property, from a related party. The note matures on May 15, 2039 and bears interest at a rate of 9.9% per year. | 2,876 | | | 2,882 | |
Notes Payable - Promissory Notes | $ | 32,475 | | | $ | 35,069 | |
Vehicle Loans | 57 | | | 76 | |
Less: Short-Term Debt | (25,879) | | | (29,662) | |
Less: Debt Discount, Net | (11) | | | (669) | |
Net Long-Term Debt | $ | 6,642 | | | $ | 4,814 | |
Amendments of Promissory Note Related to People's California, LLC
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, whereby the parties agreed to amend the terms of that certain secured promissory note ("Original Note"), issued by the Company to People's California, LLC on November 22, 2021. 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.
The Settlement Note accrues interest at 5.0% for the first 180 days, and 10.0% thereafter, interest is paid in cash (or the Company’s common stock based on the 10-day volume-weighted average price ("VWAP") at the date of issuance) starting 180 days after the effective date of the Settlement Term Sheet and on the first of the month thereafter. The amount of $5.00 million of principal is due in cash within 90 days of the effective date of the Settlement Term Sheet with the balance due on the fifth anniversary of the effective date of the Settlement Term Sheet, which is March 6, 2028. When the $5.00 million principal payment for the Settlement Note and the $3.00 million payment under the $3M Note are paid (“Up-front Settlement”) in accordance with the Settlement Term Sheet, People's California, LLC will be obligated to transfer the Riverside and Costa Mesa licenses and stores to the Company as described in that certain membership interest purchase agreement, dated as of November 22, 2021, with People's California, LLC for no additional consideration.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
16
On the earlier of the date of the Up-front Settlement payment or 180 days after the effective date of the Settlement Term Sheet, People's California, LLC will have the option to convert a portion or all of the principal balance of the Settlement Note into the Company's common stock subject to certain requirements in the Settlement Term Sheet. The conversion price is the lower of $0.20 or the 10-day VWAP of the Company's common stock. Upon payment of the Up-front Settlement, the Company has the option to convert the unpaid principal balance of either notes into the Company's common stock at a conversion price of $0.20 per share as long as the at the time of the conversion the Company's common stock has a 10-day VWAP of $0.20 per share or greater.
After the first $5.00 million principal payment on the Settlement Note, principal payments made in cash prior to the first anniversary of the Settlement Term Sheet reduce the principal balance by twice the amount of the cash payment. The modification to the Company's promissory note under the Settlement Term Sheet was classified as troubled debt restructuring pursuant to ASC 470-60, "Troubled Debt Restructurings by Debtors" ("ASC 470-60") and the Company recorded a premium of $0.47 million. See "Note 18 – Commitments and Contingencies" for details on the related litigation matters.
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 July 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. Further, upon payment of the $0.80 million on May 18, 2023, People's California, LLC shall transfer the Riverside and Costa Mesa licenses and stores to the Company for no additional consideration. Such assets have not been transferred to the Company as of June 30, 2023 and the Company has not recorded a debt premium for the contingent free assets. The amendment to the Settlement Term Sheet was classified as a troubled debt restructuring pursuant to ASC 470-60.
On July 10, 2023, the Company received a notice of breach and demand to cure from People's California, LLC in respect of the Settlement Term Sheet, as amended on May 17, 2023, wherein People’s California, LLC stated that the Company failed to make the principal repayment of $2.20 million on July 6, 2023 and a monthly interest payment of $25,000 for the month of June 2023. As a result, the promissory notes became callable by the creditor subsequent to the balance sheet date but before these consolidated financial statements are issued. Accordingly, the Company classified the long-term debt as current notes payable in the consolidated balance sheet as of June 30, 2023. The Company is currently in ongoing discussions with People's California, LLC to renegotiate the debt.
Amendment of Promissory Notes Related to SilverStreak Acquisition
On March 23, 2023, the Company entered into a binding term sheet to modify the terms of the $2.00 million and $2.50 million unsecured promissory notes originally issued on October 1, 2021 in connection with that certain stock purchase agreement dated June 9, 2021 and amended on July 13, 2021, which reduced the principal to an aggregate of $1.25 million, with required monthly aggregate payments of approximately $0.03 million, interest of 10% per annum, and maturing on March 15, 2028 ("Notes Modification"). The parties also agreed that the Company shall be responsible for certain tax liabilities of approximately $0.53 million. The Notes Modification was classified as a troubled debt restructuring pursuant to ASC 470-60, "Troubled Debt Restructurings by Debtors," and the Company recorded a gain on extinguishment of debt of $3.03 million and reduced the carrying value of the promissory notes to total future cash payments of $1.59 million.
On April 30, 2023, the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) as definitive documentation of the binding term sheet dated March 23, 2023 related to the unsecured promissory notes issued on October 1, 2021 in connection with the acquisition of SilverStreak Solutions, Inc.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
17
NOTE 1312 – EQUITYSTOCKHOLDERS' DEFICIT
Series V Preferred Stock
In December 2022, the Company filed a Certificate of Designation of Rights, Privileges, Preferences, and Restrictions with the Secretary of State of the State of Nevada to establish a new class of preferred shares, the Series V Preferred Stock, $0.001 par value. The number of authorized shares of Series V Preferred Stock is 25,000,000 shares. Each share of Series V Preferred Stock is convertible into ten shares of Common Stock at any time from and after the first anniversary of the issuance date. Each share of Series V Preferred Stock will automatically be converted into ten fully paid and non-assessable shares of Common Stock on the second anniversary of the date on which the holder’s shares of Series V Preferred Stock were issued. The Series V Class of Preferred Stock have a one-year lock-up and have a two times voting right which automatically expires in two years.
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 (the "Private Placement"). 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 the Company’s common stock on December 30, 2022 on an as-converted-to-common stock-basis of ten shares of common stock for each one share of Series V Preferred Stock or $0.014 per share of common stock and (ii) 70,357,155 warrants to purchase up to 70,357,155 of common stock with an exercise price of $0.028 or equivalent to two times the as-converted-to-common stock purchase price of $0.014. The Company received total gross proceeds of $1.97 million from the Private Placement. The purchasers in the Private Placement entered into a voting agreement to assign their voting rights to Sabas Carrillo, the Company's Chief Executive Officer.
Series N Preferred Stock
In February 2023, the Company filed a Certificate of Designation of Rights, Privileges, Preferences, and Restrictions with the Secretary of State of the State of Nevada to establish a new class of preferred shares, the Series N Preferred Stock, $0.001 par value. The number of authorized shares of Series N Preferred Stock is 2,500,000 shares. Each share of Series N Preferred Stock is convertible into 100 shares of the Company's common stock at any time from and before the first anniversary of the issuance date. Each share of Series N Preferred Stock will automatically be converted into 100 fully paid and non-assessable shares of the Company's common stock on the first anniversary of the issuance date.
Common Stock
The Company authorized 990,000,000 shares of common stock with $0.001 par value per share. As of June 30, 20222023 and December 31, 2021, 532,514,7912022, 772,483,465 and 498,546,291679,513,554 shares of common stock were outstanding, respectively.
On February 1, 2022During the six months endedJune 30, 2023, the Company granted 294,452issued 96,178,321 shares Common Stockof common stock to Apollo Management Group, Inc. in exchange for the $0.05 million Convertible Promissory Note that Apollo Management Group, Inc. held and thea related accrued interest. The fair value of the shares was $0.08 million.
On February 28, 2022,party service provider. As a result, the Company sold 25,000,000 sharesrecorded $1.91 million of stock-based compensation expense for an aggregate sales price of $4.35 million to Arthur Chan, an unrelated party. The shares were restricted.services during the six months endedJune 30, 2023. See "Note 17 – Related Party Transactions" for further information.
During the six months ended June 30, 2022 2023, a member of the Company's board of directors forfeited 900,000 shares of the Company's common stock to the Company issued 4,759,708 and 146,212 commonfor no cash value. Subsequent to the forfeiture, the Company cancelled 3,208,420 shares for the cashless exercise of warrants and options, respectively.
Duringtreasury stock during the six months ended June 30, 20222023,. Accordingly, treasury stock outstanding as of June 30, 2023 and December 31, 2022 was nil and 2,308,420 shares of common stock, respectively.
The accompanying notes are an integral part of the Company issued 2,100,000 and 943,128 common shares to employees and directors, respectively. As a result, the Company recorded stock compensationunaudited consolidated financial statements.
18
During the three and six months endedJune 30, 2022, the Company issued 725,000 common shares to third party service providers. As a result, the Company recorded stock compensation of $0.13 million.
NOTE 1413 – STOCK-BASED COMPENSATION
Equity Incentive Plans
In the first quarter of 2016, the Company adopted the 2016 Equity Incentive Plan. In the fourth quarter of 2018, the Company adopted the 2018 Equity Incentive Plan. In July 2021, the Company assumed the 2019 Equity Incentive Plan as part of the acquisition of UMBRLA. The following table contains information about the Company's equity incentive plans as of June 30, 2022:2023:
| | | Awards Reserved for Issuance | | Awards Exercised | | Awards Outstanding | | Awards Available for Grant | | Awards Reserved for Issuance | | Awards Exercised | | Awards Outstanding | | Awards Available for Grant |
| 2016 Equity Incentive Plan | 2016 Equity Incentive Plan | 999,906 | | | — | | | 499,953 | | | 499,953 | | 2016 Equity Incentive Plan | | 497,776 | | | — | | | 248,888 | | | 248,888 | |
2018 Equity Incentive Plan | 2018 Equity Incentive Plan | 30,988,982 | | | 4,022,133 | | | 14,009,842 | | | 12,957,007 | | 2018 Equity Incentive Plan | | 17,364,171 | | | 4,022,133 | | | 6,754,353 | | | 6,587,685 | |
2019 Equity Incentive Plan | 2019 Equity Incentive Plan | 109,990,468 | | | 34,884 | | | 73,014,714 | | | 36,940,870 | | 2019 Equity Incentive Plan | | 24,062,129 | | | 34,884 | | | 14,027,519 | | | 9,999,726 | |
Stock-Based Compensation Expense
The following table sets forth the total stock-based compensation expense resulting from stock options and restricted grants of common stock to employees, directors and non-employee consultants in the consolidated statement of operations which are included in selling, general and administrative expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands, except for shares / options) |
| | For the Three Months Ended |
| | June 30, 2023 | | June 30, 2022 |
Type of Award | | Number of Shares or Options Granted | | Stock-Based Compensation Expense | | Number of Shares or Options Granted | | Stock-Based Compensation Expense |
| | | | | | | | |
Stock Options | | — | | $ | 89 | | | 400,000 | | $ | 1,352 | |
| | | | | | | | |
Stock Grants: | | | | | | | | |
Employees (Common Stock) | | — | | | — | | | 1,200,000 | | 170 | |
Directors (Common Stock) | | — | | — | | | 259,796 | | 29 | |
Non–Employee Consultants (Common Stock) | | 79,997,091 | | 1,553 | | | 725,000 | | 129 | |
| | | | | | | | |
Total Stock–Based Compensation Expense | | | | $ | 1,642 | | | | | $ | 1,680 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands, except for shares / options) |
| | For the Six Months Ended |
| | June 30, 2023 | | June 30, 2022 |
Type of Award | | Number of Shares or Options Granted | | Stock-Based Compensation Expense | | Number of Shares or Options Granted | | Stock-Based Compensation Expense |
| | | | | | | | |
Stock Options | | — | | $ | 187 | | | 400,000 | | $ | 3,174 | |
| | | | | | | | |
Stock Grants: | | | | | | | | |
Employees (Common Stock) | | — | | | — | | | 2,100,000 | | 352 | |
Directors (Common Stock) | | — | | — | | | 943,128 | | 213 | |
Non–Employee Consultants (Common Stock) | | 96,178,321 | | 1,910 | | | 725,000 | | 129 | |
| | | | | | | | |
Total Stock–Based Compensation Expense | | | | $ | 2,097 | | | | | $ | 3,868 | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
19
Stock Options
The following table summarizes the Company’s stock option activity and related information for the six months ended June 30, 2022:2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value of In-the-Money Options |
| | | | | | | |
Options outstanding as of January 1, 2022 | 88,251,380 | | $ | 0.20 | | | | | |
| | | | | | | |
Granted | 400,000 | | | — | | | | | |
Exercised | (146,212) | | $ | 0.08 | | | | | |
Forfeited | (223,791) | | $ | 0.15 | | | | | |
Expired | (154,762) | | $ | 0.34 | | | | | |
Options outstanding as of June 30, 2022 | 88,126,615 | | $ | 0.20 | | | 8.3 years | | $ | 33 | |
Options exercisable as of June 30, 2022 | 50,718,424 | | $ | 0.24 | | | 7.4 years | | $ | 50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value of In-the-Money Options |
| | | | | | | | |
Options Outstanding as of January 1, 2023 | | 52,821,099 | | $ | 0.23 | | | | | |
Forfeited | | (31,695,340) | | $ | 0.23 | | | | | |
Options Outstanding as of June 30, 2023 | | 21,125,759 | | $ | 0.23 | | | 7.1 years | | $ | — | |
Options Exercisable as of June 30, 2023 | | 15,931,299 | | $ | 0.28 | | | 7.5 years | | $ | — | |
As of June 30, 2022, there was $5.44 million2023, total unrecognized stock-based compensation.compensation was $0.21 million. Such costs are expected to be recognized over a weighted-average period of approximately 1.61.01 years.
The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period.
The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. Hence, the Company uses the “simplified method” described in Staff Accounting Bulletin 107 to estimate the expected term of share option grants.
The expected stock price volatility assumption was determined by examining the historical volatilities for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available.
The risk-free interest rate assumption is based on the U.S. treasury instruments whose term was consistent with the expected term of the Company’s stock options.
The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has never paid dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable future. Accordingly, the Company has assumed no dividend yield for purposes of estimating the fair value of the Company stock-based compensation.
Stock-Based Compensation Expense
The following table sets forth the total stock-based compensation expense resulting from stock options and restricted grants of common stock to employees, directors and non-employee consultants in the consolidated statement of operations which are included in selling, general and administrative expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands except for shares / options) |
| | For the Three Months Ended |
| | June 30, 2022 | | June 30, 2021 |
Type of Award | | Number of Shares or Options Granted | | Stock-Based Compensation Expense | | Number of Shares or Options Granted | | Stock-Based Compensation Expense |
| | | | | | | | |
Stock options | | 400,000 | | $ | 1,352 | | | 5,409,716 | | $ | 641 | |
| | | | | | | | |
Stock grants: | | | | | | | | |
Employees (common stock) | | 1,200,000 | | | $ | 170 | | | 250,000 | | 68 | |
Directors (common stock) | | 259,796 | | $ | 29 | | | 343,493 | | 94 | |
Non–employee consultants (common stock) | | 725,000 | | $ | 129 | | | — | | — | |
| | | | | | | | |
Total stock–based compensation expense | | | | $ | 1,680 | | | | | $ | 803 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands except for shares / options) |
| | For the Six Months Ended |
| | June 30, 2022 | | June 30, 2021 |
Type of Award | | Number of Shares or Options Granted | | Stock-Based Compensation Expense | | Number of Shares or Options Granted | | Stock-Based Compensation Expense |
| | | | | | | | |
Stock options | | 400,000 | | $ | 3,174 | | | 5,909,716 | | $ | 885 | |
| | | | | | | | |
Stock grants: | | | | | | | | |
Employees (common stock) | | 2,100,000 | | | $ | 352 | | | 250,000 | | 67 | |
Directors (common stock) | | 943,128 | | $ | 213 | | | 885,159 | | 214 | |
Non–employee consultants (common stock) | | 725,000 | | $ | 129 | | | 332,947 | | 32 | |
| | | | | | | | |
Total stock–based compensation expense | | | | $ | 3,868 | | | | | $ | 1,198 | |
On March 10, 2022, the Company terminated the employment of Oren Schauble, the Company’s President. On March 13, 2022, the Company terminated the employment of Francis Knuettel II, the Company’s Chief Executive Officer. The Company entered into separation agreements with each of Mr. Knuettel and Mr. Schauble regarding the compensation to be granted to each of them regarding their separation from the Company. In addition, on March 17, 2022 the Company entered into a consulting agreement with Mr. Schauble pursuant to which he will continue to provide certain services to the Company through a future agreed upon date. The Company granted Mr. Schauble 910,623 restricted shares of the Company's Common Stock in 4 monthly installments.
On April 12, 2022, the Company and Francis Knuettel, formerly the Company's Chief Executive Officer, agreed to terms on a separation agreement. The Company agreed to pay Mr. Knuettel 50% of his annual base salary and continue his medical benefits for a period of six months. Mr. Knuettel's unvested shares and options vested immediately. As part of this separation agreement Mr. Knuettel resigned as a director of the Company.
On April 14, 2022, the Company and Dallas Imbimbo, an advisor to the Company and a director of the Company, agreed to terms on a separation agreement. The Company agreed to vest 100% of Mr. Imbimbo's restricted common stock granted pursuant to the advisor agreement with Mr. Imbimbo. The Company agreed to vest 100% of the options to purchase shares of the Company's common stock granted as part Mr. Imbimbo's Independent Director Agreement. The Company will pay Mr. Imbimbo $0.08 million in cash compensation. As part of this separation agreement, Mr. Imbimbo resigned as a director of the Company and as an Advisor to the Company.
NOTE 1514 – WARRANTS
The following table summarizes the Company's warrant activity for the six months ended June 30, 2022:2023:
| | | | | | | | | | | |
| Warrants | | Weighted-Average Exercise Price |
| | | |
Warrants outstanding as of January 1, 2022 | 85,826,872 | | | $ | 0.22 | |
Issued | — | | | $ | — | |
Exercised | (4,759,708) | | | $ | — | |
Warrants outstanding as of June 30, 2022 | 81,067,164 | | | $ | 0.14 | |
| | | | | | | | | | | |
| Warrants | | Weighted-Average Exercise Price |
| | | |
Warrants Outstanding as of January 1, 2023 | 80,881,817 | | | $ | 0.11 | |
| | | |
Issued | 70,357,155 | | | $ | 0.03 | |
Expired | (560,211) | | | $ | 2.43 | |
Warrants Outstanding as of June 30, 2023 | 150,678,761 | | | $ | 0.06 | |
26The accompanying notes are an integral part of the unaudited consolidated financial statements.
20
NOTE 1615 – COMMITMENTS AND CONTINGENCIESDISCONTINUED OPERATIONS
California Operating LicensesOregon Operations
On December 28, 2022, the Company entered into a Stock Purchase and Sale Agreement pursuant to which the Company sold all of its equity interests in LTRMN, Inc., which conducts cannabis distribution and wholesale activities in Oregon, for an aggregate purchase price of $0.25 million. The purchase price was paid in the form of a secured promissory note at a rate of 8.0% per annum due and payable on the third anniversary of the date of issuance. However, upon a final and binding settlement of certain ongoing litigation that is approved by UMBRLA, the purchase price shall be automatically revised to be nil and the promissory note shall be deemed paid and satisfied in-full.
On December 28, 2022, the Company entered into a Membership Interest Purchase and Sale Agreement pursuant to which the Company sold its 50.0% equity interests in Psychonaut Oregon, LLC (“Psychonaut”) to Joseph Gerlach for an aggregate purchase price of $1.00. Mr. Gerlach owns the other 50.0% of the equity interests in Psychonaut and is also the Company’s Chief Cultivation Officer. In connection with the sale of Psychonaut, the Company entered into an unsecured promissory note dated December 28, 2022 (the “Psychonaut Note”) pursuant to which the Company consolidated all current liabilities due to Mr. Gerlach totaling $0.15 million. The Psychonaut Note accrues interest at a rate of 1.0% per annum and is due and payable on the fifth anniversary of the date of issuance.
The Company concluded that the sale of LTRMN, Inc. and Psychonaut (together, the "Oregon operations") represented a strategic shift that will have a major effect on the Company’s subsidiaries have operated compliantlyoperations and have been eligiblefinancial results and thus all assets and liabilities allocable to the operations within the state of Oregon were classified as discontinued operations. The assets associated with the Oregon operations were measured at the lower of their carrying amount or fair value less costs to sell ("FVLCTS"). Revenue and expenses, gains or losses relating to the discontinuation of Oregon operations were eliminated from profit or loss from the Company’s continuing operations and are shown as a single line item in the consolidated statements of operations for applicable licenses and renewals of those licenses.all periods presented.
Litigation and Claims
The Company is the subject of lawsuits and claims arising in the ordinary course of business from time to time. The Company reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence ofrecognized a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excessupon sale of the amount accrued if such disclosure is necessary for the Company’s financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degreeOregon operations of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company determined that there was one matter that required an accrual as of June 30, 2022. We have accrued $0.50 million for the net carrying value of the assets as of the disposition date which was determined as the book value less direct costs to sell and is recognized as a component of loss on disposal of assets and other expense in the Consolidated Statements of Operations for Discontinued Operations during the year ended December 31, 2022. As of December 31, 2022, the Oregon operations have been fully deconsolidated by the Company and the Company does not have any continuing involvement with the former subsidiary outside of the Magee litigation detailed below.disclosed in “Note 18 – Commitments and Contingencies”.
NuLeaf
On November 17, 2021, Medifarm III, LLC (“Medifarm III”), a wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “NuLeaf Purchase Agreement”) with NuLeaf, Inc., a Nevada corporation (“NuLeaf”). Upon the terms and subject to the satisfaction of the conditions described in the NuLeaf Purchase Agreement, Medifarm III agreed to sell its 50.0% of the outstanding membership interests of each of NuLeaf Reno Production, LLC (“NuLeaf Reno”) and NuLeaf Sparks Cultivation, LLC (“NuLeaf Sparks”) to NuLeaf, which owned the remaining 50.0% of the membership interests of NuLeaf Reno and NuLeaf Sparks, for aggregate consideration of $6.50 million in cash. The transaction closed in April 2022.
OneQor
During fiscal year 2020, management suspended the operations of OneQor due to (i) a lack of proper growth in customer acquisition and revenue for this CBD operation during the COVID-19 pandemic and (ii) the overall financial health of the Company as a result of COVID-19 and social unrest. The Company plans to focus its attention and resources on growing its THC business. In November 2022, the Company received confirmation for the legal dissolution of OneQor. Accordingly, all liabilities and existing obligations related to OneQor were extinguished as of December 31, 2022.
The completed sales of our NuLeaf and Oregon operations during the periods presented represented a strategic shift that had a major effect on the Company’s operations and financial results. As a result, management determined the results of these components qualified for discontinued operations presentation in accordance with ASC 205, “Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity".
The accompanying notes are an integral part of the unaudited consolidated financial statements.
21
Magee v. UMBRLA, Inc. et al.-The company is currently involved in a breach of contract action brought by former LTRMN, Inc. (“LTRMN”) employee, Kurtis Magee, which was filed by Mr. Magee inOperating results for the Superior Courtdiscontinued operations were comprised of the Statefollowing:
| | | | | | | | | | | |
| (in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2022 |
Total Revenues | $ | 1,948 | | | $ | 6,833 | |
Cost of Goods Sold | 1,549 | | | 3,648 | |
Gross Profit | 399 | | | 3,185 | |
| | | |
Selling, General & Administrative Expenses | 1,137 | | | 3,608 | |
Gain on Sale of Assets | (2,047) | | | (3,728) | |
Income from Operations | 1,309 | | | 3,305 | |
| | | |
Interest Expense | (6) | | | (6) | |
Other Income | 21 | | | 50 | |
Income from Discontinued Operations Before Provision for Income Taxes | 1,324 | | | 3,349 | |
| | | |
Income Tax Expense | 95 | | | — | |
Income from Discontinued Operations | $ | 1,419 | | | $ | 3,349 | |
| | | |
Income from Discontinued Operations per Common Share Attributable to Unrivaled Brands, Inc. Common Stockholders - Basic And Diluted | $ | — | | | $ | 0.01 | |
As of California, County of Orange, on July 21, 2020. Mr. Magee alleges breach of contract in connection with Mr. Magee’s separation agreement with LTRMN. Trial in this matter is set forJune 30, 2023 and December 5, 2022.
Terra Tech Corp. v. National Fire & Marine Ins. Co., et al. - On or about December 6, 2021,31, 2022, the Company initiated an action in California Superior Court, County of Alameda, against National Fire & marine Insurance Company (“National Fire”), Woodruff-Sawyer & Co.,assets and R-T Specialty, LLC in connection with the denial of an insurance claim by National Fire following the vandalismliabilities related to discontinued operations were deconsolidated and looting of the Company’s Bay Area dispensaries in May 2020. The Company alleges that coverage levels for the Company were changed after the policy was bound, in a manner inconsistent with the binder, which prevented the Company from fully recovering its losses in connection with the incidents. Trial in this matter has not yet been set.
Unrivaled Brands, Inc. et al v. Mystic Holdings, Inc., et al. - On May 11, 2022, Unrivaled and its wholly-owned subsidiary, Medifarm I, LLC (“Plaintiffs”) initiated an action in the Second Judicial District of the State of Nevada, County of Washoe, against Mystic Holdings, Inc. (“Mystic”) and Picksy Reno LLC (collectively with Mystic, “Defendants”) in connection with Defendants’ failure to honor Plaintiffs’ exercise of a put option entitling Plaintiffs to the repurchase of approximately 8,332,096 shares of Mystic at a price of $1.00 per share. No proceedings have yet been held in this matter and a trial date has not been scheduled.
Fusion LLF, LLC v. Unrivaled Brands, Inc.- On June 27, 2022, Fusion LLF, LLC filed an action against the Company, Fusion LLF, LLC v. Unrivaled Brands, Inc., Superior Court for the State of California, County of Orange Case No. 30-2022-01266856-CU-BC-CJC alleging claims for breach of contract, account stated, and right to attach order and writ of attachment. The Complaint claims at least $4.55 million in damages. Company has not yet responded to the Complaint and is evaluating the claims.
no balance remained.
NOTE 17 – DISCONTINUED OPERATIONS
NuLeaf
On November 17, 2021, Medifarm III, LLC (“Medifarm”), a wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with NuLeaf, Inc., a Nevada corporation (“NuLeaf”). Upon the terms and subject to the satisfaction of the conditions described in the Purchase Agreement, Medifarm will sell its fifty percent (50%) of the outstanding membership interests of each of NuLeaf Reno Production, LLC (“NuLeaf Reno”) and NuLeaf Sparks Cultivation, LLC (“NuLeaf Sparks”) to NuLeaf, which currently owns the remaining fifty percent (50%) of the membership interests of NuLeaf Reno and NuLeaf Sparks, for aggregate consideration
of $6.50 million in cash. The transaction closed in April 2022 and the Company recognized a gain of $2.05 million for the difference between the aggregate consideration and the book value of the assets as of the disposition date, less direct costs to sell, for the three and six months ended June 30, 2022.
Nevada Dispensaries
During fiscal year 2019 and 2020, the Company entered into Asset Purchase Agreements with unrelated third parties to sell substantially all of the assets of the Company related to the Company's dispensaries located at:
•1130 East Desert Inn Road, Las Vegas, NV 89109
•1085 S. Virginia St., Suite A, Reno, NV 89502
•3650 S. Decatur Blvd., Las Vegas, NV
The dispensaries are collectively referred to as the "Nevada dispensaries". The transactions for the sale of the Nevada dispensaries closed upon receiving all required government approvals during the fiscal fourth quarter ended December 31, 2021.
Real Estate
On December 7, 2021, 620 Dyer LLC, a wholly-owned subsidiary of the Company, entered into a Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate (the “PSA”) with FRO III/SMA Acquisitions, LLC (the “Buyer”) to sell the real property located at 620 East Dyer Road, Santa Ana, CA (the “Dyer Property”) for $13.40 million in cash. On February 10, 2022, the Company announced the closing of the sale of the Dyer Property, resulting in the Company retiring $9.00 million of outstanding debt on the Dyer Property as disclosed in Note 11, "Notes Payable". The Company is continuing to evaluate its options with respect to the license originally connected to the Dyer property, including consideration of the retail density in the area. If the city of Santa Ana grants approval to relocate licenses elsewhere in the city, the Company may consider using the dispensary license to open a dispensary in an underserved part of Santa Ana.
During fiscal year 2020, the Company classified real property in Las Vegas, NV and Santa Ana, CA as available-for-sale as it met the criteria of ASC 360-10-45-0. In August 2021, the Company sold the properties.
OneQor
During fiscal year 2020, management suspended the operations of OneQor Technologies due to (i) a lack of proper growth in customer acquisition and revenue for this CBD operation during the COVID-19 pandemic and (ii) the overall financial health of the Company as a result of COVID-19 and social unrest. The Company plans to focus its attention and resources on growing its THC business.
Edible Garden
On March 30, 2020, the Company entered into and closed an Asset Purchase Agreement with Edible Garden AG Inc. (the "Purchaser") pursuant to which the Company sold substantially all of the assets of Edible Garden Corp. As part of the consideration received, the Company entered into two option agreements to purchase up to a 20% interest in the Purchaser. During the year ended December 31, 2021, the Company exercised both options and acquired 5,000,000 common shares of the Purchaser for a nominal fee.
The completed sales of our NuLeaf operations and Nevada dispensaries, completed sales of real estate assets, and assets divested during the periods presented represent a strategic shift that will have a major effect on the Company’s operations and financial results. As a result, management determined the results of these components qualified for discontinued
operations presentation in accordance with ASC 205, “Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity". Operating results for the discontinued operations were comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Total revenues | $ | — | | | $ | 3,391 | | | $ | 2,605 | | | $ | 6,446 | |
Cost of goods sold | (23) | | | 3,776 | | | 520 | | | 4,591 | |
Gross profit | 23 | | | (385) | | | 2,085 | | | 1,855 | |
| | | | | | | |
Selling, general and administrative expenses | 228 | | | 1,561 | | | 1,862 | | | 3,036 | |
| | | | | | | |
Impairment of assets | — | | | — | | | — | | | — | |
(Gain) loss on sale of assets | (2,048) | | | 5 | | | (3,729) | | | 6 | |
Income (loss) from operations | $ | 1,843 | | | $ | (1,951) | | | $ | 3,952 | | | $ | (1,187) | |
| | | | | | | |
Interest expense | — | | | (150) | | | — | | | (476) | |
Other income | — | | | — | | | 27 | | | — | |
Income tax benefit | 95 | | | — | | | — | | | — | |
Net income (loss) from discontinued operations | $ | 1,938 | | | $ | (2,101) | | | $ | 3,979 | | | $ | (1,663) | |
| | | | | | | |
Loss from discontinued operations per common share attributable to Unrivaled Brands, Inc. common stockholders - basic and diluted | $ | (0.01) | | | $ | (0.01) | | | $ | — | | | $ | (0.01) | |
The carrying amounts of the major classes of assets and liabilities for the discontinued operations are as follows:
| | | | | |
| (in thousands) |
| December 31, 2021 |
Cash | $ | 1,544 | |
Accounts receivable, net | 1,553 | |
Inventory | 1,359 | |
Prepaid expenses and other assets | 39 | |
Property, equipment and leasehold improvements, net | 17,661 | |
| |
| |
Other assets | 323 | |
Assets of discontinued operations | $ | 22,479 | |
| |
Accounts payable and accrued expenses | $ | 1,170 | |
| |
| |
Income taxes payable | 917 | |
Long-term lease liabilities | 184 | |
Liabilities of discontinued operations | $ | 2,271 | |
NOTE 1816 – SEGMENT INFORMATION
The Company operates in 2two segments:
(i) cannabis retail and (ii) cannabis cultivation and distribution. Our reportable segments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | (in thousands) | | | | |
| Total Revenue | | % of Total Revenue | | Total Revenue | | % of Total Revenue |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Segment | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Cannabis Retail | $ | 10,947 | | | $ | 2,318 | | | 62.4 | % | | 80.7 | % | | $ | 23,056 | | | $ | 4,017 | | | 60.2 | % | | 81.5 | % |
Cannabis Cultivation & Distribution | 6,609 | | | 554 | | | 37.6 | % | | 19.3 | % | | 15,224 | | | 911 | | | 39.8 | % | | 18.5 | % |
| | | | | | | | | | | | | | | |
Total | $ | 17,556 | | | $ | 2,872 | | | 100.0 | % | | 100.0 | % | | $ | 38,280 | | | $ | 4,928 | | | 100.0 | % | | 100.0 | % |
Cannabis Retail
– Either independently or in conjunction with third parties, we operatethe Company operates medical marijuana and adult use cannabis dispensaries in California. All our retail dispensaries offer a broad selection of medical and adult use cannabis products including flower, concentrates, and edibles.edibles.
(ii) Cannabis Cultivation and Distribution
We operate distribution centers – The Company operates a cultivation facility in Oakland, California and distributes flower grown from the facility to other manufacturers or to its own retail cannabis dispensaries in California and Oregon that distribute our own branded productsunder the Korova brand.
For the periods presented, revenue by reportable segments are as well as third party products to our own dispensaries and to other non-affiliated medical marijuana and/or adult use cannabis dispensaries.follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | (in thousands) | | | | |
| Total Revenue | | % of Total Revenue | | Total Revenue | | % of Total Revenue |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Segment | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Cannabis Retail | $ | 8,415 | | | $ | 11,140 | | | 95.7 | % | | 70.5 | % | | $ | 16,885 | | | $ | 23,653 | | | 93.6 | % | | 68.3 | % |
Cannabis Cultivation & Distribution | 382 | | | 4,661 | | | 4.3 | % | | 29.5 | % | | 1,152 | | | 10,997 | | | 6.4 | % | | 31.7 | % |
| | | | | | | | | | | | | | | |
Total | $ | 8,797 | | | $ | 15,801 | | | 100.0 | % | | 100.0 | % | | $ | 18,037 | | | $ | 34,650 | | | 100.0 | % | | 100.0 | % |
30The accompanying notes are an integral part of the unaudited consolidated financial statements.
22
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | (in thousands) |
| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total | | Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total |
Total revenues | $ | 23,056 | | | $ | 15,224 | | | $ | — | | | $ | 38,280 | | | $ | 4,017 | | | $ | 911 | | | $ | — | | | $ | 4,928 | |
Cost of goods sold | 12,311 | | | 11,267 | | | — | | | 23,578 | | | 2,110 | | | (97) | | | — | | | 2,013 | |
Gross profit | 10,745 | | | 3,957 | | | — | | | 14,702 | | | 1,907 | | | 1,008 | | | — | | | 2,915 | |
| | | | | | | | | | | | | | | |
Selling, general and administrative expenses | 11,452 | | | 8,486 | | | 17,899 | | | 37,837 | | | 2,664 | | | 874 | | | 13,809 | | | 17,347 | |
| | | | | | | | | | | | | | | |
Impairment of assets | — | | | — | | | 55,726 | | | 55,726 | | | — | | | — | | | — | | | — | |
Loss (gain) on sale of assets | 542 | | | — | | | (199) | | | 343 | | | — | | | — | | | — | | | — | |
Income (loss) from operations | (1,249) | | | (4,529) | | | (73,426) | | | (79,204) | | | (757) | | | 134 | | | (13,809) | | | (14,432) | |
| | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | |
Interest expense | — | | | (176) | | | (2,034) | | | (2,210) | | | — | | | — | | | (112) | | | (112) | |
Gain (loss) on extinguishment of debt | — | | | — | | | 542 | | | 542 | | | — | | | — | | | (6,161) | | | (6,161) | |
Realized and unrealized gain on investments | — | | | — | | | 963 | | | 963 | | | — | | | — | | | 5,337 | | | 5,337 | |
Other income | 200 | | | 527 | | | 750 | | | 1,477 | | | 80 | | | — | | | 282 | | | 362 | |
Total other income (loss) | 200 | | | 351 | | | 222 | | | 773 | | | 80 | | | — | | | (654) | | | (574) | |
| | | | | | | | | | | | | | | |
Income (loss) before provision for income taxes | $ | (1,049) | | | $ | (4,178) | | | $ | (73,204) | | | $ | (78,432) | | | $ | (677) | | | $ | 134 | | | $ | (14,463) | | | $ | (15,006) | |
| | | | | | | | | | | | | | | |
Total assets | $ | 51,164 | | | $ | (73) | | | $ | 133,018 | | | $ | 180,255 | | | $ | 18,950 | | | $ | (3,522) | | | $ | 91,373 | | | $ | 106,801 | |
| | | | | | | | | | | | | | | |
For the periods presented, results of operations by reportable segments are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) |
| Three Months Ended June 30, 2023 | | Three Months Ended June 30, 2022 |
| Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total | | Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total |
Total Revenues | $ | 8,415 | | | $ | 382 | | | $ | — | | | $ | 8,797 | | | $ | 11,140 | | | $ | 4,661 | | | $ | — | | | $ | 15,801 | |
Cost of Goods Sold | 3,963 | | | 234 | | | — | | | 4,197 | | | 5,430 | | | 2,284 | | | — | | | 7,714 | |
Gross Profit | 4,452 | | | 148 | | | — | | | 4,600 | | | 5,710 | | | 2,377 | | | — | | | 8,087 | |
Gross Profit % | 52.9 | % | | 38.7 | % | | | | | | 51.3 | % | | 51.0 | % | | | | |
| | | | | | | | | | | | | | | |
Selling, General & Administrative Expenses | 2,852 | | | 312 | | | 4,907 | | | 8,071 | | | 6,427 | | | 3,886 | | | 7,847 | | | 18,160 | |
Impairment Expense | — | | | — | | | — | | | — | | | — | | | — | | | 55,726 | | | 55,726 | |
(Gain) Loss on Disposal of Assets | — | | | — | | | (1,739) | | | (1,739) | | | 542 | | | — | | | (1) | | | 541 | |
Income (Loss) from Operations | 1,600 | | | (164) | | | (3,168) | | | (1,732) | | | (1,259) | | | (1,509) | | | (63,572) | | | (66,340) | |
| | | | | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | | | | |
Interest Income (Expense) | 48 | | | — | | | (235) | | | (187) | | | — | | | (11) | | | (427) | | | (438) | |
Gain on Settlement of Liabilities | 110 | | | — | | | — | | | 110 | | | — | | | — | | | — | | | — | |
Unrealized Gain on Investments | — | | | — | | | — | | | — | | | — | | | — | | | 963 | | | 963 | |
Other Income (Expense) | (31) | | | 9 | | | 264 | | | 242 | | | (71) | | | 112 | | | 189 | | | 230 | |
Total Other Income (Expense), Net | 127 | | | 9 | | | 29 | | | 165 | | | (71) | | | 101 | | | 725 | | | 755 | |
| | | | | | | | | | | | | | | |
Income (Loss) Before Provision for Income Taxes | $ | 1,727 | | | $ | (155) | | | $ | (3,139) | | | $ | (1,567) | | | $ | (1,330) | | | $ | (1,408) | | | $ | (62,847) | | | $ | (65,585) | |
| | | | | | | | | | | | | | | |
Total Assets (Liabilities) | $ | 18,231 | | | $ | 4,456 | | | $ | 15,573 | | | $ | 38,260 | | | $ | 51,162 | | | $ | (73) | | | $ | 129,166 | | | $ | 180,255 | |
31The accompanying notes are an integral part of the unaudited consolidated financial statements.
23
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | (in thousands) |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
| Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total | | Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total |
Total revenues | $ | 10,947 | | | $ | 6,609 | | | $ | — | | | $ | 17,556 | | | $ | 2,318 | | | $ | 554 | | | $ | — | | | $ | 2,872 | |
Cost of goods sold | 5,430 | | | 3,856 | | | — | | | 9,286 | | | 1,154 | | | (1,007) | | | — | | | 147 | |
Gross profit | 5,517 | | | 2,753 | | | — | | | 8,270 | | | 1,164 | | | 1,561 | | | — | | | 2,725 | |
| | | | | | | | | | | | | | | |
Selling, general and administrative expenses | 6,427 | | | 3,886 | | | 8,757 | | | 19,070 | | | 1,416 | | | 512 | | | 2,770 | | | 4,698 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Impairment of assets | — | | | — | | | 55,726 | | | 55,726 | | | — | | | — | | | — | | | — | |
Loss on sale of assets | 542 | | | — | | | — | | | 542 | | | — | | | — | | | — | | | — | |
Income (loss) from operations | (1,452) | | | (1,133) | | | (64,483) | | | (67,068) | | | (252) | | | 1,049 | | | (2,770) | | | (1,973) | |
| | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | |
Interest expense | — | | | (11) | | | (432) | | | (443) | | | — | | | — | | | (39) | | | (39) | |
| | | | | | | | | | | | | | | |
Realized and unrealized gain (loss) on investments | — | | | — | | | 963 | | | 963 | | | — | | | — | | | (874) | | | (874) | |
Other income (loss) | 122 | | | 112 | | | 209 | | | 443 | | | 80 | | | — | | | (63) | | | 17 | |
Total other income (loss) | 122 | | | 101 | | | 740 | | | 963 | | | 80 | | | — | | | (976) | | | (896) | |
| | | | | | | | | | | | | | | |
Income (loss) before provision for income taxes | $ | (1,330) | | | $ | (1,032) | | | $ | (63,743) | | | $ | (66,105) | | | $ | (172) | | | $ | 1,049 | | | $ | (3,746) | | | $ | (2,869) | |
| | | | | | | | | | | | | | | |
Total assets | $ | 51,164 | | | $ | (73) | | | $ | 133,018 | | | $ | 180,255 | | | $ | 18,950 | | | $ | (3,522) | | | $ | 91,373 | | | $ | 106,801 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) |
| Six Months Ended June 30, 2023 | | Six Months Ended June 30, 2022 |
| Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total | | Cannabis Retail | | Cannabis Cultivation & Distribution | | Corporate & Other | | Total |
Total Revenues | $ | 16,885 | | | $ | 1,152 | | | $ | — | | | $ | 18,037 | | | $ | 23,653 | | | $ | 10,997 | | | $ | — | | | $ | 34,650 | |
Cost of Goods Sold | 7,768 | | | 974 | | | — | | | 8,742 | | | 12,311 | | | 8,139 | | | — | | | 20,450 | |
Gross Profit | 9,117 | | | 178 | | | — | | | 9,295 | | | 11,342 | | | 2,858 | | | — | | | 14,200 | |
Gross Profit % | 54.0 | % | | 15.5 | % | | | | | | 48.0 | % | | 26.0 | % | | | | |
| | | | | | | | | | | | | | | |
Selling, General & Administrative Expenses | 5,310 | | | 467 | | | 7,891 | | | 13,668 | | | 11,452 | | | 8,486 | | | 16,153 | | | 36,091 | |
Impairment Expense | — | | | — | | | — | | | — | | | — | | | — | | | 55,726 | | | 55,726 | |
(Gain) Loss on Disposal of Assets | — | | | — | | | (1,739) | | | (1,739) | | | 542 | | | — | | | (199) | | | 343 | |
Income (Loss) from Operations | 3,807 | | | (289) | | | (6,152) | | | (2,634) | | | (652) | | | (5,628) | | | (71,680) | | | (77,960) | |
| | | | | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | | | | |
Interest Expense | — | | | — | | | (1,211) | | | (1,211) | | | — | | | (176) | | | (2,028) | | | (2,204) | |
Gain on Extinguishment of Debt | — | | | — | | | 3,026 | | | 3,026 | | | — | | | — | | | 542 | | | 542 | |
Gain on Settlement of Liabilities | 110 | | | — | | | — | | | 110 | | | — | | | — | | | — | | | — | |
Realized Loss on Investments | — | | | — | | | (61) | | | (61) | | | — | | | — | | | — | | | — | |
Unrealized Gain on Investments | — | | | — | | | — | | | — | | | — | | | — | | | 963 | | | 963 | |
Other Income (Expense) | (317) | | | 324 | | | 264 | | | 271 | | | (397) | | | 527 | | | 728 | | | 858 | |
Total Other Income (Expense), Net | (207) | | | 324 | | | 2,018 | | | 2,135 | | | (397) | | | 351 | | | 205 | | | 159 | |
| | | | | | | | | | | | | | | |
Income (Loss) Before Provision for Income Taxes | $ | 3,600 | | | $ | 35 | | | $ | (4,134) | | | $ | (499) | | | $ | (1,049) | | | $ | (5,277) | | | $ | (71,475) | | | $ | (77,801) | |
| | | | | | | | | | | | | | | |
Total Assets (Liabilities) | $ | 18,231 | | | $ | 4,456 | | | $ | 15,573 | | | $ | 38,260 | | | $ | 51,162 | | | $ | (73) | | | $ | 129,166 | | | $ | 180,255 | |
NOTE 17 – RELATED PARTY TRANSACTIONS
All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Company's board of directors.
During the three and six months ended June 30, 2023, the Company incurred a total of $0.60 million and $1.05 million in fees pursuant to the engagement letter with Adnant, LLC ("Adnant") dated August 12, 2022, as amended on June 30, 2023, for executive level consulting and related business support services (the "Engagement"). Effective April 1, 2023, Adnant is entitled to receive monthly fees of $0.20 million through September 30, 2023 as compensation for Adnant’s continued services. The Engagement, as amended, provides Adnant with the option to convert accrued and unpaid service fees into shares of common stock of the Company. In accordance with the Engagement, the Company issued 79,997,091 and 96,178,321 shares of the Company's common stock under the performance bonus award valued at $1.55 million and $1.91 million for the three and six months ended June 30, 2023, respectively.
During the six months endedJune 30, 2023, a member of the Company's board of directors forfeited 900,000 shares of the Company's common stock to the Company for no cash value. Refer to "Note 12 - Stockholders' Deficit" for further information.
During the six months endedJune 30, 2023, the Company's CEO advanced the Company $0.20 million for working capital needs. The advance is non-interest bearing and due on demand. The related party advance is presented as a component of accounts payable and accrued expenses in the consolidated balance sheet as of June 30, 2023.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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NOTE 1918 – RELATED PARTY TRANSACTIONSCOMMITMENTS AND CONTINGENCIES
Refer to Note 11, "Notes Payable"California Operating Licenses
The Company’s subsidiaries have operated compliantly and have been eligible for related party transactionsapplicable licenses and balances during the current period.renewals of those licenses.
All related party transactions are monitored quarterly by the CompanyLitigation and approved by the Audit Committee of the Board of Directors.
NOTE 20 – GOING CONCERN
We have incurred significant losses in prior periods. For the three and six months ended June 30, 2022, we incurred a pre-tax net loss from continuing operations of $66.10 million and $78.43 million, respectively, and, as of that date, we had an accumulated deficit of $323.71 million. For the three and six months ended June 30, 2021, we incurred a net loss from continuing operations of $2.87 million and $15.01 million, respectively. As of December 31, 2021, we had an accumulated deficit of $250.02 million. We expect to experience further significant net losses in 2022 and the foreseeable future. At June 30, 2022, we had a consolidated cash balance of approximately $7.26 million. We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. 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.Claims
We willThe Company is the subject of lawsuits and claims arising in the ordinary course of business from time to time. The Company reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued if such disclosure is necessary for the Company’s financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company determined that there was one matter that required an accrual as of June 30, 2023.
Magee v. UMBRLA, Inc. et al. - The Company is currently involved in a breach of contract action brought by former LTRMN, Inc. (“LTRMN”) employee, Kurtis Magee, which was filed by Mr. Magee in the Superior Court of the State of California, County of Orange, on July 21, 2020. Mr. Magee alleges breach of contract in connection with Mr. Magee’s separation agreement with LTRMN. Trial in this matter is set for April 29, 2024. The Company believes the likelihood of a loss contingency is probable. Accordingly, the Company has accrued $0.50 million for this matter in the consolidated balance sheet.
Terra Tech Corp. v. National Fire & Marine Ins. Co., et al. - On or about December 6, 2021, the Company initiated an action in California Superior Court, County of Alameda, against National Fire & marine Insurance Company (“National Fire”), Woodruff-Sawyer & Co., and R-T Specialty, LLC in connection with the denial of an insurance claim by National Fire following the vandalism and looting of the Company’s Bay Area dispensaries in May 2020. The Company alleges that coverage levels for the Company were changed after the policy was bound, in a manner inconsistent with the binder, which prevented the Company from fully recovering its losses in connection with the incidents. Trial in this matter has not been set. No amount has been recognized in the consolidated balance sheets as of June 30, 2023 and December 31, 2022 for the gain contingency.
Unrivaled Brands, Inc. et al v. Mystic Holdings, Inc., et al. - On May 11, 2022, Unrivaled and its wholly-owned subsidiary, Medifarm I, LLC (“Plaintiffs”) initiated an action in the Second Judicial District of the State of Nevada, County of Washoe, against Mystic Holdings, Inc. (“Mystic”) and Picksy Reno LLC (collectively with Mystic, “Defendants”) in connection with Defendants’ failure to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are ablehonor Plaintiffs’ exercise of a put option entitling Plaintiffs to raise revenues to a pointthe repurchase of positive cash flow. We are evaluating various options to further reduce our cash requirements to operateapproximately 8,332,096 shares of Mystic at a reduced rate,price of $1.00 per share. A trial date has not yet been set. No amount has been recognized in the consolidated balance sheets as well as optionsof June 30, 2023 and December 31, 2022 for the gain contingency.
Fusion LLF, LLC v. Unrivaled Brands, Inc.- On June 27, 2022, Fusion LLF, LLC filed an action against the Company, in the Superior Court for the State of California, County of Orange, alleging claims for breach of contract, account stated, and right to raise additional funds, including obtaining loansattach order and selling common stock. Therewrit of attachment. The complaint claims at least $4.55 million in damages. On August 11, 2022, the Company filed an answer to the complaint. On August 5, 2022, Fushion LLF, LLC filed an application for a right to attach order and writ of attachment, which was denied on December 8, 2022.
People's California, LLC v. Unrivaled Brands, Inc. - On July 19, 2022, People’s California, LLC, the sellers of People's First Choice, filed an action against the Company in the Superior Court for the State of California, County of Orange, bringing claims for breach of contract and breach of the covenant of good faith and fair dealing stemming from the Company’s alleged breach of certain agreements with People’s California, LLC. The complaint claims at least $23.00 million in damages.
On September 20, 2022, the Company filed a cross-complaint in the matter in November 2021. The Company was seeking a minimum of $5.40 million in damages.
On March 6, 2023, the parties entered into a binding term sheet to settle the litigation. The litigation is no guarantee that we willstayed pending final documentation of the settlement agreement. The litigation is expected to be abledismissed in the next 180 days. Refer to generate enough revenue and/or"Note 11 – Notes Payable" for further details.
32The accompanying notes are an integral part of the unaudited consolidated financial statements.
25
raise capital to support our operations, or if we are able to raise capital, that it will be available to usPeople's California, LLC v. Kovacevich, et al - On August 1, 2022, People’s California, LLC filed an action against certain current and former officers and directors of the Company in the Superior Court for the State of California, County of Orange, derivatively on acceptable terms,behalf of the Company and listing the Company as a nominal defendant alleging claims for breach of fiduciary duty, abuse of control, self-dealing, corporate waste, and unjust enrichment based on an acceptable schedule, or at all.a series of corporate transactions and management decisions. The Complaint does not state a specific claim for damages.
On March 6, 2023, the parties entered into a binding term sheet to settle the litigation. The issuancelitigation is stayed pending final documentation of additional securities may result in a significant dilutionthe settlement agreement. The litigation is expected to be dismissed in the equity interests of our current stockholders. Obtaining loans, assuming these loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available for use when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations.next 180 days.
1149 South LA Street Fashion District, LLC vs Unrivaled Brands, Inc. - On January 30, 2023, 1149 South LA Street Fashion District, LLC and 1135 South LA Street Fashion District LLC filed an action against the Company and other defendants in the Superior Court of the State of California, County of Los Angeles, alleging claims for breach of written contract, breach of written guaranty, breach of implied covenant of good faith and fair dealing, waste, and declaratory relief. The risks and uncertainties surrounding our abilitycomplaint claims at least $0.58 million in damages. On April 10, 2023, the Company filed an answer to continue to raise capital and our limited capital resources raise substantial doubtthe complaint. Because no conclusion has been formed as to our abilitywhether an unfavorable outcome is either probable or remote, no opinion is expressed as to continuethe likelihood of an unfavorable outcome or the amount or range of any possible loss to the Company.
Greenlane Holdings, LLC v. Unrivaled Brands, Inc. - On February 6, 2023, Greenlane Holdings, LLC, a related party, filed an action against the Company in the Superior Court of the State of California, County of Los Angeles, alleging claims for breach of contract, account stated, and unjust enrichment. The complaint alleges damages of $0.40 million. On April 10, 2023, the Company filed an answer to the complaint. Because no conclusion has been formed as a going concernto whether an unfavorable outcome is either probable or remote, no opinion is expressed as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to the Company.
WGS Group, Inc. vs Unrivaled Brands, Inc. - On July 17, 2023 WGS Group, Inc. filed an action against the Company in the Superior Court of California, County of Orange Central Justice Center, alleging claims for twelve months fromdamages and declaratory relief, breach of security service agreements, breach of the issuanceimplied covenant of thesegood faith and fair dealing, quantum meruit, violations of business and professional code sections 17200 Et SEQ., declaratory relief regarding successor-in-interest liability, and declaratory relief regarding ultra vires actions imposing personal liability on chief financial statements.officer. Because no conclusion has been formed as to whether an unfavorable outcome is either probable or remote, no opinion is expressed as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to the Company.
NOTE 2119 – SUBSEQUENT EVENTS
On July 19, 2022, People’s California, LLC, the sellers of Peoples First Choice, filed an action against Unrivaled Brands, Inc. (the “Company”), styled, People’s California, LLC v. Unrivaled Brands, Inc., in the Superior Court for the State of California, County of Orange Case No. 30-2022-01270747-CU-BC-CJC, bringing claims for breach of contract and breach of the covenant of good faith and fair dealing stemming from the Company’s alleged breach of certain agreements with People’s California, LLC. The Complaint claims at least
$23.00 million in damages.
The Company has not yet respondedevaluated subsequent events through August 14, 2023, which is the date these consolidated financial statements were issued, and has concluded no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the Complaint and is evaluating the claims.
On August 1, 2022, People’s California, LLC filed an action against certain current and former officers and directors of the Company, styled People’s California, LLC v. Nicholas Kovacevich, et al, in the Superior Court for the State of California, County of Orange Case No. 30-2022-01272843-CU-MC-CJC, derivatively on behalf of the Company and listing the Company as a nominal defendant alleging claims for breach of fiduciary duty, abuse of control, self-dealing, corporate waste, and unjust enrichment based on a series of corporate transactions and management decisions. The Complaint does not state a specific claim for damages. The Company and the individual defendants have not yet responded to the Complaint and the Company is evaluating the claims.
On July 21, 2022, Tiffany Davis resigned as Interim Chief Executive Officer and as a member of the Company’s Board of Directors effective immediately.
On August 12, 2022, the Board of Directors appointed Sabas Carrillo as Interim Chief Executive Officer. Mr. Carrillo is the Founder and CEO of Adnant, LLC, an accounting and consulting firm advising cannabis companies on technical and operational accounting, strategic transactions, and the public offering process.
On August 12, 2022, the Company entered into an engagement letter with Adnant, LLC (“Adnant”). Pursuant to the engagement letter, Adnant will provide executive level consulting and related business support and services related to the Company’s present and future challenges and opportunities. Specifically, Adnant will provide a team of restructuring focused executives that may include, but not be limited to, CEO support, chief restructuring officer, executive vice president of finance, Financial Planning and Analysis (“FP&A”) professional, and/or legal consulting. Adnant is expected to work closely with the Company and its internal teams, existing management, existing consultants and advisors, lenders, attorneys, and other relevant parties in connection with the implementation of the strategies most appropriate to achieve the Company's objectives and as directed and authorized by the Company’s Board of Directors (the “Board”).
Adnant’s fees for the services will be a flat fee of $0.15 million monthly. The payment of the monthly fee shall be subject to the Company having available a cash balance greater than or equal to $1.2 million (the “Cash Threshold”) following the payment of the monthly fee. Should cash not be sufficient when the fee becomes due and payable, the Company shall accrue such fee(s) until such time as the Cash Threshold is achieved or, at the election of Adnant, and as mutually agreed by the Company, such fees may be paid in an equivalent value of shares of the Company’s common stock.
In addition to the monthly fee described above, a Performance Bonus Award in the aggregate amount of $2,000,000 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 Engagement Letter and the continued performance of Adnant towards obtaining such Performance Bonus Award Objectives.consolidated financial statements.
33The accompanying notes are an integral part of the unaudited consolidated financial statements.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In addition to historical information,This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of Unrivaled Brands, Inc. (“Unrivaled Brands”, “Unrivaled”, or the “Company”) is for the three and six months ended June 30, 2023. The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A(this "Form 10-Q") and those discussed in Item 8 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 management’s expectations, beliefs, estimates, and projections will occur or can be can 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 Quarterly Report on Form 10-Q. 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 ourCompany’s Annual Report on Form 10-K for the year ended December 31, 2021 and in other filings we make from time to time with the U.S. Securities and Exchange Commission (“SEC”(the “Form 10-K”).
We caution you that the risks, uncertainties, and other factors set forth in our periodic filings filed with the SEC may not contain all ofon April 10, 2023. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below for many reasons, including the risks uncertainties,described in “Cautionary Language Concerning Forward-Looking Statements,” “Item 1A—Risk Factors” 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 statementselsewhere 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.Form 10-Q.
Company OverviewCOMPANY OVERVIEW
Our corporate headquarters is located at 3242 S. Halladay St, Santa Ana, California 92705 and our telephone number is (888) 909-5564. Our website addresses are as follows: www.unrivaledbrands.com. No information available on or through our websites shall be deemed to be incorporated into this Quarterly Report on Form 10-Q. Our common stock, par value $0.001 (the “Common Stock”), is quoted on the OTC Markets Group, Inc’s OTCQX tier under the symbol “UNRV.”
Our Business
The Company is a multi-state operator ("MSO")cannabis company with retail, production, distribution, and cultivation operations throughout California, with an emphasis on providing the highest quality of medical and adult use cannabis products. From the acquisition of UMBRLA, the Company has multiple cannabis lifestyle brands. The Company is home to Korova, a brand of high potency products across multiple product categories, currently available in California, Oregon, Arizona, and Oklahoma. Other Company brands include Cabana, a boutique cannabis flower brand, and Sticks, a mainstream value-driven cannabis brand, active in California and Oregon. With the acquisition of People’s First Choice, the Company operates a premier cannabis dispensary in Santa Ana, California.Orange County, California, regularly servicing upwards of 1,000 customers each day. The Company also owns dispensaries in California which operate as The Spot in Santa Ana, BlumBlüm in Oakland, and SilverstreakBlüm in San Leandro. TheAs of June 30, 2023, the Company also has licensed distribution facilities in Portland, OR, Los Angeles, CA and Sonoma County, CA.had 145 employees.
We are organized into two reportable segments:
•Cannabis Retail – Includes cannabis-focused retail, both physical stores and non-store front delivery
•Cannabis Cultivation and Distribution – Includes cannabis cultivation, production,manufacturing, and distribution operations
Either independently or in conjunction with third parties, we operate medical marijuana retail and adult use dispensaries and cultivation and production facilities in California and Oregon.California.
As
Our corporate headquarters are located at 3242 S. Halladay St, Santa Ana, California 92705 and our telephone number is (888) 909-5564. Our website address is www.unrivaledbrands.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 “UNRV.”
Fiscal Second Quarter 2023 Highlights
Amendments of Promissory Note Related to People's California, LLC
On May 17, 2023, the Company amended the binding settlement term sheet ("Settlement Term Sheet") with People’s California, LLC to extend the maturity date of certain principal repayments as originally agreed upon in the Settlement Term Sheet dated March 6, 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 11 of the Consolidated Financial Statements for additional details.
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, 2022,2023, 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 $40.00 million in the aggregate.
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Outlook
employees. Our employees
The Company will continue to focus on its performing assets, particularly California retail assets. In particular, the Company intends to emphasize retail business fundamentals including a robust and diverse product offering, improving inventory and vendor management, effective marketing, and reinvigorating its Korova brand. The Company will continue to focus on reducing and streamlining its corporate overhead and rightsizing the Company. This outlook is based on several management assumptions that are largely outside the heartcontrol of ourthe Company. InWith a rapidly evolvingdisciplined approach to retail performance, a management team with extensive cannabis industry, itcapital markets experience, deep relationships in the industry, and a commitment to investing in its team and, specifically, its company culture, the Company is imperativeencouraged that we attract, develop,Unrivaled will emerge from its current restructuring efforts as an effective cannabis company. We will continue to seek further opportunities to expand profitability and retain top talent on an ongoing basis. To do this, we seek to make Unrivaled Brands an inclusive, diverse, and safe workplace, with meaningful compensation and opportunitiesmaximize returns for career its shareholders.
RESULTS OF OPERATIONS
The below table outlines our consolidated statements of operations for the impactthree and six months ended June 30, 2023 and 2022:
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| (unaudited) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | 2023 | | 2022 | | $ Change | | % Change | | 2023 | | 2022 | | $ Change | | % Change |
Revenue | $ | 8,797 | | | $ | 15,801 | | | $ | (7,004) | | | (44.0) | % | | $ | 18,037 | | | $ | 34,650 | | | $ | (16,613) | | | (48.0) | % |
Cost of Goods Sold | 4,197 | | | 7,714 | | | (3,517) | | | (46.0) | % | | 8,742 | | | 20,450 | | | (11,708) | | | (57.0) | % |
Gross Profit | 4,600 | | | 8,087 | | | (3,487) | | | (43.0) | % | | 9,295 | | | 14,200 | | | (4,905) | | | (35.0) | % |
Gross Profit % | 52.3 | % | | 51.2 | % | | 1.1 | % | | | | 51.5 | % | | 41.0 | % | | 10.6 | % | | |
| | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | |
Selling, General & Administrative Expenses | 8,071 | | | 18,160 | | | (10,089) | | | (55.6) | % | | 13,668 | | | 36,091 | | | (22,423) | | | (62.1) | % |
Impairment Expense | — | | | 55,726 | | | (55,726) | | | (100.0) | % | | — | | | 55,726 | | | (55,726) | | | (100.0) | % |
(Gain) Loss on Disposal of Assets | (1,739) | | | 541 | | | (2,280) | | | (421.4) | % | | (1,739) | | | 343 | | | (2,082) | | | (607.0) | % |
Total Operating Expense, Net | 6,332 | | | 74,427 | | | (68,095) | | | (91.5) | % | | 11,929 | | | 92,160 | | | (80,231) | | | (87.1) | % |
| | | | | | | | | | | | | | | |
Loss from Operations | (1,732) | | | (66,340) | | | 64,608 | | | (97.4) | % | | (2,634) | | | (77,960) | | | 75,326 | | | (96.6) | % |
Other Income, Net | 165 | | | 755 | | | (590) | | | (78.1) | % | | 2,135 | | | 159 | | | 1,976 | | | 1,242.8 | % |
| | | | | | | | | | | | | | | |
Loss from Continuing Operations Before Provisions for Income Taxes | (1,567) | | | (65,585) | | | 64,018 | | | (97.6) | % | | (499) | | | (77,801) | | | 77,302 | | | (99.4) | % |
Provision for Income Tax Benefit (Expense) for Continuing Operations | 125 | | | 448 | | | (323) | | | (72.1) | % | | (533) | | | 2,136 | | | (2,669) | | | (125.0) | % |
| | | | | | | | | | | | | | | |
Net Loss from Continuing Operations | (1,442) | | | (65,137) | | | 63,695 | | | (97.8) | % | | (1,032) | | | (75,665) | | | 74,633 | | | (98.6) | % |
Net Income from Discontinued Operations | — | | | 1,419 | | | (1,419) | | | (100.0) | % | | — | | | 3,349 | | | (3,349) | | | (100.0) | % |
| | | | | | | | | | | | | | | |
Net Loss | (1,442) | | | (63,718) | | | 62,276 | | | (97.7) | % | | (1,032) | | | (72,316) | | | 71,284 | | | (98.6) | % |
| | | | | | | | | | | | | | | |
Net Income from Discontinued Operations Attributable to Non-Controlling Interest | — | | | — | | | — | | | — | % | | — | | | 275 | | | (275) | | | (100.0) | % |
| | | | | | | | | | | | | | | |
Net Loss Attributable to Unrivaled Brands, Inc. | $ | (1,442) | | | $ | (63,718) | | | $ | 62,276 | | | (97.7) | % | | $ | (1,032) | | | $ | (72,591) | | | $ | 71,559 | | | (98.6) | % |
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Revenue
Overall revenue for the three months ended June 30, 2023 was $8.80 million compared to $15.80 million for the same period in 2022, a decrease of reclassifying$7.00 million or 44.0%. During the three months ended June 30, 2023, the Company generated revenue from continuing operations of $8.80 million composed of retail revenue of $8.42 million and cultivation/distribution revenue of $0.38 million. This compared to revenue from continuing operations of $15.80 million for the quarter ended June 30, 2022, which included retail revenue of $11.14 million and cultivation/distribution revenue of $4.66 million.
Retail revenue for the three months ended June 30, 2023 decreased compared to the same period in the prior year by $2.73 million or 24.5% 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 during the last half of 2022. While we operated the non-storefront Sacramento retail operation and the Los Angeles retail operations during the first quarter of 2022, there were no operations of the NuLeafsame non-storefront Sacramento retail and Los Angeles retail operations Nevada Dispensaries, OneQor, and Edible Garden to discontinued operations:
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| (in thousands) | | (in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
Revenue | | | | | | | | | | | | | | | |
Continuing Operations | $ | 17,555 | | | $ | 2,871 | | | $ | 14,684 | | | 511.0 | % | | $ | 38,280 | | | $ | 4,928 | | | $ | 33,352 | | | 677.0 | % |
Discontinued Operations | — | | | 3,391 | | | (3,047) | | | (100.0) | % | | 2,605 | | | 6,446 | | | (3,841) | | | (60.0) | % |
Total Revenue | $ | 17,555 | | | $ | 6,262 | | | $ | 11,637 | | | 180.0 | % | | $ | 40,885 | | | $ | 11,374 | | | $ | 29,511 | | | 259.0 | % |
| | | | | | | | | | | | | | | |
Cost of Goods Sold | | | | | | | | | | | | | | | |
Continuing Operations | $ | 9,286 | | | $ | 147 | | | $ | 9,139 | | | 6,217.0 | % | | $ | 23,578 | | | $ | 2,013 | | | $ | 21,565 | | | 1,071.0 | % |
Discontinued Operations | (23) | | | 3,776 | | | (3,799) | | | (101.0) | % | | 520 | | | 4,591 | | | (4,071) | | | (89.0) | % |
Total Cost of Goods Sold | $ | 9,263 | | | $ | 3,923 | | | $ | 5,340 | | | 136.0 | % | | $ | 24,098 | | | $ | 6,604 | | | $ | 17,494 | | | 265.0 | % |
| | | | | | | | | | | | | | | |
Gross Profit $ | | | | | | | | | | | | | | | |
Continuing Operations | $ | 8,269 | | | $ | 2,724 | | | $ | 5,545 | | | 204.0 | % | | $ | 14,702 | | | $ | 2,915 | | | $ | 11,787 | | | 404.0 | % |
Discontinued Operations | 23 | | | (385) | | | 408 | | | (106.0) | % | | 2,085 | | | 1,855 | | | 230 | | | 12.0 | % |
Total Gross Profit $ | $ | 8,292 | | | $ | 2,339 | | | $ | 5,953 | | | 255.0 | % | | $ | 16,787 | | | $ | 4,770 | | | $ | 12,017 | | | 252.0 | % |
| | | | | | | | | | | | | | | |
Gross Profit % | | | | | | | | | | | | | | | |
Continuing Operations | 47.1 | % | | 94.9 | % | | (47.8) | % | | | | 38.4 | % | | 59.2 | % | | (20.7) | % | | |
Discontinued Operations | n.d. | | (11.4) | % | | 11.4 | % | | | | 80.0 | % | | 28.8 | % | | 51.3 | % | | |
Total Gross Profit % | 47.2 | % | | 37.4 | % | | 9.9 | % | | | | 41.1 | % | | 41.9 | % | | (0.9) | % | | |
| | | | | | | | | | | | | | | |
Outlookduring the quarter ended June 30, 2023, which contributed $0.91 million in revenues in the prior year.
Unrivaled Brands, Inc. has made substantial progress on its integration efforts since successfully closing the merger with UMBRLA on July 1st, 2021. Management believes that this strategic acquisition and corporate rebranding will provide a sustainable platform to capture synergies across organization verticals by leveraging Unrivaled’s existing brand portfolio and scaling its multi-state distribution operations. Furthermore, on September 1st, 2021, the Company entered into a Management Agreement with People’s First Choice; granting Unrivaled Brands, Inc. operational management and control of the Santa Ana, CA dispensary which provided an immediate lift to revenues as well as the opportunity to expand the retail footprint of our in-house product lines including, but not limited to, Korova, Sticks and Cabana. However, if these
acquisitions do not perform as expected, an earlier than expected impairment analysis of these acquired intangible assetsCultivation and goodwill may result in impairments of our long-lived assets.
Besides integrating and expanding the Company’s platform, management is focused on fostering strategic partnerships with keystone brands in the west coast that complement our brand portfolio and corporate mission. As such, on August 18th 2021, Unrivaled entered into an exclusive distribution agreement with G-Eazy’s FlowerShop, a lifestyle and wellness brand that can be found in over 400 retail stores across California at time of writing. To this end, the Company’s efforts to create a robust and scalable platform in tandem to brand-conscious partnerships both position the Company to create sustainable shareholder value as “The West Coast MSO”.
Comparison of the Three Months Ended June 30, 2022 and 2021
Revenues
Duringrevenue for the three months ended June 30, 2022, the Company generated total revenue of $17.562023 decreased by $4.28 million composed of retail revenue of $10.95 million and cultivation/distribution revenue of $6.61 million. Thisor 91.8% compared to total revenue of $2.87 million for the quarter ended June 30, 2021, which included retail revenue of $2.32 million and cultivation/distribution revenue of $0.55 million. This was an increase of 511.0%same period in total revenue.
Retail revenue for the quarter dramatically outpaced the second quarter of the prior year due to the retail assets acquiredclosure of all operations except for one growing facility in Northern California that was implemented as part of the Company's turnaround plan in 2022. In addition, we eliminated third-party distribution operations in California which contributed $4.66 million of revenue in the Company's 2021 acquisitionssame period in the prior year. We also ceased growing operations at a 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 $0.34 million of UMBRLA, People's First Choice and SilverStreak Solutions. We are operating five retail stores andrevenue in the current year. Combined revenues from both facilities provided $1.11 million in the prior year.
Gross Profit
Cost of goods sold for the three months ended June 30, 2023 was $4.20 million, a non-storefront delivery service in 2022decrease of $3.52 million, or 46.0%, compared to prior year when the Company was operating two retail stores. On a comparable store basis, we saw a 23.3% increase over first quarter 2021$7.71 million for the two comparable stores.three months ended June 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.
Cultivation and distribution revenues were dramatically increased as
Gross profit from continuing operations for the three months ended June 30, 2023 was $4.60 million compared to a resultgross profit of the Company’s merger with UMBRLA, with a wholesale/distribution operation throughout California and Oregon. The additive wholesale/distribution assets provided a net benefit of $9.47$8.09 million for the three months ended June 30, 2022, as a direct resultdecrease of integrating UMBRLA’s platform - an increase of 2,863%$3.49 million or 43.0%. 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 gross margin improved for the three months ended June 30, 2021.
2023 to 52.3% as compared to 51.2% 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
The Company’s gross profit for on-going retail operations improved to 52.9% for the three months ended June 30, 2022 was $8.27 million,2023 compared to a gross profit of $2.72 million51.3% for the three months ended June 30, 2021, an increase of $5.55 million or 204.0%.same period in the prior year.
Selling, General and& Administrative Expenses and Other Operating Expenses
The merger with UMBRLA and the acquisitions of People's First Choice and SilverStreak Solutions in 2021 led to more operations with additional facilities, employees, and costs to support them.
Selling, generalgeneral and administrative expenses for the three months ended June 30, 20222023 were $19.07$8.07 million, compared to $4.70$18.16 million for the three months ended June 30, 2021, an increase2022, a decrease of $14.37$10.09 million or 305.9%55.6%. For 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 June 30, 2022,2023 as compared to the same period in the prior year. Specifically, the Company saw a decrease of $2.57 million in depreciation and amortization and depreciation expenses increased by $2.56expense, a decrease of $1.40 million over the three months ended June 30, 2021, facilitiesin facility related expenses, such as rent, utilities, repairs and maintenance, security, and insurance, increased by $2.89a decrease of $3.00 million over second quarterin salaries and benefits, and a decrease of 2021. Taxes, licensing$0.04 million in stock-based compensation. Management expects to continue focusing on efficiencies within its core assets and permitting increased by $1.17 million. Advertising increased by $0.73 million. Employee related expenses increased by $3.93 million or 382%.reducing non-core assets and expenditures.
Operating Loss
The Company realized an operating loss from continuing operations of $67.07$1.73 million for the three months ended June 30, 2023 compared to $66.34 million for the three months ended June 30, 2022, compareda decrease of $64.61 million or 97.4%. 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 operating lossimpairment charge of $1.97$55.73 million forrecognized in the three months ended June 30, 2021, an increase of $65.09 million or 3,298.5%. This increase2022, where no impairment charge was attributed primarily to a $55.73 million charge for impairment of intangible assets and goodwill related torecognized during the UMBRLA and People's acquisitions.current period.
Other Income (Expense)
Other income for the three months ended June 30, 2022, were $0.962023 of $0.17 million was generally consistent compared to other expense of $0.90 million recognized in the three months ended June 30, 2021, an improvement of $1.86 million. This increase in other income was attributed to the mark-to-market adjustment for the Company's investment in Edible Garden which resulted in a $4.82 million unrealized gain during the fiscal second quarter.
Discontinued Operations
We realized a net income of $1.94$0.76 million for the three months ended June 30, 2022. This was an increase of $4.04 million overDuring the three months ended June 30, 2021, resulting from2023, the disposalCompany recognized a gain on settlement of liabilities of $0.11 million versus none in the Dyer property and profit from our NuLeaf operations.comparative prior period. This was offset by an unrealized gain on investments of $0.96 million during the three months ended June 30, 2022 compared to none in the current period.
Discontinued Operations
Net Loss Attributable to Unrivaled Brands, Inc.
We incurred a net loss of $63.72 million, or $(0.11) per share,income from discontinued operations was nil for the three months ended June 30, 2022, an increase of $(0.09) per share2023 compared to $1.42 million for the comparative prior period. All discontinued operations were fully divested as of December 31, 2022, and as a netresult, the Company had no income or loss of $4.10 million, or $(0.02) per share,from discontinued operations for the three months ended June 30, 2021.2023.
The increase in net loss per share was attributable to the $55.73 million impairment on intangible assets and goodwill related to the UMBRLA and People’s acquisitions.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Revenue
Overall revenue was $18.04 million for the six months ended June 30, 2023 compared to $34.65 million for the same period in 2022, a decrease of $16.61 million or 48.0%. Revenue from continuing operations was $18.04 million for the six months ended June 30, 2023 which was composed of retail revenue of $16.89 million and 2021
Revenues
Duringcultivation/distribution revenue of $1.15 million. This compared to revenue from continuing operations of $34.65 million for the six months ended June 30, 2022, the Company generated total revenue of $38.28 million composed ofwhich included retail revenue of $23.06$23.65 million and cultivation/distribution revenue of $15.22$11.00 million. This compared to total revenue of $4.93 million for the six months ended June 30, 2021 which included retail revenue of $4.02 million and cultivation/distribution revenue of $0.91 million. This was an increase of 677.0% in total revenue.
Retail revenue for the six months ended June 30, 2023 decreased compared to the same period in the prior year by $6.77 million or 28.6% 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, dramatically outpacedand a general decline in the cannabis market during the last half of 2022. While we operated the non-storefront Sacramento retail operation and the Los Angeles retail operations during the first two quarters of 2022, there were no operations of the same non-storefront Sacramento retail and Los Angeles retail operations during the first two quarters of 2023, which contributed $2.29 million in revenues in the prior year.
Cultivation and distribution revenue for the six months ofended June 30, 2023 decreased by $9.85 million or 89.5% compared to the same period in the prior year due to the retail assets acquiredclosure of all operations except one growing facility in Northern California that was implemented as part of the Company's turnaround plan. In addition, we eliminated third-party distribution operations in California which contributed $11.87 million of revenue in the Company's 2021 acquisitionssame period in the prior year. We also ceased growing operations at a 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 $0.99 million of UMBRLA, People's First Choice and SilverStreak Solutions. We operated five retail stores and a non-storefront delivery servicerevenue in 2022the current year compared to $2.21 million in the prior year whenyear.
Gross Profit
Cost of goods sold for the Companysix months ended June 30, 2023 was operating two retail stores.
Cultivation and distribution revenues were dramatically increased as$8.74 million, a resultdecrease of the Company’s merger with UMBRLA, with its distribution network in California and Oregon. The additive distribution assets provided a net benefit of $14.31$11.71 million or 57.0% compared to $20.45 million for the six months ended June 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
The Company’sprofit from continuing operations for the six months ended June 30, 2023 was $9.30 million compared to a gross profit of $14.20 million for the six months ended June 30, 2022, a decrease of $4.91 million or 35.0%. The decrease in gross profit was $14.70 million,directly impacted by the decrease in revenues for the current reporting period as compared to athe prior year. However, the Company's overall gross margin improved for the six months June 30, 2023 to 51.5% as compared to 41.0% 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 of $2.92 millionfor on-going retail operations improved to 54.0% for the six months ended June 30, 2021, an increase of $11.79 million .2023 compared to 48.0% for the same period in the prior year.
Selling, General and& Administrative Expenses and Other Operating Expenses
The merger with UMBRLA and the acquisitions of People's First Choice and SilverStreak Solutions in 2021 led to more operations with additional facilities, employees, and costs to support them.
Selling, general and administrative expenses for the six months ended June 30, 2022,2023 were $37.84$13.67 million, compared to $17.35$36.09 million for the six months ended June 30, 2021, an increase2022, a decrease of $20.49$22.42 million or 118.1%62.1%. ForAs 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 six months ended June 30, 2022,2023 as compared to the same period in the prior year. Specifically, the Company saw a decrease of $5.04 million in depreciation and amortization and depreciation expenses increased by $4.71expense, a decrease of $3.03 million over the six months ended June 30, 2021, facilitiesin facility related expenses, such as rent, utilities, repairs and maintenance, security, and insurance, increased by $5.04a decrease of $5.93 million over the first halfin salaries and benefits, and a decrease of 2021. Option expense$1.77 million in stock-based compensation. Management expects to continue focusing on efficiencies within its core assets and director’s compensation increased by $1.92 million with the two more board members in muchreducing non-core assets and expenditures.
Operating Loss
The Company realized an operating loss from continuing operations of $79.20$2.63 million for the six months ended June 30, 2023 compared to $77.96 million for the six months ended June 30, 2022, compareda decrease of $75.33 million or 96.6%. 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 operating lossimpairment charge of $14.43$55.73 million forrecognized in the six months ended June 30, 2021. This was primarily driven by a $55.73 million intangible asset and goodwill2022, where no impairment charge related towas recognized for the UMBRLA and People's acquisitions.
three months ended June 30, 2023. Other Income (Expense)
Other income for the six months ended June 30, 2022, were $0.772023 was $2.14 million compared to the $(0.57)$0.16 million expense recognized in the six months ended June 30, 2021, an increase of $1.35 million. This increase in other income was attributed to the mark-to-market adjustment for the Company's investment in Edible Garden which resulted in a $4.82 million unrealized gain.
Discontinued Operations
We realized a net income of $3.98 million for the six months ended June 30, 2022. This was an increase of $5.55 million over the six months ended June 30, 2021 resulting from the disposal of the Dyer property and profit from our NuLeaf operations.
Net Loss Attributable to Unrivaled Brands, Inc.
We incurred a net loss attributable to Unrivaled Brands, Inc. of $72.32 million, or $(0.13) per share, for the six months ended June 30, 2022, an increase of $0.05 per share$1.98 million. The change from the prior year was primarily attributable to an increase in gain on extinguishment of debt due to the $3.03 million recognized during the current period, offset by a decrease in other income of $0.59 million compared to a net loss of $16.18 million, or $(0.07) per share,the same period in the prior year.
Discontinued Operations
Net income from discontinued operations was nil for the six months ended June 30, 2021.2023 compared to $3.35 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 six months ended June 30, 2023.
Three Months Ended June 30, 2023 Compared to Three Months Ended March 31, 2023
The dramatic increase in net loss was attributable to an impairment chargebelow table outlines our consolidated statements of $55.73 million on intangible assets and goodwill relating to the UMBRLA and People’s acquisitions duringoperations for the fiscal second quarter of 2023 compared to the fiscal first quarter of 2023:
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| (unaudited) |
| Three Months Ended |
| June 30, | | March 31, | | | | |
($ in thousands) | 2023 | | 2023 | | $ Change | | % Change |
Revenue | $ | 8,797 | | | $ | 9,240 | | | $ | (443) | | | (5.0) | % |
Cost of Goods Sold | 4,197 | | | 4,545 | | | (348) | | | (8.0) | % |
Gross Profit | 4,600 | | | 4,695 | | | (95) | | | (2.0) | % |
Gross Profit % | 52.3 | % | | 50.8 | % | | 1.5 | % | | |
| | | | | | | |
Operating Expenses: | | | | | | | |
Selling, General & Administrative Expenses | 8,071 | | | 5,597 | | | 2,474 | | | 44.2 | % |
Gain on Disposal of Assets | (1,739) | | | — | | | (1,739) | | | 100.0 | % |
Total Operating Expenses | 6,332 | | | 5,597 | | | 735 | | | 13.1 | % |
| | | | | | | |
Loss from Operations | (1,732) | | | (902) | | | (830) | | | 92.0 | % |
Other Income, Net | 165 | | | 1,970 | | | (1,805) | | | (91.6) | % |
| | | | | | | |
(Loss) Income Before Provisions for Income Taxes | (1,567) | | | 1,068 | | | (2,635) | | | (246.7) | % |
Provision for Income Tax Benefit (Expense) | 125 | | | (658) | | | 783 | | | (119.0) | % |
| | | | | | | |
Net (Loss) Income | $ | (1,442) | | | $ | 410 | | | $ | (1,852) | | | (451.7) | % |
Revenue
Revenues for the three months ended June 30, 2023 were generally consistent with the preceding quarter ended March 31, 2023. The decrease in consolidated revenue of $0.44 million was primarily due to a $0.39 million decrease in cultivation/distribution revenue quarter over quarter due to the Company's focus on its retail operations during the current period. Retail revenue was generally consistent with the prior quarter.
Gross Profit
Cost of goods sold for the three months ended June 30, 2023 was $4.20 million, a decrease of $0.35 million or 8.0%, compared to $4.55 million for the three months ended March 31, 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 June 30, 2023 was $4.60 million compared to $4.70 million for the three months ended March 31, 2023, an decrease of $0.10 million or 2.0%. The decrease in gross profit was directly impacted by the decrease in promotion and marketing program ("PMP") revenue compared to the immediate prior quarter. The Company's overall gross profit improved for the three months June 30, 2023 to 52.3% as compared to 50.8% for the immediate prior quarter. Gross profit for on-going retail operations declined to 52.9% for the three months ended June 30, 2023 compared to 55.1% for the preceding quarter as a result of a decline in PMP revenue during the three months ended June 30, 2023. Gross profit for on-going retail operations remained consistent from product sales.
Selling, General & Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2023 were $8.07 million, compared to $5.60 million for the three months ended March 31, 2023. The quarter-over-quarter increase of $2.47 million or 44.2%.was primarily related to an increase in stock-based compensation of $1.19 million for shares issued pursuant to a related party for executive-level consulting and related business support services and an increase in professional fee expenses of $0.47 million due to professional fees related to legal services.
Operating Loss
The Company realized an operating loss from continuing operations of $1.73 million for the three months ended June 30, 2023 compared to $0.90 million for the three months ended March 31, 2023, an increase of $0.83 million or 92.0%. The increase in operating loss from the immediate prior quarter was primarily due to the $2.47 million increase in selling, general and administrative expenses as described above, offset by a gain on disposal of assets of $1.74 million for the dissolution of UMBRLA, Inc.
Other Income
Other income for the three months ended June 30, 2023 was $0.17 million compared to $1.97 million for the three months ended March 31, 2023, a decrease of $1.81 million. This change from was primarily attributable to the gain on extinguishment of debt of $3.03 million during the first quarter of 2023, versus none in the current quarter.
DISCLOSURE ABOUT OFF-BALANCE SHEET ARRANGEMENTSNon-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 $0.80 million for the three months ended June 30, 2023 compared to $4.61 million for the three months ended June 30, 2022. For the six months ended June 30, 2023, the Company recorded non-GAAP Adjusted EBITDA Loss of $0.45 million compared to $9.69 million for the six months ended June 30, 2022. The details of those expenses and non-GAAP reconciliation of these non-cash items are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net Loss | $ | (1,442) | | | $ | (63,718) | | | $ | (1,032) | | | $ | (72,316) | |
Less: Net Income from Discontinued Operations, Net | — | | | (1,419) | | | — | | | (3,349) | |
Add (Deduct) Impact of: | | | | | | | |
Interest Expense | 187 | | | 438 | | | 1,211 | | | 2,204 | |
Provision for Income Tax (Benefit) Expense | (125) | | | (448) | | | 533 | | | (2,136) | |
Depreciation Expense | 221 | | | 930 | | | 433 | | | 1,837 | |
Amortization of Intangible Assets | 562 | | | 2,422 | | | 1,125 | | | 4,765 | |
EBITDA Income (Loss) from Continuing Operations (Non-GAAP) | $ | (597) | | | $ | (61,795) | | | $ | 2,270 | | | $ | (68,995) | |
| | | | | | | |
Non-GAAP Adjustments: | | | | | | | |
Stock-based Compensation Expense | 1,642 | | | 1,680 | | | 2,097 | | | 3,868 | |
Impairment of Assets | — | | | 55,726 | | | — | | | 55,726 | |
Severance Expense for Series A Share Repurchases | — | | | 201 | | | — | | | 871 | |
Realized Loss on Sale of Investments | — | | | — | | | 61 | | | — | |
Unrealized Gain on Investments | — | | | (963) | | | — | | | (963) | |
(Gain) Loss on Disposal of Assets | (1,739) | | | 541 | | | (1,739) | | | 343 | |
Gain on Settlement of Liabilities | (110) | | | — | | | (110) | | | — | |
Gain on Extinguishment of Debt | — | | | — | | | (3,026) | | | (542) | |
Adjusted EBITDA Loss from Continuing Operations (Non-GAAP) | $ | (804) | | | $ | (4,610) | | | $ | (447) | | | $ | (9,692) | |
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
We incurred net losses for the three and six months ended June 30, 2023 and 2022, respectively and have an accumulated deficit of $441.08 million and $440.05 million at June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, we had a working capital deficit of $47.10 million, including $0.59 million of cash compared to a working capital deficit of $54.57 million, including $1.20 million of cash, as of December 31, 2022. Current assets were approximately 0.11 times current liabilities as of June 30, 2023, compared to approximately 0.08 times current liabilities as of December 31, 2022.
We dohave not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have any transactions, agreementsraised 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 contractual arrangements until we are able to raise revenues to a point of positive cash flow. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the end of 2023. However, 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 constitute off-balance sheet arrangements.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 US GAAP, which contemplate our continuation as a going concern.
Operating Activities
Cash used in operating activities for the six months ended June 30, 2023 was $2.15 million, compared to $2.50 million for the six months ended June 30, 2022, a decrease of $0.36 million, or 14.3%. 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 period as compared to the same period in the prior year and our increased efforts to scale back on non-accretive expenditures. For the latter half of fiscal year 2022, 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 improvements in cash flow from operating activities as the Company continues to execute its strategic restructuring.
Investing Activities
Cash provided by investing activities for the six months ended June 30, 2023 was $0.69 million, compared to $19.50 million for the six months ended June 30, 2022, a decrease of $18.81 million, or 96.5%. The decrease in cash provided by investing activities was primarily due to the cash received upon disposing some of the Company's subsidiaries, which the Company had no such transactions in the current year.
Financing Activities
Cash provided by financing activities for the six months ended June 30, 2023 was $0.84 million, compared to cash used in financing activities of $17.27 million for the six months ended June 30, 2022, an improvement of $18.11 million, or 104.9%. The decrease in cash used in financing activities as compared to the prior year was primarily due to the significant debt payments made on the Company's debt in the prior year, while the Company has minimal debt payments in the current year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section discusses our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described in “Note 2 “Summary – Summary of Significant Accounting Policies” of the notes to unaudited condensed consolidated financial statements included in this report.Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
We incurred net losses for the three and six months ended June 30, 2022 and 2021 and have an accumulated deficit of approximately $323.71 million and $250.02 million at June 30, 2022 and December 31, 2021, respectively.DISCLOSURE ABOUT OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2022, we had working capital deficit of $57.25 million, including $7.26 million of cash compared to working capital deficit of $62.44 million, including $6.89 million of cash, as of December 31, 2021. Current assets were approximately 0.24 times current liabilities as of June 30, 2022, compared to approximately 0.29 times current liabilities as of December 31, 2021.
We2023, the Company does not 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 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. In addition to this, if certain of our previous acquisitions do not operationally improve, we may be required to do an earlier than expected impairment analysis of our intangible assets and goodwill may result in impairments of our long-lived assets.
We will be required to raise additional funds through public or private financing, additional collaborative relationshipsany transactions, agreements or other contractual arrangements until we are able to raise revenues to a point of positive cash flow. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the end of 2022. However, 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 it will be available to us on acceptable terms, on an acceptable schedule, or at all.
Operating Activities
Cash used in operating activities for the six months ended June 30, 2022 was $1.32 million, compared to $6.74 million for the three months ended June 30, 2021, an increase of $5.41 million, or 80.4%. The increase in cash used in operating activities was due to primarily to increase in cash used for prepaid expenses and other assets.
Investing Activities
Cash provided by investing activities for the six months ended June 30, 2022 was $19.41 million, compared to cash provided by investing activities of $43.72 million for the six months ended June 30, 2021, a decrease of $24.32 million, or 55.6%. The decrease in cash provided by investing activities was primarily due to the $39.38 million gain on sale of the Company's Hydrofarm investment in 2021 and no comparable sale in 2022.
Financing Activities
Cash used in financing activities for the six months ended June 30, 2022 was $17.27 million, compared to $2.31 million provided by financing activities for the six months ended June 30, 2021, a decrease of $19.58 million, or 847.6%. The decrease in cash provided by financing activities for the six months ended June 30, 2022 was primarily due to $21.64 million of principal repayments of debt made in the first half of the year.
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 our 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 our liquidity. In addition, in evaluating non-GAAP earnings, you should be aware that in the future we will incur expenses or charges such as those added back to calculate non-GAAP earnings. Our presentation of non-GAAP earnings should not be construed as an inference that our 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 our results as reported under US GAAP. Some of these limitations are (i) it does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) it does not reflect changes in, or cash requirements for, our working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our 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 our 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.
We compensate for these limitations by providing specific information regarding the US GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable US GAAP measures more prominently.
We believe 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). We also present non-GAAP earnings because (i) we believe that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use non-GAAP earnings internally as benchmark to compare our performance to that of our competitors.
In the presentation of the financial results below, the Company reconciles non-GAAP earnings (loss) with net loss attributable to continuing operations, the most directly comparable GAAP measure, and reports non-GAAP earnings (loss) per share, which is calculated by dividing non-GAAP net income (loss) divided by weighted average common shares. Management believes that this presentation may be more meaningful in analyzing our income generation.
On a non-GAAP basis, the Company recorded a non-GAAP loss of $2.82 million for the three months ended June 30, 2022 compared to $1.88 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, the Company recorded a $4.40 million loss compared to a $4.11 million loss for the six months ended June 30, 2021. The details of those expenses and non-GAAP reconciliation of these non-cash items are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net loss attributable to Unrivaled Brand, Inc. | $ | (63,718) | | | $ | (4,102) | | | $ | (72,592) | | | $ | (16,183) | |
Non-GAAP adjustments: | | | | | | | |
Amortization of intangible assets | 2,422 | | | 184 | | | 4,765 | | | 376 | |
Depreciation expense | 972 | | | 323 | | | 1,918 | | | 660 | |
Stock-based compensation expense | 1,553 | | | 803 | | | 3,868 | | | 1,198 | |
| | | | | | | |
Impairment of assets | 55,726 | | | — | | | 55,726 | | | — | |
Interest expense | 443 | | | 39 | | | 2,210 | | | 112 | |
Severance expense | 201 | | | — | | | 871 | | | 8,990 | |
Loss (gain) on sale of investments | — | | | 874 | | | — | | | (5,337) | |
Unrealized gain on investments | (963) | | | — | | | (963) | | | — | |
Loss on sale of assets | 542 | | | — | | | 343 | | | — | |
Gain for debt forgiveness | — | | | — | | | — | | | (86) | |
Loss (gain) on extinguishment of debt | — | | | — | | | (542) | | | 6,161 | |
| | | | | | | |
Non-GAAP net loss attributable to Unrivaled Brands, Inc. | $ | (2,822) | | | $ | (1,879) | | | $ | (4,396) | | | $ | (4,109) | |
The following table sets forth the computation of basic and diluted loss per share on a non-GAAP basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except for shares) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Non-GAAP net loss | $ | (2,822) | | | $ | (1,879) | | | $ | (4,396) | | | $ | (4,109) | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares - Basic | 575,973,609 | | | 258,897,777 | | | 572,176,041 | | | 248,066,926 | |
Weighted average common shares - Diluted | 575,973,609 | | | 258,897,777 | | | 572,176,041 | | | 248,066,926 | |
| | | | | | | |
Non-GAAP loss per common share: | | | | | | | |
Non-GAAP loss - Basic | $ | — | | | $ | (0.01) | | | $ | (0.01) | | | $ | (0.02) | |
Non-GAAP loss - Diluted | $ | — | | | $ | (0.01) | | | $ | (0.01) | | | $ | (0.02) | |
constitute off-balance sheet arrangements.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This item is omitted as it is not required for a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, our principal executive officer and our principal financial officer are responsible for conducting an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30, 2022.2023. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective to a reasonable level as of June 30, 2022.2023.
Based on the results of its assessment, our management concluded that our internal control over financial reporting was not effective as of December 31, 2021June 30, 2023 based on such criteria due to material weaknesses in internal control over financial reporting described below:
Material Weaknesses in Internal Control over Financial Reporting
•The Company’s primary user access controls (i.e., provisioning, de-provisioning, and quarterly user access review) to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate Company personnel were not operating effectively. Automated process-level controls and manual controls that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result of such deficiency.
•The Company did not maintain adequate and timely review transactions and account reconciliations resulting in material audit adjustments.
Remediation Plan
We plan to enhance our internal control over financial reporting in an effort to remediate the material weaknesses described above. We are committed to ensuring that our internal control over financial reporting is designed and operating effectively. Our remediation process will include:
•Investing in IT systems to enhance our operational and financial reporting and internal controls.
•Enhancing the organizational structure to support financial reporting processes and internal controls.
•Providing guidance, education and training to employees relating to our accounting policies and procedures.
•Further developing and documenting detailed policies and procedures regarding business processes for significant accounts, critical accounting policies and critical accounting estimates.
•Establishing effective general controls over IT systems to ensure that information produced can be relied upon by process level controls is relevant and reliable.
We expect to remediate these material weaknesses during 2022.fiscal year 2023. However, we may discover additional material weaknesses that may require additional time and resources to remediate.remediate.
Changes in Internal Control Over Financial Reporting
We regularly assess the adequacy of our internal controls over financial reporting and enhance our controls in response to internal control assessments and external audit and regulatory recommendations. No changes in internal control over financial reporting have been identified in connection with the evaluation of disclosure controls and procedures during the quarter ended June 30, 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is the subject of lawsuits and claims arising in the ordinary course of business from time to time. See “Note 16, “Commitments18 – Commitments and Contingencies” and Note 21, "Subsequent Events"for further information about legal activity.litigation and claims.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors disclosed in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, 2021,2022, except for the risk factors noted below. Please refer to that section for disclosures regarding the risk and uncertainties relating to our business.
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.
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.
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 Commission has adopted Rule 15g-9 under the Exchange Act, 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, unless we qualify for an exception, may be considered “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, if applicable to us, would 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.
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. During the fiscal second quarter ended June 30, 2022, we recorded an impairment charge of $22.10 million for intangible assets and $33.63 million for goodwill related to acquisitions during the 2021 fiscal year. As of June 30, 2022, we had remaining goodwill of $14.51 million and intangible assets of $102.77 million. The Company will perform its annual impairment assessment on September 30 that may result in additional impairment.
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| | | | | | | | |
Exhibit | | Description |
| | |
2.1 | | |
2.2 | | |
2.3 | | |
2.4 | | |
2.5 | | |
2.6 | | |
2.73.1 | | |
2.83.2 | | |
2.93.3 | | |
2.103.4 | | |
2.113.5 | | |
2.123.6 | | |
2.133.7 | | |
2.143.8 | | |
2.123.9 | | |
3.13.10 | | |
3.11 | | |
3.12 | | |
3.13 | | |
4.1 | | |
3.24.2 | | |
3.34.3 | | |
3.44.4 | | |
3.54.5 | | |
3.64.6 | | |
3.74.7 | | |
3.84.8 | | |
3.94.9 | | |
3.104.10 | | |
3.114.11 | | |
3.124.12 | | |
3.1310.1 | | |
3.1410.2 | | |
3.15 | | |
3.16 | | |
3.17 | | |
3.18 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.5 | | |
4.6 | | |
4.7 | | |
| | | | | | | | |
4.8 | | |
4.9 | | |
4.10 | | |
4.11 | | |
4.12 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022,March 31, 2023, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flow, (iv) Consolidated Statements of Stockholders Equity, and (v) Notes to Unaudited Consolidated Financial Statements.* |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).* |
___________________
*Filed herewith
** Furnished herewith
*** Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.
♦ Indicates a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| UNRIVALED BRANDS, INC. |
| | |
Date: August 18, 202214, 2023 | By: | /s/ Jeffrey BatlinerChris Rivera |
| | Jeffrey BatlinerChris Rivera |
| | Interim Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) |