The accompanying notes are an integral part of the unaudited consolidated financial statements.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
References in this document to “the Company”, “Unrivaled”, “we”, “us”, or “our” are intended to mean Unrivaled Brands, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis. Effective July 7, 2021 the Company changed its corporate name from “Terra Tech Corp.” to “Unrivaled Brands, Inc.” in connection with the Company’s acquisition of UMBRLA, Inc (“UMBRLA”).
Unrivaled is a holding company with the following subsidiaries:
·
|
620 Dyer LLC, a California corporation (“Dyer”)
|
·
|
1815 Carnegie LLC, a California limited liability company (“Carnegie”)
|
·
|
Black Oak Gallery, a California corporation (“Black Oak”)
|
·
|
Blüm San Leandro, a California corporation (“Blüm San Leandro”)
|
·
|
MediFarm, LLC, a Nevada limited liability company (“MediFarm”)
|
·
|
MediFarm I, LLC, a Nevada limited liability company (“MediFarm I”)
|
·
|
121 North Fourth Street, LLC, a Nevada limited liability company ("121 North Fourth")
|
·
|
OneQor Technologies, Inc., a Delaware corporation ("OneQor")
|
·
|
UMBRLA, Inc., a Nevada corporation ("UMBRLA")
|
The Company is a retail, production, and cultivation company, with an emphasis on providing the highest quality of medical and adult use cannabis products. We currently have a concentrated cannabis interest in California. All of the Company’s cannabis dispensaries operate under the name Blüm. The Company’s cannabis dispensaries in California operate as Black Oak Gallery in Oakland and Blum San Leandro in San Leandro and offer a broad selection of medical and adult-use cannabis products including flowers, concentrates and edibles.
From the acquisition of UMBRLA, the Company has become a cannabis multi-state operator and the parent company of 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. The Company also added a dispensary in California which operates as The Spot in Santa Ana and licensed distribution facilities in Portland, Los Angeles, Orange, and Sonoma County. See Note 19 – Subsequent Events for further discussion on the acquisition of UMBRLA.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to U.S. Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of Regulation S-X of the Securities Act of 1933 and reflect the accounts and operations of the Company and those of our subsidiaries in which we have a controlling financial interest. In accordance with the provisions of FASB or ASC 810, “Consolidation,” we consolidate any variable interest entity (“VIE”) of which we are the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We do not consolidate a VIE in which we have a majority ownership interest when we are not considered the primary beneficiary. We evaluate our relationships with all the VIEs on an ongoing basis to reassess if we continue to be the primary beneficiary.
All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of June 30, 2021 and December 31, 2020, and the consolidated results of operations and cash flows for the quarters ended June 30, 2021 and 2020 have been included. These interim unaudited condensed consolidated financial statements do not include all disclosures required by GAAP for complete financial statements and, therefore, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2020. The December 31, 2020 balances reported herein are derived from the audited consolidated financial statements for the year ended December 31, 2020. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Going Concern
The accompanying financial statements have been prepared assuming that we will continue as a going concern. The risks and uncertainties on the future of our business due to COVID-19 and regulatory uncertainty, combined with the fact that we have historically lost money, have in the past, raised substantial doubt as to our ability to continue as a going concern. However, management believes that the acquisition of UMBRLA, proceeds from sales of Hydrofarm investment, proceeds from the Nevada asset sales, management’s past and on-going efforts to trim costs and management’s recent efforts to boost sales will lead to cash sustainability. Therefore, management believes that there is no material uncertainty as to the Company’s ability to continue as a going concern. See Note 5 – Investments in Unconsolidated Affiliates for more details about the Hydrofarm investment.
Non-Controlling Interest
Non-controlling interest is shown as a component of stockholders’ equity on the consolidated balance sheets and the share of net income (loss) attributable to non-controlling interest is shown as a component of net income (loss) in the consolidated statements of operations.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses in the reporting periods. The Company regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, derivative liabilities, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not affect net loss, revenues or stockholders’ equity. See Note 16 – Discontinued Operations for further discussion regarding discontinued operations.
Trade and Other Receivables
The Company extends noninterest bearing trade credit to its customers in the ordinary course of business which is not collateralized. Accounts receivable are shown on the face of the consolidated balance sheets, net of an allowance for doubtful accounts. The Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. The allowance for doubtful accounts was zero as of June 30, 2021 and December 31, 2020.
Investments
Investments in unconsolidated affiliates are accounted for under the cost or the equity method of accounting, as appropriate. The Company accounts for investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5% of the investee’s outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid. As investments accounted for under the cost method do not have readily determinable fair values, the Company only estimates fair value if there are identified events or changes in circumstances that could have a significant adverse effect on the investment’s fair value.
Publicly held equity securities are recorded at fair value with unrealized gains or losses resulting from changes in fair value reflected as unrealized gains or losses on equity securities in our consolidated statements of operations.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Inventory
Inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include advertising, insurance, and service or other contracts requiring upfront payments.
Property, Equipment and Leasehold Improvements, Net
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The approximate useful lives for depreciation of our property, equipment and leasehold improvements are as follows: thirty-two years for buildings; three to eight years for furniture and equipment; three to five years for computer and software; five years for vehicles and the shorter of the estimated useful life or the underlying lease term for leasehold improvements. Repairs and maintenance expenditures that do not extend the useful lives of related assets are expensed as incurred.
Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. The Company continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. See Note 7, “Property, Equipment and Leasehold Improvements, Net” for further information.
Intangible Assets
Intangible assets continue to be subject to amortization, and any impairment is determined in accordance with ASC 360, “Property, Plant, and Equipment,” intangible assets are stated at historical cost and amortized over their estimated useful lives. The Company uses a straight-line method of amortization unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed can be reliably determined. The approximate useful lives for amortization of our intangible assets are as follows:
Customer relationships
|
|
3 to 5 Years
|
|
Trademarks and Patent
|
|
2 to 8 Years
|
|
Dispensary licenses
|
|
14 Years
|
|
The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall, or an adverse action or assessment by a regulator. If an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), the Company will write the carrying value down to the fair value in the period identified.
Intangible assets that have indefinite useful lives are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the asset group exceeds its fair value.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business acquisition. In accordance with ASC 350, “Intangibles—Goodwill and Other,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.
The Company reviews the goodwill allocated to each of our reporting units for possible impairment annually as of September 30 and whenever events or changes in circumstances indicate carrying amount may not be recoverable. In the impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting unit.
The carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit.
If the carrying amount of a reporting unit is in excess of its fair value, the Company recognizes an impairment charge equal to the amount in excess.
Assets Held for Sale and Discontinued Operations
Assets held for sale represent furniture, equipment, and leasehold improvements less accumulated depreciation as well as any other assets that are held for sale in conjunction with the sale of a business. The Company records assets held for sale in accordance with ASC 360, “Property, Plant, and Equipment,” at the lower of carrying value or fair value less costs to sell. Fair value is based on the estimated proceeds from the sale of the facility utilizing recent purchase offers, market comparables and/or data. Our estimate as to fair value is regularly reviewed and subject to changes in the commercial real estate markets and our continuing evaluation as to the facility’s acceptable sale price. The reclassification takes place when the assets are available for immediate sale and the sale is highly probable. These conditions are usually met from the date on which a letter of intent or agreement to sell is ready for signing. The Company follows the guidance within ASC 205, “Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity” when assets held for sale represent a strategic shift in the Company’s operations and financial results.
Fair Value of Financial Instruments
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of June 30, 2021 and December 31, 2020:
|
|
June 30, 2021
|
|
Investments:
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrants to acquire shares of HydroFarm
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Shares in HydroFarm
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Option to acquire Edible Garden Inc
|
|
|
330
|
|
|
|
-
|
|
|
|
-
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
330
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
330
|
|
|
|
December 31, 2020
|
|
Investments:
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrants to acquire shares of HydroFarm
|
|
$
|
10,195
|
|
|
$
|
-
|
|
|
$
|
10,195
|
|
|
$
|
-
|
|
Shares in HydroFarm
|
|
|
23,850
|
|
|
|
-
|
|
|
|
23,850
|
|
|
|
-
|
|
Option to acquire Edible Garden Inc
|
|
|
330
|
|
|
|
-
|
|
|
|
-
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,375
|
|
|
$
|
-
|
|
|
$
|
34,045
|
|
|
$
|
330
|
|
Business Combinations
The Company accounts for its business acquisitions in accordance with ASC 805-10, “Business Combinations.” The Company allocates the total cost of the acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, the Company identifies and attributes values and estimated lives to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding multiple, highly subjective variables, including those with respect to future cash flows, discount rates, asset lives, and the use of different valuation models, and therefore require considerable judgment. The Company’s estimates and assumptions are based, in part, on the availability of listed market prices or other transparent market data. These determinations affect the amount of amortization expense recognized in future periods. The Company bases its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain.
Revenue Recognition and Performance Obligations
Cannabis Dispensary, Cultivation and Production
The Company recognizes revenue from manufacturing and distribution product sales when our customers obtain control of our products. Revenue from our retail dispensaries is recorded at the time customers take possession of the product. Revenue from our retail dispensaries is recognized net of discounts, rebates, promotional adjustments, price adjustments and returns, and net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Upon purchase, the Company has no further performance obligations and collection is assured as sales are paid for at time of purchase.
Revenue related to distribution customers is recorded when the customer is determined to have taken control of the product. This determination is based on the customer specific terms of the arrangement and gives consideration to factors including, but not limited to, whether the customer has an unconditional obligation to pay, whether a time period or event is specified in the arrangement and whether the Company can mandate the return or transfer of the products. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities with collected taxes recorded as current liabilities until remitted to the relevant government authority.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Disaggregation of Revenue
The table below shows the revenue break between California operations and Nevada operations for the six months ended June 30, 2021 and 2020:
|
|
(in thousands)
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
California
|
|
$
|
4,929
|
|
|
$
|
4,932
|
|
Nevada
|
|
|
6,446
|
|
|
|
1,821
|
|
Total
|
|
$
|
11,375
|
|
|
$
|
6,753
|
|
Contract Balances
Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC Topic 606.
Contract Estimates and Judgments
The Company’s revenues accounted for under ASC Topic 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.
Cost of Goods Sold
Cannabis Dispensary, Cultivation and Production
Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles, and concentrates, as well as packaging and delivery costs. It also includes the labor and overhead costs incurred in cultivating and producing cannabis flower and cannabis-derived products. Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs.
Advertising Expenses
The Company expenses advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.” Advertising expenses recognized totaled $0.11 million and $0.17 million for the six months ended June 30, 2021 and 2020, respectively.
Stock-Based Compensation
The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation – Stock Compensation”, which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors, including restricted stock awards. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. The fair value of restricted stock awards is based upon the quoted market price of the common shares on the date of grant. The fair value is then expensed over the requisite service periods of the awards, net of estimated forfeitures, which is generally the performance period and the related amount is recognized in the consolidated statements of operations.
The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future. The Company accounts for forfeitures of stock-based awards as they occur.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. At June 30, 2021 and 2020, such net operating losses were offset entirely by a valuation allowance.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
Loss Per Common Share
In accordance with the provisions of ASC 260, “Earnings Per Share”, net loss per share is computed by dividing net loss by the weighted-average shares of common stock outstanding during the period. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock, and convertible debt are not considered in the diluted loss per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the three and six months ended June 30, 2021 and 2020. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for both years.
Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows (in common equivalent shares):
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
16,076,556
|
|
|
|
1,205,126
|
|
Common stock options
|
|
|
16,721,567
|
|
|
|
15,350,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,798,123
|
|
|
|
16,555,706
|
|
Warrants issued that are exercisable for little to no cost are included in the denominator of basic earnings per share. During the three months ended June 30, 2021, the Company issued no warrants.
Recently Adopted Accounting Standards
FASB ASU No. 2020-06 “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” – Issued in August 2020, ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and the interest rate on convertible debt instruments will typically be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those years. The Company adopted ASU 2020-06 as of January 1, 2021, utilizing the modified retrospective method of adoption. As a result of adoption of the new standard, previously recognized beneficial conversion features for convertible debt instruments outstanding as of January 1, 2021 were removed from additional paid-in capital and the debt discount. A cumulative impact adjustment was recorded to account for a reduction in interest expense due to a decrease in the discount, which is recognized as interest expense upon conversion of the convertible notes. The January 1, 2021 cumulative effect adjustment to the Company’s financial position was as follows:
|
|
As Reported
December 31,
2020
|
|
|
Cumulative Effect Adjustment
|
|
|
As Reported
January 1,
2021
|
|
Additional Paid-In Capital
|
|
$
|
275,060
|
|
|
$
|
1,071
|
|
|
$
|
276,131
|
|
Accumulated Deficit
|
|
|
219,803
|
|
|
|
(1,059
|
)
|
|
|
218,744
|
|
Debt Discount
|
|
|
50
|
|
|
|
(12
|
)
|
|
|
38
|
|
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions that are insured by either the Federal Deposit Insurance Corporation or the National Credit Union Association up to certain federal limitations. At times, the Company’s cash balance exceeds these federal limitations, and it maintains significant cash on hand at certain of its locations. The Company has not historically experienced any material loss from carrying cash on hand. The amount in excess of insured limitations was at $39.95 million as of June 30, 2021 and was approximately $0.06 million as of December 31, 2020.
The Company provides credit in the normal course of business to customers located throughout the U.S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were no customers that comprised more than 10.0% of the Company’s revenue for the three and six months ended June 30, 2021 and 2020.
The Company sources cannabis products for retail, cultivation and production from various vendors. However, as a result of regulations in the State of California, the Company’s California retail, cultivation and production operations must use vendors licensed by the State. As a result, the Company is dependent upon the licensed vendors in California to supply products. If the Company is unable to enter into a relationship with sufficient members of properly licensed vendors, the Company’s sales may be impacted. During the three and six months ended June 30, 2021, we did not have any concentration of vendors for inventory purchases. However, this may change depending on the number of vendors who receive appropriate licenses to operate in the State of California.
NOTE 4 – VARIABLE INTEREST ENTITIES
NuLeaf, Inc.
On October 26, 2017, the Company entered into operating agreements with NuLeaf, Inc. and formed NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC (collectively “NuLeaf”) to build and operate cultivation and production facilities for our IVXX brand of cannabis products in Nevada. The agreements were subject to approval by the State of Nevada, the City of Sparks and the City of Reno in Nevada. Under the terms of the agreements, the Company remitted to NuLeaf an upfront investment of $4.50 million in the form of convertible loans bearing an interest rate of 6% per annum. On June 28, 2018, the Company received approval from the State of Nevada. The remaining required approvals from local authorities were received in July 2018. As a result, the notes receivable balance was converted into a 50% ownership interest in NuLeaf. The investment in NuLeaf was recorded at cost and accounted for using the equity method as of December 31, 2019.
In February 2019, we amended and restated the NuLeaf agreements and obtained control of the operations of NuLeaf. The Company has determined these entities are variable interest entities in which the Company is the primary beneficiary by reference to the power and benefits criterion under ASC 810, “Consolidation.” The provisions within the amended agreement granted the Company the power to manage and make decisions that affect the operation of these entities. As the primary beneficiary of NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC, the Company began consolidating the accounts and operations of these entities on March 1, 2019. All intercompany transactions are eliminated in the unaudited consolidated financial statements. Effective March 1, 2019, we remeasured our equity method investment in NuLeaf to fair value and consolidated the results of NuLeaf within our consolidated financial statements.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue and net loss attributed to NuLeaf was $6.45 million and $0.97 million, respectively, for the six months ended June 30, 2021 and was $3.39 million and $1.73 million, respectively, for the three months ended June 30, 2021. The aggregate carrying values of Sparks Cultivation, LLC and NuLeaf Reno Production, LLC assets and liabilities, after elimination of any intercompany transactions and balances, in the consolidated balance sheets were as follows:
|
|
(in thousands)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
769
|
|
|
$
|
671
|
|
Accounts receivable, net
|
|
|
1,038
|
|
|
|
483
|
|
Inventory
|
|
|
1,961
|
|
|
|
3,118
|
|
Prepaid expenses and other current assets
|
|
|
89
|
|
|
|
21
|
|
Total current assets
|
|
|
3,857
|
|
|
|
4,293
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
|
6,248
|
|
|
|
7,442
|
|
Other assets
|
|
|
347
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
10,452
|
|
|
$
|
12,130
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
676
|
|
|
$
|
396
|
|
Total long-term liabilities
|
|
|
245
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
$
|
921
|
|
|
$
|
703
|
|
NOTE 5 – INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Hydrofarm
On August 28, 2018, the Company entered into a Subscription Agreement with Hydrofarm Holdings Group, Inc. (“Hydrofarm”), one of the leading independent providers of hydroponic products in North America, pursuant to which the Company agreed to purchase from Hydrofarm and Hydrofarm agreed to sell to the Company 2,000,000 “Units”, each Unit consisting of one share of common stock and one warrant to purchase one-half of a share of common stock for an initial exercise price of $5.00 per share, for $2.50 per Unit for an aggregate purchase price of $5.00 million.
On November 24, 2020, Hydrofarm’s board of directors and stockholders approved an amendment to their amended and restated certificate of incorporation effecting a 1-for-3.3712 reverse stock split of their issued and outstanding shares of common stock. Subsequent to the reverse split, the Company owned 593,261 shares of common stock in Hydrofarm, with an acquisition price of $8.43 per share, and 296,630 warrants to purchase one share of common stock, with an exercise price of $16.86 per share.
On December 14, 2020, Hydrofarm announced the closing of its initial public offering; shares of Hydrofarm began trading on the Nasdaq Global Select Market under the ticker symbol “HYFM.” Hydrofarm’s common shares outstanding on the closing date were 31,720,727; the Company’s ownership percentage in Hydrofarm was approximately 1.9%.
Upon closing of Hydrofarm’s initial public offering, the Company determined that the investment in Hydrofarm no longer qualified to be stated at cost, as the equity security had a readily determinable value and therefore should be recorded at fair value. In the fourth quarter of 2020, the Company recorded its investment in Hydrofarm of 593,261 common shares at fair value, and the warrants to acquire an additional 296,630 shares of Hydrofarm common stock at an exercise price of $16.86, at their respective fair values. The Company marked the investment in Hydrofarm to market as of December 31, 2020 and March 31, 2021 and recorded the change in fair value in those period’s earnings.
On June 16, 2021, the Company completed disposition of 593,261 shares of Hydrofarm common stock and warrants to purchase 296,630 shares of Hydrofarm common stock at a current exercise price of $16.86 per share, for aggregate gross proceeds of $40.76 million in cash pursuant to a Securities Purchase Agreement (the “SPA”) between the Company and two accredited investors. There is no material relationship between the Company or its affiliates and either of the investors other than in respect of the transactions contemplated by the SPA.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – INVENTORY
Raw materials consist of material for NuLeaf and IVXX’s line of cannabis pure concentrates. Work-in-progress consists of cultivation materials and live plants grown at NuLeaf and Black Oak Gallery. Finished goods consists of cannabis products sold in retail.
Inventory as of June 30, 2021 and December 31, 2020 consisted of the following:
|
|
(in thousands)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,122
|
|
|
$
|
39
|
|
Work-in-progress
|
|
|
1,145
|
|
|
|
1,196
|
|
Finished goods
|
|
|
323
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
2,590
|
|
|
$
|
1,602
|
|
NOTE 7 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment, and leasehold improvements, net consists of the following:
|
|
(in thousands)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Land and building
|
|
$
|
11,206
|
|
|
$
|
11,206
|
|
Furniture and equipment
|
|
|
2,894
|
|
|
|
2,913
|
|
Computer hardware
|
|
|
228
|
|
|
|
215
|
|
Leasehold improvements
|
|
|
16,765
|
|
|
|
16,459
|
|
Construction in progress
|
|
|
10,167
|
|
|
|
9,922
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
41,260
|
|
|
|
40,715
|
|
Less accumulated depreciation
|
|
|
(10,046
|
)
|
|
|
(8,235
|
)
|
Property, equipment and leasehold improvements, net
|
|
|
|
|
|
|
|
|
|
|
$
|
31,214
|
|
|
$
|
32,480
|
|
Depreciation expense related to property, equipment and leasehold improvements for the three months ended June 30, 2021 and June 30, 2020 was $0.93 million and $0.96 million, respectively, and for the six months ended June 30, 2021 and June 30, 2020 was $1.88 million and $1.92 million, respectively.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INTANGIBLE ASSETS AND GOODWILL
Intangible Assets, Net
Intangible assets, net consisted of the following as of June 30, 2021 and December 31, 2020:
|
|
|
|
|
(in Thousands)
|
|
|
|
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful Life
in Years
|
|
|
Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Carrying
Value
|
|
|
Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
3 to 5
|
|
|
$
|
7,400
|
|
|
$
|
(7,400
|
)
|
|
$
|
-
|
|
|
$
|
7,400
|
|
|
$
|
(7,400
|
)
|
|
$
|
-
|
|
Trademarks and Patent
|
|
2 to 8
|
|
|
|
196
|
|
|
|
(196
|
)
|
|
|
-
|
|
|
|
196
|
|
|
|
(187
|
)
|
|
|
9
|
|
Dispensary Licenses
|
|
14
|
|
|
|
10,270
|
|
|
|
(3,851
|
)
|
|
|
6,419
|
|
|
|
10,270
|
|
|
|
(3,485
|
)
|
|
|
6,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amortizing Intangible Assets
|
|
|
|
|
|
|
17,866
|
|
|
|
(11,447
|
)
|
|
|
6,419
|
|
|
|
17,866
|
|
|
|
(11,072
|
)
|
|
|
6,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Amortizing Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
Indefinite
|
|
|
|
920
|
|
|
|
-
|
|
|
|
920
|
|
|
|
920
|
|
|
|
-
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Amortizing Intangible Assets
|
|
|
|
|
|
|
920
|
|
|
|
-
|
|
|
|
920
|
|
|
|
920
|
|
|
|
-
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets, Net
|
|
|
|
|
|
$
|
18,786
|
|
|
$
|
(11,447
|
)
|
|
$
|
7,339
|
|
|
$
|
18,786
|
|
|
$
|
(11,072
|
)
|
|
$
|
7,714
|
|
Amortization expense for the three months ended June 30, 2021 and 2020 was $0.18 million and $0.74 million, respectively and for the six months ended June 30, 2021 and 2020 was $0.38 million and $1.78 million, respectively.
Goodwill
Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities.
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the last day of the third quarter, or more frequently under certain circumstances. For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as “step zero”) to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary or a quantitative assessment (“step one”) where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach). Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. The balance of goodwill at June 30, 2021 and December 31, 2020 was unchanged and was $6.17 million.
The Company tests for impairment annually on September 30, and between annual tests if the Company becomes aware of an event or a change in circumstances that would indicate the carrying value may be impaired. Management did not identify any impairment triggers during the second quarter of 2021 and therefore no impairment of goodwill was recognized.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – NOTES PAYABLE
Notes payable consist of the following as of June 30, 2021 and December 31, 2020:
|
|
(in thousands)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Promissory note dated January 18, 2018, issued for the purchase of real property. The promissory note is collateralized by the land and building purchased and matures 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
|
|
|
|
6,500
|
|
Promissory note dated October 5, 2018, issued for the purchase of real property. Matures October 5, 2021. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.5%. In the event of default, the note is convertible at the holder's option.
|
|
|
1,600
|
|
|
|
1,600
|
|
Promissory note dated June 11, 2019, issued to accredited investors, which matures December 31, 2021 and incurred interest at a rate of 7.5% per annum. The conversion price was the lower of $4.50 or 87% of the average of the two (2) lowest VWAPs in the thirteen (13) trading days prior to the conversion date.
|
|
|
-
|
|
|
|
2,800
|
|
Promissory note dated October 21, 2019, issued to accredited investors, which matured April 21, 2021 and incurred interest at a rate of 7.5% per annum. The conversion price was the lower of $4.50 or 87% of the average of the two (2) lowest VWAPs in the thirteen (13) trading days prior to the conversion date.
|
|
|
-
|
|
|
|
725
|
|
Secured promissory note dated December 30, 2019, issued to Matthew Lee Morgan Trust (a related party), which matured January 30, 2021, and incurred interest at a rate of 10% per annum.
|
|
|
-
|
|
|
|
500
|
|
Secured promissory note dated January 10, 2020, issued to an unaffilitated third party. The note matured on July 10, 2021 and incurred an interest rate of 15.0% per annum.
|
|
|
1,000
|
|
|
|
1,000
|
|
Promissory note dated May 4, 2020, issued to Harvest Small Business Finance, LLC, an unaffiliated third party. Loan is part of the Paycheck Protection Program ("PPP Loan") offered by the U.S. Small Business Administration. The interest rate on the note is 1%. The note requires interest and principal payments seven months from July 2020. The note matures in two years.
|
|
|
562
|
|
|
|
562
|
|
Promissory note dated July 29, 2020, issued to an unaffilitated third party. The note incurred an interest rate of 8% per annum and matured on April 29, 2021.
|
|
|
-
|
|
|
|
1,000
|
|
Unsecured promissory note dated January 22, 2021, issued to Michael Nahass (a related party), which matured July 25, 2021, and incurred interest at a rate of 3% per annum.
|
|
|
1,050
|
|
|
|
-
|
|
Unsecured promissory note dated January 22, 2021, issued to Michael Nahass (a related party), which matures January 25, 2022, and bears interest at a rate of 3% per annum.
|
|
|
1,050
|
|
|
|
-
|
|
Convertible promissory note dated January 25, 2021, issued to accredited investors, which matures July 22, 2022 and bears interest at a rate of 3% per annum. The conversion price is $0.175 per share.
|
|
|
3,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes payable - promissory notes
|
|
$
|
15,262
|
|
|
$
|
14,687
|
|
Vehicle loans
|
|
|
21
|
|
|
|
29
|
|
Less: Short term debt
|
|
|
(11,779
|
)
|
|
|
(8,033
|
)
|
Less: Debt discount
|
|
|
(4
|
)
|
|
|
(51
|
)
|
Net Long Term Debt
|
|
$
|
3,500
|
|
|
$
|
6,632
|
|
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
During the six months ended June 30, 2021, the Company converted debt and accrued interest into 20,391,774 shares of the Company’s common stock.
Promissory Note Extensions
On January 7, 2021, 620 Dyer LLC (“620 Dyer”), a subsidiary of the Company, entered into Amendment No. 1 (the “Loan Agreement Amendment”) to the Loan Agreement between 620 Dyer and Elizon DB Transfer Agent LLC (“Elizon”), dated as of January 18, 2018 (the “Loan Agreement”). The Loan Agreement Amendment, among other things, amends the maturity date of the Loan Agreement from January 18, 2021 to January 18, 2022. 620 Dyer paid a 1% fee to extend the maturity date.
On January 8, 2021, the Company entered an amendment to the Secured Promissory Note issued by the Company (the “Borrower”) to Arthur Chan (the “Lender”) on January 10, 2020. The Loan Agreement Amendment, among other things, amended the maturity date of the Loan Agreement from January 10, 2021 to July 10, 2021. See Note 19 – Subsequent Events for further discussion on Arthur Chan note.
Series A Preferred Stock Purchase Agreement
On January 22, 2021, the Company entered into a Series A Preferred Stock Purchase Agreement with Michael A. Nahass, pursuant to which the Company agreed to purchase from Mr. Nahass the four shares of the Company’s Series A Preferred Stock held by Mr. Nahass for an aggregate purchase price of $3.10 million, of which (i) $1.00 million was paid in cash, (ii) $1.05 million was paid in the form of an unsecured promissory note bearing interest at the rate of 3% and maturing on or about July 25, 2021 and (iii) $1.05 million was paid in the form of an unsecured promissory note bearing interest at the rate of 3% and maturing on or about January 25, 2022.
Amendment of Existing Senior Convertible Promissory Notes and Securities Purchase Agreement
On January 25, 2021, the Company entered into several agreements with an accredited investor (the “Lender”) that holds the promissory notes under the 2018 Securities Purchase Agreement. The amendments, among other things, (1) extended the maturity date of the June 2019 Note from January 26, 2021 to December 31, 2021 and (2) extended the maturity date of the October 2019 Note from April 21, 2021 to December 31, 2021. In connection with the Note Amendments, the Company issued to the Lender warrants to purchase 5,000,000 shares of the Company’s common stock (the “Old Note Warrants”) at an exercise price of $0.01 per share. The Old Note Warrants are exercisable at any time before the close of business on June 25, 2026. The Old Note Warrants contain cashless exercise provisions and, to the extent not previously exercised, will be automatically exercised via cashless exercise on June 25, 2026.
In conjunction with the above amendments, the Company entered into a Securities Purchase Agreement with certain accredited investors (the “Purchasers”), pursuant to which the Company agreed to sell to the Purchasers $3,500,000 in aggregate principal amount of the Company’s senior convertible promissory notes (the “Notes”) and warrants to purchase shares of the Company’s common stock (the “Warrants”), exercisable at any time before the close of business on June 25, 2026. The Warrants are comprised of 15,000,000 “A Warrants” with an exercise price of $0.01 per share and 15,000,000 “B Warrants” with an exercise price of $0.2284 per share.
The Notes, which are convertible into common stock at any time at the discretion of the respective Purchasers at a conversion price of $0.175 per share of common stock, will bear an interest rate of 3%. The Notes mature on or about July 24, 2022 unless accelerated due to an event of default. The Company has the right to prepay the Notes at any time upon 10 days’ prior notice to the Purchasers. If the Company elects to prepay the Notes, the Company must pay the respective Purchasers an amount in cash equal to the product of (i) the sum of the then-outstanding principal amount of the Notes and all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the prepayment date is within 90 days of the original issue date, (y) 115%, if the prepayment date is between 91 days and 180 days following the original issue date or (z) 125%, if the prepayment date is after the 180th day following the original issue date.
The Company can demand that the Purchasers convert the Notes at any time, on five calendar days’ notice, that (i) the daily dollar volume-weighted average price for the Company’s common stock for the prior five consecutive trading days is $0.30 or more and (ii) (1) the shares underlying the Notes have been registered with the SEC or (2) there is a fundamental transaction that has been announced by the Company.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Notes contain standard and customary terms concerning events of default. Events of default include, among other things, any failure to make payments when due, failure to observe or perform material covenants or agreements contained in the Notes, a material default under the Securities Purchase Agreement or related transaction documents or any other material contract to which the Company or any of its subsidiaries is a party, the breach of any representation or warranty in the Notes or the Securities Purchase Agreement, the bankruptcy or insolvency of the Company or any of its subsidiaries, the Company’s common stock not being eligible for listing or quotation on a trading market and not eligible to resume listing or quotation for trading within 5 trading days, the Company’s failure to meet the current public information requirements under Rule 144 under the Securities Act of 1933, as amended, the Company’s failure to file required reports with the SEC, and the Company’s failure to maintain sufficient reserved shares for issuance upon conversion of the Notes and exercise of the Warrants. If any event of default occurs, subject to any cure period, the full principal amount, together with interest (including default interest of 18% per annum) and other amounts owing in respect thereof through the date of acceleration shall become, at the Purchaser’s election, immediately due and payable in cash.
Management performed an analysis to determine the appropriate accounting treatment of the above transactions and concluded (1) a troubled debt restructuring had not occurred, and (2) as the total change in cash flows was greater than 10% of the carrying value of the debt, the transactions should be treated as a debt extinguishment for accounting purposes. A loss on extinguishment equal to the difference between the carrying value of the old debt and the reacquisition price was recognized in current period earnings.
NOTE 10 – FAIR VALUE MEASUREMENTS
On March 30, 2020, Edible Garden Corp. (“Edible Garden”), a wholly-owned subsidiary of the Company, entered into and closed an Asset Purchase Agreement (the “Purchase Agreement”) with Edible Garden Incorporated (the “Purchaser”), pursuant to which Edible Garden sold and the Purchaser purchased substantially all of the assets of Edible Garden (the “Business”). The consideration paid for the Business included two option agreements to purchase up to a 20% interest in the Purchaser for a nominal fee. The first option gives the Company the right to purchase a 10% interest in the Purchaser for one dollar at any time between the one and five-year anniversary of the transaction, or at any time should a change in control event or public offering occur. The second option gives the Company the right to purchase an additional 10% interest in the Purchaser for one dollar at any point prior to the five-year anniversary of the transaction. The second option is automatically terminated upon payment in full of the $3.00 million secured promissory note.
Management estimated the fair value of the options using the Black-Scholes model, utilizing level 3 inputs that included the stock price, annual volatility, and the probability the second option will be terminated due to repayment of the secured promissory note. The estimated fair value of the options was $0.33 million as of June 30, 2021 and December 31, 2020. The options are included in the “Investments” line within the consolidated balance sheet.
NOTE 11 – 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 (“ROU assets”) are included in other assets while lease liabilities are a line-item on the Company’s Consolidated Balance Sheets.
ROU 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. ROU 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 ROU 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. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU 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 for the six months ended June 30, 2021 and June 30, 2020 were $0.39 million and $0.45 million, respectively. Short-term lease costs during the 2021 and 2020 fiscal quarters ended June 30 were not material.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2021 and December 31, 2020, short term lease liabilities of $1.50 million and $0.81 million are included in “Accounts Payable and Accrued Expenses” on the consolidated balance sheets, respectively. The table below presents total operating lease ROU assets and lease liabilities as of June 30, 2021 and December 31, 2020:
|
|
(in thousands)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating lease ROU assets
|
|
$
|
7,752
|
|
|
$
|
8,137
|
|
Operating lease liabilities
|
|
|
8,593
|
|
|
|
8,895
|
|
The table below presents the maturities of operating lease liabilities as of June 30, 2021:
|
|
(in thousands)
|
|
|
|
Operating
|
|
|
|
Leases
|
|
2021 (remaining)
|
|
$
|
837
|
|
2022
|
|
|
2,506
|
|
2023
|
|
|
1,801
|
|
2024
|
|
|
1,562
|
|
2025
|
|
|
1,470
|
|
Thereafter
|
|
|
5,015
|
|
Total lease payments
|
|
|
13,191
|
|
Less: discount
|
|
|
(4,598
|
)
|
Total operating lease liabilities
|
|
$
|
8,593
|
|
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,
|
|
|
|
2021
|
|
Weighted average remaining lease term (years)
|
|
|
79.0
|
|
Weighted average discount rate
|
|
|
11.6
|
%
|
NOTE 12 – EQUITY
Preferred Stock
On January 22, 2021, the Company entered into a Resignation and Release Agreement and a Series A Preferred Stock Purchase Agreement with Michael A. Nahass. Mr. Nahass agreed to resign from his positions as a director, executive officer and employee of the Company, and the Company agreed to purchase from Mr. Nahass the four shares of the Company’s Series A Preferred Stock held by Mr. Nahass for an aggregate purchase price of $3,100,000, of which (i) $1,000,000 was paid in cash, and $2.1 million was paid in the form of promissory notes. The Company recorded severance expense equal to the fair value of consideration paid to Mr. Nahass in current period earnings.
On January 22, 2021, the Company entered into a Resignation and Release Agreement with Derek Peterson, pursuant to which Mr. Peterson agreed to resign from his positions as a director, executive officer and employee of the Company effective immediately upon the Company’s closing of a private placement in the amount of not less than $3,500,000, which occurred on January 25, 2021. In addition, the Company extended the time within which vested common stock options held by Mr. Peterson may be exercised to 150 days after the date of resignation.
Mr. Peterson agreed to the cancellation of his Series A Preferred Stock through conversion into 16,485,714 shares of common stock and, in consideration of the conversion, was issued 4,945,055 warrants to purchase common stock, expiring in June 2026, with an exercise price of $0.01 per share, which are subject to a one-year lockup with registration rights. The Company recorded severance expense equal to the fair value of consideration paid to Mr. Peterson in current period earnings.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On February 3, 2021, the Company filed (1) a Certificate of Withdrawal of Certificate of Designation of the Company’s Series A Preferred Stock with the Secretary of State of the State of Nevada, which withdraws the Certificate of Designation establishing the Company’s Series A Preferred Stock and eliminates the Company’s Series A Preferred Stock from the Company’s Articles of Incorporation and (2) a Certificate of Withdrawal of Certificate of Designation of the Company’s Series B Preferred Stock with the Secretary of State of the State of Nevada, which withdraws the Certificate of Designation establishing the Company’s Series B Preferred Stock and eliminates the Company’s Series B Preferred Stock from the Company’s Articles of Incorporation.
Common Stock
The Company authorized 990.0 million shares of common stock with $0.001 par value per share. As of June 30, 2021 and December 31, 2020, 234.24 million and 194.2 million shares of common stock were outstanding, respectively.
Treasury Stock
During 2021, the Company acquired 8 shares of Series A Preferred stock as part of the resignation and release agreements entered into with Mr. Nahass and Mr. Peterson, as described above. The shares were recorded at fair market value as of the date the agreements were executed.
NOTE 13 – STOCK-BASED COMPENSATION
2016 & 2018 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. On February 14, 2020, the Company amended the number of shares reserved for issuance under the 2018 Equity Incentive Plan to 43,976,425. The following table contains information about the 2016 and the 2018 Equity Incentive Plans as of June 30, 2021:
|
|
Awards Reserved for Issuance
|
|
|
Awards
Outstanding
|
|
|
|
|
|
|
|
|
2016 Equity incentive plan
|
|
|
2,000,000
|
|
|
|
499,953
|
|
2018 Equity incentive plan
|
|
|
43,976,425
|
|
|
|
15,894,507
|
|
In the third quarter of 2021, the Company adopted UMBRLA’s 2019 Equity Incentive Plan. The maximum number of shares of our common stock that may be issued pursuant to 2019 Equity Incentive Plan is 82,000,000 shares. See Note 19 – Subsequent Events for further discussion on acquisition of UMBRLA.
Stock Options
The following table summarizes the Company’s stock option activity and related information for the three months ended June 30, 2021:
|
|
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, 2021
|
|
|
17,492,830
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
5,909,716
|
|
|
$
|
0.22
|
|
|
|
|
|
|
Options exercised
|
|
|
(2,096,970
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
Options forfeited
|
|
|
(4,584,010
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
Options expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Options outstanding as of June 30, 2021
|
|
|
16,721,566
|
|
|
$
|
0.45
|
|
|
8.7 years
|
|
$
|
2,943
|
|
Options exercisable as of June 30, 2021
|
|
|
8,225,610
|
|
|
$
|
0.72
|
|
|
9.0 years
|
|
$
|
1,119
|
|
As of June 30, 2021, there was $1.20 million total unrecognized stock-based compensation. Such costs are expected to be recognized over a weighted-average period of approximately 1.46 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.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, within continuing operations:
|
|
For the Three Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
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
|
|
|
5,409,716
|
|
|
$
|
641
|
|
|
|
9,650,000
|
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors (common stock)
|
|
|
343,493
|
|
|
|
94
|
|
|
|
(173,610
|
)
|
|
$
|
(100
|
)(a)
|
Employees (common stock)
|
|
|
250,000
|
|
|
|
68
|
|
|
|
826,429
|
|
|
$
|
58
|
|
Non–employee consultants (common stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock–based compensation expense
|
|
|
|
|
|
$
|
803
|
|
|
|
|
|
|
$
|
284
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
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
|
|
|
5,909,716
|
|
|
$
|
885
|
|
|
|
9,650,000
|
|
|
$
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors (common stock)
|
|
|
885,159
|
|
|
|
214
|
|
|
|
(173,610
|
)
|
|
|
(100
|
)(a)
|
Employees (common stock)
|
|
|
250,000
|
|
|
|
67
|
|
|
|
3,179,544
|
|
|
|
58
|
(b)
|
Non–employee consultants (common stock)
|
|
|
332,947
|
|
|
|
32
|
|
|
|
1,075,000
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock–based compensation expense
|
|
|
|
|
|
$
|
1,198
|
|
|
|
|
|
|
$
|
1,244
|
|
(a) clawback of shares granted in 2019.
(b) Expense for Q1 grants attributed to 2019 bonuses was recorded in 2019.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – WARRANTS
The following table summarizes warrant activity for the six months ended June 30, 2021:
|
|
Warrants
|
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
Warrants Outstanding as of January 1, 2021
|
|
|
1,076,555
|
|
|
$
|
1.99
|
|
Warrants Granted
|
|
|
39,945,055
|
|
|
$
|
0.09
|
|
Warrants Outstanding as of June 30, 2021
|
|
|
41,021,610
|
|
|
$
|
0.14
|
|
The Company estimated the fair value of the warrants issued in 2021 utilizing the Black-Scholes option-pricing model with the following weighted-average inputs:
|
|
June 30,
|
|
|
|
2021
|
|
Expected term (years)
|
|
2.5 Years
|
|
Volatility
|
|
|
115.20
|
%
|
Risk-free interest rate
|
|
|
0.09
|
%
|
Dividend yield
|
|
|
0
|
%
|
There was no activity related to warrants during the three months ended June 30, 2021.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
California Operating Licenses
The Company’s subsidiaries have operated compliantly and have been eligible for applicable licenses and renewals of those licenses. Currently, we have received annual as well as provisional licenses from California’s cannabis licensing agencies. We are actively working with the State to provide all required information and have confidence that the provisional licenses that we have received will become annual licenses in the future.
NOTE 16 – DISCONTINUED OPERATIONS
On May 8, 2019, MediFarm LLC, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Picksy, LLC (the “Purchaser”) pursuant to which the Company agreed to sell and the Purchaser agreed to purchase substantially all of the assets of the Company related to the Company’s dispensary located at 1130 East Desert Inn Road, Las Vegas, NV 89109 (the “Business”). The aggregate consideration to be paid for the Business is $10.00 million, of which $7.20 million is cash (the “Purchase Price”). A portion of the Purchase Price is payable by the Purchaser pursuant to a 12 month Secured Promissory Note with a principal amount of $2.80 million (the “Note”). The Note is secured by all the assets sold pursuant to the Purchase Agreement. In conjunction with the Note, Purchaser and the Company entered into a Security Agreement granting the Company a security interest in all the assets sold pursuant to the Purchase Agreement. The transaction has been approved by the Nevada Department of Taxation and is awaiting local government approval which is being impacted by COVID-19. It is expected to close promptly following receipt of such approval.
On August 19, 2019, MediFarm I LLC, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Picksy Reno, LLC (the “Purchaser”) pursuant to which the Company agreed to sell and the Purchaser agreed to purchase substantially all of the assets of the Company related to the Company’s dispensary located at 1085 S Virginia St Suite A, Reno, NV 89502 (the “Business”). The aggregate consideration to be paid for the Business is $13.50 million, of which $9.30 million is cash (the “Purchase Price”). A portion of the Purchase Price is payable by the Purchaser pursuant to a 12 month Secured Promissory Note with a principal amount of $4.20 million (the “Note”). The Note is secured by all the assets sold pursuant to the Purchase Agreement. In conjunction with the Note, Purchaser and the Company entered into a Security Agreement granting the Company a security interest in all the assets sold pursuant to the Purchase Agreement. The transaction has been approved by the Nevada Department of Taxation and is awaiting local government approval which is being impacted by COVID-19. It is expected to close promptly following receipt of such approval.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On April 15, 2020, MediFarm LLC, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Natural Medicine, LLC, a nonaffiliated third party (the “Purchaser”) pursuant to which the Company agreed to sell and the Purchaser agreed to purchase substantially all of the assets of the Company related to the Company’s dispensary located at 3650 S. Decatur Blvd., Las Vegas, NV. The aggregate consideration to be paid for the Business is $5.25 million, of which $2.50 million is cash and $2.75 million is payable by the Purchaser pursuant to a 12-month Secured Promissory Note bearing 8% interest per annum, which is secured by all of the assets sold pursuant to the Purchase Agreement. The transaction has been approved by the Nevada Department of Taxation and is awaiting local government approval which is being impacted by COVID-19. It is expected to close promptly following receipt of such approval. The Company will recognize a gain upon completion of the sale of the assets, equal to the difference between the consideration paid and the book value of the assets as of the disposition date, less direct costs to sell, and reflect such loss in discontinued operations.
As of June 30, 2021, Management has classified a real estate asset held Nevada as available-for-sale, as it has met the criteria of ASC 360-10-45-9.
The pending sales of our Nevada dispensaries, expected sale of real estate, and assets divested during 2020 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.”
During 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.
Operating results for the discontinued operations were comprised of the following:
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
699
|
|
|
$
|
-
|
|
|
$
|
3,275
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
621
|
|
|
|
-
|
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
78
|
|
|
|
-
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
58
|
|
|
|
1,274
|
|
|
|
58
|
|
|
|
3,868
|
|
Impairment of assets
|
|
|
-
|
|
|
|
6,316
|
|
|
|
-
|
|
|
|
6,316
|
|
Loss on sale of assets
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
3,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations
|
|
$
|
(58
|
)
|
|
$
|
(7,521
|
)
|
|
$
|
(58
|
)
|
|
$
|
(12,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
2
|
|
|
|
(387
|
)
|
|
|
15
|
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
$
|
(56
|
)
|
|
$
|
(7,908
|
)
|
|
$
|
(43
|
)
|
|
$
|
(13,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations per common share attributable to Unrivaled Brands, Inc. common stockholders - basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts of the major classes of assets and liabilities for the discontinued operations are as follows:
|
|
(in thousands)
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Prepaid expenses and other assets
|
|
$
|
-
|
|
|
$
|
2
|
|
Property, equipment and leasehold improvements, net
|
|
|
2,765
|
|
|
|
2,766
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
-
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
Other assets
|
|
|
136
|
|
|
|
186
|
|
Assets of discontinued operations
|
|
$
|
2,901
|
|
|
$
|
2,954
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
823
|
|
|
$
|
985
|
|
Deferred gain on sale of assets
|
|
|
13,533
|
|
|
|
8,783
|
|
Long-term lease liabilities
|
|
|
-
|
|
|
|
28
|
|
Liabilities of discontinued operations
|
|
$
|
14,356
|
|
|
$
|
9,796
|
|
NOTE 17 – 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 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 were no material matters that required an accrual as of June 30, 2021.
NOTE 18 – RELATED PARTY TRANSACTIONS
On July 1, 2021, the Company entered into a Membership Interest Purchase Agreement with Nicholas Kovacevich and Dallas Imbimbo, pursuant to which the Company acquired 100% of the outstanding membership interests in Halladay Holding, LLC from Mr. Kovacevich and Mr. Imbimbo. Halladay Holding, LLC is the owner of real property located at 3242 S. Halladay Street, Santa Ana, CA 92705, where the Company operates a cannabis dispensary and maintains its principal office space. Pursuant to the Purchase Agreement, as consideration for the Acquisition, the Company paid Mr. Kovacevich and Mr. Imbimbo an aggregate purchase price of $4.60 million in cash. The Company had an independent third-party perform a valuation of the Property prior to entering into the Purchase Agreement. Mr. Kovacevich is the Chairman of the Company’s Board of Directors and Mr. Imbimbo is a director of the Company. As such, the Acquisition is a related party transaction.
All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors.
UNRIVALED BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 – SUBSEQUENT EVENTS
On July 1, 2021, the Company completed the acquisition of UMBRLA. Pursuant to Articles of Merger filed by the Company with the Nevada Secretary of State, which became effective upon filing on July 1, 2021. UMBRLA became a wholly owned subsidiary of the Company. Following the acquisition, the Company changed its name from “Terra Tech Corp” to “Unrivaled Brands, Inc.” in connection with the name change, the ticker symbol for the Company’s common stock was officially changed from “TRTC” to “UNRV” effective as of the open of the market on July 8, 2021.
On July 1, 2021, the Company entered into an Independent Director Agreement and a Director Indemnification Agreement with each of Dallas Imbimbo and Eric Baum in connection with their appointment to the Board of Directors of the Company.
On July 13, 2021, the Company entered into a First Amendment to Stock Purchase Agreement with Sterling Harlan and Matthew Guild to amend the Stock Purchase Agreement among the Company and the Sellers, dated as of June 9, 2021 (the “SPA”), pursuant to which the Company will purchase from the Sellers all the issued and outstanding shares of common stock of Silverstreak Solutions, Inc. (“Silverstreak”), a cannabis delivery service based in Sacramento, CA. The Amendment provides that, among other things, 1) in consideration for the Shares, at the closing of the transactions contemplated by the SPA, the Company will pay the Sellers on a pro rata basis a total of $8.50 million (the “Purchase Price”). The Purchase Price is comprised of (i) $1.50 million in cash, (ii) a number of shares of restricted common stock, par value $0.001 per share, of the Company (the “Purchaser Shares”), equal to the quotient obtained by dividing (a) $2.50 million, by (b) the volume-weighted average price of the Purchaser Shares as reported through Bloomberg for the ten (10) consecutive trading days ending on the business day prior to the Closing, (iii) a $2.00 million unsecured promissory note with an interest rate of 3% and due six months after the Closing (the “Six-Month Note”), and (iv) a $2.50 million unsecured promissory note with an interest rate of 3% and due twelve months after the Closing (the “Twelve-Month Note”), and 2) the Company will pay all reasonable and documented out-of-pocket costs and expenses incurred by Silverstreak in connection with the preparation of the audited financial statements of Silverstreak for the fiscal year ended December 31, 2020 (the “Audit Costs”); provided, however, that the Sellers will reimburse the Company for all Audit Costs if the Closing does not occur under certain circumstances.
On July 27, 2021, the Company entered into a Note Termination and Exchange Agreement with Arthur Chan, pursuant to which the Company issued to Mr. Chan 4,548,006 shares of the Company’s common stock at a price of $0.23 per share as payment in full of the principal, interest and fees payable under the Secured Promissory Note issued by the Company to Mr. Chan on January 10, 2020 in the original principal amount of $1.00 million. As a result, the Secured Promissory Note is no longer outstanding. Contemporaneously with the execution of the Exchange Agreement, the Company issued to Mr. Chan a Promissory Note in the amount of $2.50 million. The New Note bears an interest rate of 8% and matures on July 26, 2024.
On August 10, 2021, the Company entered into a Stock Purchase Agreement with two individuals pursuant to which the Company sold all of the share of common stock of its wholly-owned subsidiary, 1815 Carnegie Santa Ana, Corp. (“1815 Carnegie”) to those individuals for aggregate consideration of $1,700,000. 1815 Carnegie holds a permit to operate a cannabis dispensary in the City of Santa Ana, CA. On August 12, 2021, the Company also entered into a Supply agreement with an affiliate of purchasers to obtain a right of first refusal to purchase cannabis bulk and distillate to be integrated into the Company cannabis goods and products, as well as a Retail Space Agreement with 1815 Carnegie, pursuant to which the Company will receive guaranteed placement of 15 SKUs at the cannabis dispensary. Each agreement has a term of three years.
On August 15, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with People’s California, LLC, a California limited liability company (“People’s California”) and People’s First Choice, LLC, a California limited liability company and wholly owned subsidiary of People’s California (the “Target”), which operates cannabis dispensary operations. Upon the terms and subject to the satisfaction of the conditions described in the Purchase Agreement, the Company will acquire 100% of the outstanding equity of the Target in two separate closings (the “Acquisition”), with 80% of the equity of the Target transferred at the first closing and the remaining 20% of the equity transferred at the second closing.
At the first closing of the Acquisition, People’s California shall receive from the Company: (a) a cash payment of $24,000,000 less certain outstanding indebtedness and transaction expenses related to the Acquisition; (b) a secured note in an aggregate principal amount of $36,000,000 less certain indebtedness; and (c) 40,000,000 shares of Company common stock valued at $0.40 per share, subject to terms and conditions of a stockholder’s agreement by and between the Company and People’s California, which includes a one-year lockup of the shares. The first closing is currently intended to be October 1, 2021. The Purchase Agreement is subject to customary indemnification provisions.
On August 4, 2021, in connection with the Acquisition, People’s California issued senior secured indebtedness to the Company, pursuant to the terms of a certain Secured Promissory Note (the “Deposit Note”). The Deposit Note provided for a one-time advance of $6,000,000 (the “Loan”) by the Company to People’s California at a flat rate of 3% per annum. The Deposit Note matures on August 4, 2022.
The full principal balance and all outstanding but unpaid interest is due and payable at the maturity date of August 4, 2022; provided that, if the Company consummates the first closing, pursuant to the terms of the Purchase Agreement, then the principal amount of the Deposit Note, but not the accrued interest, shall be deemed repaid, satisfied, or otherwise applied to the cash consideration paid for the equity of the Target and the Deposit Note shall be deemed satisfied.
On August 7, 2021, the Company received a letter from Eaze Technologies, Inc. (“Eaze”), raising an unspecified breach of a certain agreement between the Company and Eaze. Eaze also alleges that a contract it has with People’s Direct, Inc. (“People’s”) will be breached if People’s and the Company proceed with the Acquisition described above. The Company understands that People’s received a substantially similar letter from Eaze on the same date.