NOTE 10 – NOTES PAYABLE
Notes payable consists of the following:
| | | | | | | | | | | |
| (in thousands) |
| December 31,
2021 | | December 31,
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 principle 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. Matured October 5, 2021. The promissory note bore interest at 12.0% for year one and escalated 0.5% per year thereafter up to 13.5%. In the event of default, the note was convertible at the holder's option. | — | | | 1,600 | |
Promissory note dated June 11, 2019, issued to accredited investors, which matured December 31, 2021 and bore 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 bore 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 bore interest at a rate of 10% per annum. | — | | | 500 | |
Secured promissory note dated January 10, 2020, issued to an unaffiliated third party. The note matured on July 10, 2021 and bore interest at a rate of 15.0% per annum. | — | | | 1,000 | |
Promissory note dated July 29, 2020, issued to an unaffiliated third party. The note bore interest at a rate of 8% per annum and matured on April 28, 2021. | — | | | 1,000 | |
| Promissory note dated May 4, 2020, issued to Harvest Small Business Finance, LLC, an unaffiliated third party. The 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 1.0%. The note requires interest and principle payments seven months from July 2020. The note matures on May 4, 2022. | 562 | | | 562 | |
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 | | | |
Promissory note dated July 27, 2021, issued to Arthur Chan, which matures July 26, 2024, and bears interest at a rate of 8% per annum. | 2,500 | | | |
Senior Secured Promissory Note dated November 22, 2021 issued to Dominion Capital LLC, which matures on February 22, 2022 and bears interest at a rate of 12% per annum. | 2,500 | | | |
| Unsecured promissory note without interest owed to a related party. The loan, which is paid in 20 equal installments, matures on August 1, 2022. | 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 matures on June 1, 2022. | 297 | | | |
Line of credit agreement entered on March 31, 2021, which matures on March 31, 2022 and bears 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 is 3%. The note matures April 1, 2022. | 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%. The note matures October 1, 2022. | 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% 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. | 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 annum. | 2,954 | | | |
| | | |
| Notes payable - promissory notes | $ | 57,522 | | | $ | 14,687 | |
| Vehicle loans | 204 | | | 29 | |
| Less: Short term debt | (45,749) | | | (8,033) | |
| Less: Debt discount | (1,971) | | | (51) | |
| Net Long Term Debt | $ | 10,006 | | | $ | 6,632 | |
Scheduled Maturities of Debt
Scheduled maturities of debt are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) |
| Year Ending December 31, |
| 2022 | | 2023 | | 2024 | | 2039 | Total |
| Total Debt | $ | 45,749 | | | $ | 6,523 | | | $ | 2,500 | | | $ | 2,954 | | $ | 57,726 | |
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 July 25, 2021 and (iii) $1.05 million is in the form of an unsecured promissory note bearing interest at the rate of 3% and maturing on or about January 25, 2022.
Mortgages
Carnegie Mortgage
On November 22, 2017, the Company entered into a $4.50 million promissory note for the purchase of land and a building in California with a third-party creditor. The promissory note is collateralized by the land and building purchased and matures in December 1, 2020. The interest rate for the first year is 12.0% and increases 0.5% per year through 2021. Payments of interest only were due monthly. The full principal balance and accrued interest were paid upon sale of the real estate during 2021.
Dyer Mortgage
On January 18, 2018, the Company entered into a $6.50 million promissory note for the purchase of land and a building in California with a third-party creditor. As part of the closing of the purchase of land, the Company issued warrants with a value of approximately $0.16 thousand and paid a cash fee of $0.20 million. The warrants and cash fee were recorded as a debt discount. The unamortized balance of such discount as of December 31, 2021 and 2020 was $0.04 million and $0.14 million, respectively. The interest rate for the first year was 12.0% and increased 0.5% per year, up to 13.0%, through 2021. Payments of interest are due monthly, while the principal balance is due at maturity.
On January 7, 2021, the Company executed an amendment to the terms of the promissory note. The amendment extended the maturity date from January 18, 2021 to January 18, 2022. 620 Dyer paid a 1% fee to extend the maturity date.
4th Street Mortgage
On October 5, 2018, the Company entered into a $1.60 million promissory note for the purchase of a building in Nevada with a third-party creditor. The promissory note is collateralized by the building purchased and matures in October 5, 2021.
The interest rate for the first year is 12.0% and increases 0.5% per year through 2020. Payments of interest only are due monthly, while the full principal balance is due at maturity. The full principal balance and accrued interest were paid upon sale of the real estate during 2021.
2018 Master Securities Purchase Agreement and Convertible Promissory Notes
In March 2018, the Company entered into the 2018 Master Securities Purchase Agreement with an accredited investor pursuant to which the Company sells to the accredited investor 7.5% Senior Convertible Promissory Notes in eight tranches averaging $5.00 million, for a total of $40.00 million. The Company converted $1.98 million of convertible notes into the Company’s common stock during the year ended December 31, 2021. As of December 31, 2021, $3.50 million of principal remains outstanding.
For each note issued under the 2018 Master Securities Purchase Agreement, the principal and interest due and owed under the note is convertible into shares of Common Stock at any time at the election of the holder at a conversion price per share equal to the lower of (i) the original conversion price as defined in each note issuance or (ii) 87% of the average of the two lowest daily volume weighted average price of the Common Stock in the thirteen (13) trading days prior to the conversion date (“Conversion Price”). The Conversion Price is subject to adjustment for (i) stock splits, stock dividends, combinations, or similar events and (ii) full ratchet anti-dilution protection. Upon certain events of default, the conversion price will automatically become 70% of the average of the three (3) lowest volume weighted average prices of the Common Stock in the twenty (20) consecutive trading days prior to the conversion date for so long as such event of default remains in effect.
In addition, at any time that (i) the daily volume weighted average price of the Common Stock for the prior ten (10) consecutive trading days is $10.50 or more and (ii) the average daily trading value of the Common Stock is greater than $2.50 million for the prior ten (10) consecutive trading days, then the Company may demand, upon one (1) days’ notice, that the holder convert the notes at the Conversion Price.
The Company may prepay in cash any portion of the outstanding principal amount of the notes and any accrued and unpaid interest by, upon ten (10) days’ written notice to the holder, paying an amount equal to (i) 110% of the sum of the then-outstanding principal amount of the notes plus accrued but unpaid interest, if the prepayment date is within 90 days of the issuance date of the notes; (ii) 115% of the sum of the then-outstanding principal amount plus accrued but unpaid interest, if the prepayment date is between 91 days and 180 days of the issuance date of the notes; or (iii) 125% of the sum of the then-outstanding principal amount of the notes plus accrued but unpaid interest, if the prepayment date is after 180 days of the issuance date of the notes.
During the years ended December 31, 2021 and 2020, the Company converted debt and accrued interest into 24,939,780 and 31,086,209 shares of the Company’s common stock, respectively.
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.
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 of debt of $5.98 million, equal to the difference between the carrying value of the old debt and the reacquisition price, was recognized in current period earnings.
Debt Assumed in the UMBRLA Acquisition
On July 1, 2021, upon the closing of the UMBRLA acquisition, the Company assumed debt instruments consisting of the following:
Line of Credit: A line of credit agreement with Bespoke Financial, Inc. The line of credit is for the lesser of a maximum draw amount of $4.5 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. The total outstanding balance on the line of credit was $4.50 million as of December 31, 2021.
Payroll Protection Program (“PPP”) Loans: In May 2020, Umbrla received loans under the Paycheck Protection Program offered by the U.S. Small Business Administration (“SBA”) of which $0.30 million remained outstanding on the acquisition date. The loan proceeds are available to be used to pay for payroll costs, including salaries, commissions and similar compensation, group health care benefits, rent, utilities and interest on certain other outstanding debt. The interest rate on the PPP Loans is a fixed rate of 1% per annum. The Company is required to make principal and interest payments in monthly installments. The PPP loans mature in the second quarter of 2022. The PPP Loans include events of default. Upon the occurrence of an event of default, the lender will have the right to exercise remedies against the Company, including the right to require immediate payment of all amounts due under the PPP Loans.
Related Party Promissory Note: On January 1, 2021, UMBRLA issued an unsecured promissory note with a principal balance of $0.20 million to a related party. No interest accrues on the note, except in the case of default, when the note bears 4.0% of interest. Principal payments on the note are due in monthly installments. As of December 31, 2021, the outstanding principal on the note was $0.09 million.
Debt Assumed in the Acquisition of People's Choice
During the year ended December 31, 2021, in connection with the acquisition of People's Choice, the Company issued a secured promissory note in a principal amount of $30.6 million as partial consideration under the purchase agreement. The
note accrues interest on the basis of a 360-day year at a fixed rate of eight percent (8%) per annum and matures on November 22, 2023. The Company agreed to pay the principal balance on the note in monthly installments, commencing on December 1, 2021. The note, of which $28.6 million remained outstanding as of December 31, 2021, is secured by the Company's membership interests in 620 Dyer LLC. The unamortized discount on the note was $1.93 million as of December 31, 2021.
On January 1, 2021, People’s First Choice, LLC issued an unsecured promissory note with a principal balance of $5.00 million to a related party. Interest on the note accrues at a rate of 10.00% per annum, compounded quarterly. The note matures on June 30, 2022. The Company may prepay the note in whole or in part without premium or penalty, provided that any partial payment shall first be credited first to interest then due and payable. The note was fully repaid as of December 31, 2021.
Debt Assumed with Purchase of Halladay Holding, LLC.
On July 1, 2021, the Company entered into a Membership Interest Purchase Agreement with Nicholas Kovacevich and Dallas Imbimbo, who are Directors of the Company, 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. Upon consummation of the agreement, the Company assumed a mortgage, which had an outstanding balance of $2.97 million as of December 31, 2021. The loan, which accrues interest at a rate of 9.89% per annum, matures on May 1, 2039.
Debt Assumed in the Acquisition of Silverstreak Solutions, Inc. ("Silverstreak")
During the year ended December 31, 2021, in connection with the acquisition of Silverstreak, the Company issued (i) a $2,000,000 unsecured promissory note, with an interest rate of 3% per annum and a maturity date six months after closing of the purchase, and (ii) a $2,500,000 unsecured promissory note with an interest rate of 3% per annum and a maturity date of twelve months after the closing of the transaction.
Additional Financing Arrangements
On December 30, 2019, the Company issued a promissory note to Matthew Lee Morgan Trust (a related party), which matures on January 30, 2021. The note accrues interest at a rate of 10% per annum. The note was converted into 1,428,571 shares of the Company’s common stock in January of 2021.
On January 10, 2020, the Company issued a promissory note to Arthur Chan, an unaffiliated third party, in the amount of $1.00 million dollars. The note accrues interest at a rate of 15.00% per annum and matures on January 10, 2021. The note is secured by the Company’s real estate located at 620 E. Dyer Rd., Santa Ana, CA. On January 8, 2021, the Company executed an amendment to the promissory note, which extended the maturity date from January 10, 2021 to July 10, 2021. 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 May 4, 2020, OneQor Technologies, Inc entered into a Promissory Note dated May 4, 2020 (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 (the “PPP Loan”) offered by the U.S. Small Business Administration (the “SBA”) in a principal amount of $0.56 million pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP Loan proceeds are available to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves; rent; utilities; and interest on certain other outstanding debt. The amount that will be forgiven will be calculated in part with reference to OneQor’s full time headcount during the eight week week period following the funding of the PPP loan. The interest rate on the PPP Note is a fixed rate of 1% per annum. To the extent that the amounts owed under the PPP Loan, or a portion of them, are not forgiven, OneQor will be required to make principal and interest payments in monthly installments. The PPP Note matures in two years. The PPP Note includes events of default. Upon the occurrence of an event of default, the lender will have the
right to exercise remedies against OneQor, including the right to require immediate payment of all amounts due under the PPP Note.
On July 29, 2020, the Company issued a promissory note to an unaffiliated third party, in the amount of $1.00 million. The note incurs interest at a rate of 8.00% per annum and matured on April 28, 2021.
On November 22, 2021, the Company issued a Senior Secured Promissory Note to Dominion Capital LLC in the amount of $2.50 million, which matures on February 22, 2022 and bears interest at a rate of 12% per annum.
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 are included in other assets while lease liabilities are a line-item on the Company’s 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 lease 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 and lease liabilities 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 and other 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 years ended December 31, 2021 and December 31, 2020 were $2.95 million and $0.69 million, respectively. Short-term lease costs during the 2021 and 2020 fiscal years were not material.
As of December 31, 2021 and December 31, 2020, short term lease liabilities of $3.12 million and $0.69 million are included in “Accounts Payable and Accrued Expenses” on the consolidated balance sheets, respectively. The table below presents total operating right-of-use assets and lease liabilities as of December 31, 2021:
| | | | | |
| (in thousands) |
| Operating right-of-use assets | $ | 24,448 | |
| Operating lease liabilities | 24,436 | |
The table below presents the maturities of operating lease liabilities as of December 31, 2021:
| | | | | |
| (in thousands)
Operating
Leases |
| 2022 | $ | 5,370 | |
| 2023 | 5,301 | |
| 2024 | 5,215 | |
| 2025 | 4,324 | |
| 2026 | 4,209 | |
| Thereafter | 14,005 | |
| Total lease payments | 38,424 | |
| Less: discount | (13,988) | |
| Total operating lease liabilities | $ | 24,436 | |
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:
| | | | | |
| December 31,
2021 |
| Weighted average remaining lease term (years) | 5.71 |
| Weighted average discount rate | 11.4 | % |
NOTE 12 – TAX EXPENSE
The provision for income taxes consisted of the following for the years ended December 31, 2021 and 2020.
| | | | | | | | | | | |
| Year Ended December 31, |
| Current: | 2021 | | 2020 |
| Federal | 108 | | | — | |
| State | 860 | | | — | |
| Foreign | — | | | — | |
| Total current tax expense | 968 | | | — | |
| | | |
| Year Ended December 31, |
| Deferred: | 2021 | | 2020 |
| Federal | 1,112 | | | — | |
| State | (277) | | | — | |
| Foreign | — | | | |
| Total deferred tax expense | 835 | | | — | |
| | | |
| Total Tax Provision | 1,803 | | | — | |
The components of deferred income tax assets and (liabilities) are as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Deferred income tax assets: | | | |
| Options expense | $ | — | | | $ | 2,871 | |
| Depreciation | — | | | 194 | |
| Allowance for Doubtful Accounts | — | | | 291 | |
| Accrued Expenses | 58 | | | — | |
| Net operating Losses | 5,010 | | | 19,676 | |
| | | |
| Total | 5,068 | | | 23,032 | |
| | | |
| | | |
| Deferred income tax liabilities: | | | |
| Fixed Assets and Intangibles | (11,094) | | | — | |
| Leases | (96) | | | — | |
| Unrealized gain on investments | — | | | (8,658) | |
| Total | (11,190) | | | 14,374 | |
| | | |
| Valuation allowance | — | | | (14,374) | |
| | | |
| Net deferred tax assets (liabilities) | $ | (6,122) | | | $ | — | |
The net deferred tax liability as of December 31, 2021 is associated with the Company's continuing operations.
The reconciliation between the Company’s effective tax rate and the statutory tax rate is as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| | | |
| Expected Income Tax Benefit at Statutory Tax Rate, Net | $ | (6,385) | | | $ | (6,151) | |
| Changes in income taxes resulting from: | | | |
| State taxes (net of federal tax benefits) | 9,937 | | | (2,045) | |
| Decrease in valuation allowance | (14,375) | | | (3,727) | |
| Foreign tax rate differential | — | | | — | |
| Gain/loss on distinguishment of debt | 1,255 | | | — | |
| Non-deductible 280E | 5,421 | | | 2,683 | |
| Goodwill impairment | 1,296 | | | 5,572 | |
| Debt discount | 239 | | | — | |
| Passthrough and managed | 308 | | | 713 | |
| RTP adjustments and other | 4,107 | | | 613 | |
| | | |
| Reported income tax expense (benefit) | $ | 1,803 | | | $ | — | |
For the years ended December 31, 2021 and 2020, the Company had subsidiaries that produced and sold cannabis or cannabis pure concentrates, subjecting the Company to the limits of Internal Revenue Code (“IRC”) Section 280E. Pursuant to IRC Section 280E, the Company is allowed only to deduct expenses directly related to sales of product. The State of California does not conform to IRC Section 280E and, accordingly the Company is allowed to deduct all operating expenses on its California income tax returns. As the Company files consolidated federal income tax returns, the taxable income generated from its subsidiaries subject to IRC Section 280E has been offset by losses generated by operations not subject to IRC Section 280E.
As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $16.30 million, which do not expire, but are limited in utilization against 80% of taxable income. As of December 31, 2021, the Company had state net operating loss carryforwards of approximately $17.9 million, which begin to expire in 2038. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under IRC Section 382, which will limit their utilization. Management completed an analysis of our owner shifts and believe we underwent ownership changes as defined by Section 382 on May 7, 2018 and July 1,2021. Net operating loss carryforwards have been reduced to reflect the maximum amount available subject to these limitations.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. As of December 31, 2021, we have determined that a valuation allowance is no longer required due to our net deferred tax liability position. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. All tax years are subject to examination.
Under ASC 740-10, Income Taxes, we periodically review the uncertainties and judgments related to the application of complex income tax regulations to determine income tax liabilities in several jurisdictions. We use a “more likely than not” criterion for recognizing an asset for unrecognized income tax benefits or a liability for uncertain tax positions. We have determined we have unrecognized assets related to uncertain tax positions for IRC Section 280E as of December 31, 2021. We do not anticipate any significant changes in such uncertainties and judgments during the next twelve months. We settled prior year positions with adjustments to previously filed income tax returns. As of December 31, 2021, we had approximately $8.6 million of unrecognized tax benefits, all of which would affect the effective tax rate if recognized. Of the $8.6 million in unrecognized tax benefits, all of it relates to prior years through our acquisition of UMBRLA.
NOTE 13 – 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.
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 990.00 million shares of common stock with $0.001 par value per share. As of December 31, 2021 and 2020, 496.24 million and 194.20 million shares of common stock were outstanding, respectively.
Treasury Stock
During 2019, the Company acquired 2.31 million shares of common stock and 4 shares of Series A Preferred stock as part of a litigation settlement. The shares were recorded at fair market value as of the date the agreement was executed.
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 14 – 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. The following table contains information about both plans as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Awards
Reserved
for Issuance | | Awards
Exercised | | Awards
Outstanding | | Awards
Available
for Grant |
| | | | | | | |
| 2016 Equity Incentive Plan | 2,000,000 | | | — | | | 499,953 | | | 1,500,047 | |
| 2018 Equity Incentive Plan | 43,976,425 | | | 3,875,921 | | | 14,409,604 | | | 25,690,900 | |
| 2019 Equity Incentive Plan | 84,150,000 | | | 34,884 | | | 73,014,717 | | | 11,100,399 | |
Stock Options
The following table summarizes the Company’s stock option activity and related information for the year ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 December 31, 2019 | 12,365,295 | | | $ | 1.61 | | | | | |
| | | | | | | |
| Options Granted | 12,803,918 | | | $ | 0.08 | | | | | |
| Options Exercised | — | | | $ | — | | | | | |
| Options Forfeited | (7,203,334) | | | $ | 1.19 | | | | | |
| Options Expired | (473,049) | | | $ | 1.51 | | | | | |
| Options Outstanding as of December 31, 2020 | 17,492,830 | | | $ | 0.41 | | | | | |
| | | | | | | |
| Options Granted | 88,627,220 | | | $ | 0.23 | | | | | |
| Options Exercised | (3,910,805) | | | $ | 0.08 | | | | | |
| Options Forfeited | (13,547,745) | | | $ | 0.15 | | | | | |
| Options Expired | (410,120) | | | $ | 0.41 | | | | | |
| | | | | | | |
| Options Outstanding as of December 31, 2021 | 88,251,380 | | | $ | 0.20 | | | 8.8 years | | $ | 10,334,294 | |
| Options Exercisable as of December 31, 2021 | 35,661,302 | | | $ | 0.27 | | | 7.6 years | | $ | 3,591,052 | |
The aggregate intrinsic value is calculated as the difference between the Company’s closing stock price of $0.26 on December 31, 2021 and the exercise price of options, multiplied by the number of options. As of December 31, 2021, there was $7.97 million total unrecognized stock-based compensation. Such costs are expected to be recognized over a weighted-average period of approximately 1.58 years. The weighted average fair value of awards granted was $0.23 and $0.08 during 2021 and 2020, respectively.
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 following weighted-average assumptions were used to calculate stock-based compensation:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Expected term | 5 years | | 6 years |
| Volatility | 106.7 | % | | 104.6 | % |
| Risk-Free Interest Rate | 0.8 | % | | 0.4 | % |
| Dividend Yield | 0 | % | | 0 | % |
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 number of shares or options)
For the Year Ended |
| | December 31, 2021 | | December 31, 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 | | 89,930,019 | | | $ | 2,415 | | | 4,174,428 | | | $ | 1,868 | |
| | | | | | | | |
| Stock Grants: | | | | | | | | |
| Employees (Common Stock) | | 250,000 | | | 68 | | | 740,580 | | | 142 | |
| Directors (Common Stock) | | 1,917,837 | | | 494 | | | 173,610 | | | 105 | |
| Non–Employee Consultants (Common Stock) | | 4,556,603 | | | 1,078 | | | 715,065 | | | 60 | |
| | | | | | | | |
| Total Stock–Based Compensation Expense | | | | $ | 4,055 | | | | | $ | 2,175 | |
NOTE 15 – WARRANTS
The following table summarizes warrant activity for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| Shares | | Weighted-
Average
Exercise
Price |
| | | |
| Warrants Outstanding as of January 1, 2020 | 1,313,459 | | | $ | 2.67 | |
| Warrants Issued | — | | | $ | — | |
| Warrants Expired | (236,904) | | | $ | 5.73 | |
| Warrants Outstanding as of December 31, 2020 | 1,076,555 | | | $ | 1.99 | |
| Warrants Issued | 85,336,515 | | | $ | 0.08 | |
| Warrants Exercised | (586,198) | | | $ | 0.07 | |
| Warrants Outstanding as of December 31, 2021 | 85,826,872 | | | $ | 0.22 | |
The weighted-average exercise price and weighted-average fair value of the warrants granted by the Company during 2021 were as follows:
| | | | | | | | | | | |
| For the Year Ended |
| December 31, 2021 |
| Weighted-
Average
Exercise
Price | | Weighted-
Average Fair
Value |
| | | |
| Warrants Granted Whose Exercise Price Exceeded Fair Value at the Date of Grant | $ | 0.08 | | | $ | 0.21 | |
| Warrants Granted Whose Exercise Price Was Equal or Lower Than Fair Value at the Date of Grant | $ | — | | | $ | — | |
The Company estimated the fair value of the warrants issued during 2021 utilizing the Black-Scholes option-pricing model with the following weighted-average inputs:
| | | | | |
| Year Ended December 31,
2021 |
| Volatility | 112.6 | % |
| Term | 3.8 years |
| Risk-Free Interest Rate | 0.2 | % |
| Expected Dividend Rate | 0.0 | % |
For the years ended December 31, 2021 and 2020, zero warrants were issued in connection with debt and recorded as a debt discount.
NOTE 16 – FAIR VALUE MEASUREMENTS
As of December 31, 2020, the Company owned 593,261 common shares of Hydrofarm, a public company trading on the Nasdaq Global Select Market under the ticker symbol “HYFM.” As of December 31, 2020, the Company’s investment in Hydrofarm is stated at fair value and is presented in the “Short term investments” line within the consolidated balance sheet. As the Hydrofarm shares held by the Company were restricted from sale for a period of 180 days from the date of Hydrofarm’s initial public offering, the fair value of the Company’s investment was estimated utilizing the market price of the common shares at the end of each reporting period (a level one input), less a discount for lack of marketability (a level two input). The discount for marketability was estimated upon consideration of volatility and the length of the lock-up period On December 31, 2020, the HYFM stock price was $52.58 and the investment value was $23.85 million. Changes in the fair value of the Company’s investment are reported in current period earnings.
As of December 31, 2020, the Company held 296,630 warrants to purchase one share of Hydrofarm’s common stock, with an exercise price of $16.86 per share. As the underlying shares are restricted from sale for a period of 180 days from the date of Hydrofarm’s initial public offering, the fair value of the warrants were estimated using the Black-Scholes option pricing model that uses several inputs, including market price of Hydrofarm’s common shares at the end of each reporting period (a level one input), less a discount for lack of marketability (a level two input). The discount for lack of marketability was estimated upon consideration of volatility and the length of the lock-up period. The estimated fair value of the warrants was $10.20 million as of December 31, 2020. Changes in the fair value of the warrants are reported in current period 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.
On March 30, 2020, Edible Garden Corp. (“Edible Garden”), then 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 December 31, 2020 and the options are included within the “Investments” line within the consolidated balance sheet. 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. During 2021, Management concluded that the investment was impaired and recorded an impairment charge of $0.33 million during the fourth quarter of 2021, representing the total amount of the investment.
NOTE 17 – BUSINESS COMBINATIONS
On February 14, 2020, the Company acquired all of the assets of OneQor Technologies, Inc. (“OneQor”). The acquisition of OneQor was accounted for in accordance with ASC 805-10, “Business Combinations.” The total consideration transferred included 58,154,027 shares of the Company’s common stock, with a fair value of $9.31 million. The preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions of the assets acquired and liabilities assumed were subject to change within the measurement period pending the finalization of a third-party valuation. The multi-period excess earnings method, an income approach, was utilized to estimate the fair value of OneQor’s customer relationships. The relief-from-royalty method, an income approach, was
utilized to estimate the fair value of OneQor’s trade name. The following table summarizes the preliminary allocation of the purchase price:
| | | | | |
| (in thousands) |
| Assets acquired | |
| Accounts receivable | $ | 51 | |
| Inventory | 81 | |
| Prepaid expenses | 241 | |
| Property, plant and equipment | 80 | |
| Customer relationships | 3,070 | |
| Trade name | 690 | |
| Goodwill | 6,763 | |
| Other long-term assets | 260 | |
| Total Assets acquired | $ | 11,237 | |
| |
| Liabilities assumed | |
| Accounts payable and accrued expenses | $ | 1,481 | |
| Deferred income | 300 | |
| Short-term debt | 100 | |
| Long-term lease liabilities | 108 | |
| Total liabilities assumed | $ | 1,990 | |
In the view of management, goodwill reflected the future cash flow expectations for OneQor’s market position in the growing CBD industry, synergies and the assembled workforce, at the time of the acquisition. Goodwill recorded for the OneQor transaction is non-deductible for tax purposes. 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 the COVID-19 pandemic and social unrest. During the year ended December 31, 2020, the Company recognized $1.21 million of revenue and a net loss of $12.29 million from OneQor. During the year ended December 31, 2021, the Company recognized a net loss of $0.16 million from OneQor. The results of OneQor's operations are included in Discontinued Operations (see Note 19, "Discontinued Operations").
UMBRLA, Inc.
On July 1, 2021, the Company completed the acquisition of UMBRLA, Inc. 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. The acquisition of UMBRLA was accounted for in accordance with ASC 805-10, “Business Combinations.” The preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions of the assets acquired and liabilities assumed were subject to change within the measurement period pending the finalization of a third-party valuation. The multi-period excess earnings method, an income approach, was utilized to estimate the fair value of UMBRLA customer relationships. The relief-from-royalty method, an income approach, was utilized to estimate the fair value of UMBRLA trade name.
Consideration for the merger consisted of 191,772,781 shares of common stock issued on the acquisition date, 23,424,674 shares of common stock reserved for issuance in one year, and the assumption of all of UMBRLA’s stock options and
warrants outstanding as of July 1, 2021. The fair value of the components of the purchase price is summarized below (in thousands):
| | | | | |
| Purchase Price (in thousands): | |
| |
| Stock | $ | 52,929 | |
| Liability for holdback shares | 6,465 | |
| Stock options assumed | 9,695 | |
| Warrants assumed | 10,733 | |
| Less: cash transferred | (1,290) | |
| Total consideration | 78,532 | |
The preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions of the assets acquired and liabilities assumed were subject to change within the measurement period pending finalization of a third-party valuation. The relief-from-royalty method, an income approach, was utilized to estimate the fair value of UMBRLA’s trade name. The multi-period excess earnings method was utilized to estimate the fair value of UMBRLA’s licenses. The following table summarizes the preliminary allocation of the purchase price (in thousands):
| | | | | |
| (in thousands) |
| Assets acquired | |
| Accounts receivable | 3,772 | |
| Inventory | 6,532 | |
| Prepaid & other current assets | 1,543 | |
| Fixed assets | 1,450 | |
| Notes receivable | 750 | |
| Other long-term assets | 3 | |
| Right-of-use asset | 460 | |
| Trade name | 31,130 | |
| Licenses | 40,760 | |
| Goodwill | 16,216 | |
| Total assets acquired | $ | 102,617 | |
| | |
| Liabilities assumed | |
| Accounts payable/accrued expenses | $ | 15,849 | |
| Short-term lease liability | 118 | |
| Long-term lease liability | 342 | |
| Short-term debt | 4,796 | |
| Long-term debt | 674 | |
| Deferred tax liability | 499 | |
| Uncertain Tax Position | 1,806 | |
| Total liabilities assumed | $ | 24,084 | |
For the fiscal year ended December 31, 2021, the Company recognized $21.50 million of revenue and a net loss of $6.88 million from UMBRLA. In the view of management, goodwill reflects the future cash flow expectations for UMBLRA market position in the cannabis industry, synergies and the assembled workforce. Goodwill recorded for the UMBRLA transaction is non-deductible for tax purposes.
People’s California
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 $24.00 million less certain outstanding indebtedness and transaction expenses related to the Acquisition; (b) a secured note in an aggregate principal amount of $36.00 million 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 the agreement by and between the Company and People’s California, which includes a one-year lockup of the shares. 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 $6.00 million (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 September 1, 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 “Second Deposit Note”). The Second Deposit Note provided for a one-time advance of $9.00 million (the “Loan”) by the Company to People’s California at a flat rate of 3% per annum. The Second Deposit Note matures on September 1, 2022.
The full principal balance and all outstanding but unpaid interest is due and payable at the maturity date of September 1, 2022; provided that, if the Company consummates the first closing, pursuant to the terms of the Purchase Agreement, then the principal amount of the Second 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 Second Deposit Note shall be deemed satisfied.
On September 1, 2021, the Company entered into a Management Agreement with the Target, which provided the Company with control over the Target’s operation and finances. Management concluded that effective September 1, 2021, the Company became the primary beneficiary of the Target as a result of the Management Agreement, and began consolidating the Target’s financial results. The Company applied acquisition accounting on September 1, 2021 and allocated the fair value of the Target to its assets and liabilities. The preliminary valuation of the Target was based on the purchase price described below (in thousands):
| | | | | |
| Purchase Price (in thousands): | |
| |
| Cash | $ | 24,000 | |
| Note payable | $ | 33,749 | |
| Common stock | $ | 16,000 | |
| Less: cash transferred | $ | (994) | |
| Total consideration | $ | 72,755 | |
The preliminary allocation was based upon the Company’s estimates and assumptions of the assets acquired and liabilities assumed are subject to change within the measurement period pending the finalization of a third-party valuation. The following table summarizes the preliminary allocation of the purchase price:
| | | | | |
| Assets acquired | (in thousands) |
| Inventory | 662 | |
| Prepaids | 74 | |
| Fixed Assets | 554 | |
| Right-of-use asset | 2,105 | |
| Trade name | 4,500 | |
| Licenses | 49,510 | |
| Goodwill | 20,995 | |
| Total assets acquired | $ | 78,400 | |
| | |
| Liabilities assumed | |
| Accounts Payable/Accruals | $ | 2,586 | |
| Short-term lease liability | 540 | |
| Long-term lease liability | 1,565 | |
| Deferred tax liabilities | 4,775 | |
| Total liabilities assumed | $ | 9,466 | |
Silverstreak Solutions
On October 1, 2021, the Company completed the acquisition of Silverstreak Solutions, Inc ("Silverstreak"). Silverstreak became a wholly owned subsidiary of the Company. The acquisition of Silverstreak was accounted for in accordance with ASC 805-10, “Business Combinations.” The preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions of the assets acquired and liabilities assumed were subject to change within the measurement period pending the finalization of a third-party valuation. The cost approach was utilized to estimate the fair value of the Silverstreak license.
Consideration is comprised of (i) One Million Five Hundred Thousand Dollars ($1,500,000) in cash, (ii) 9,051,412 shares of restricted common stock, par value $0.001 per share, which is equal to the quotient obtained by (a) $2,500,000, 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) $2,000,000 in unsecured promissory notes with an interest rate of 3% and due six months after the Closing, and (iv)
$2,500,000 in unsecured promissory notes with an interest rate of 3% and due twelve months after the Closing (the “Twelve-Month Notes”). The fair value of the components of the purchase price is summarized below (in thousands):
| | | | | |
| Purchase Price (in thousands): | |
| Cash | $ | 1,500 | |
| Note payable | 4,500 | |
| Common stock | 2,500 | |
| Less: cash transferred | (24) | |
| Total consideration | $ | 8,476 | |
The preliminary allocation was based upon the Company’s estimates and assumptions of the assets acquired and liabilities assumed are subject to change within the measurement period pending the finalization of a third-party valuation. The following table summarizes the preliminary allocation of the purchase price:
| | | | | |
| Assets acquired | (in thousands) |
| Inventory | 215 | |
| Prepaid expenses | 6 | |
| Fixed assets | 257 | |
| Licenses | 161 | |
| Goodwill | 10,921 | |
| Total assets acquired | $ | 11,561 | |
| |
| Liabilities assumed | |
| Accounts payable and accrued expenses | $ | 1,517 | |
| Deferred taxes | 14 | |
| Taxes payable | 1,553 | |
| Total liabilities assumed | $ | 3,084 | |
Supplemental Pro-Forma Information (Unaudited)
Supplemental information on an unaudited pro-forma basis is reflected as if each of the 2020 and 2021 acquisitions had occurred in the year prior to the year in which each acquisition closed, after giving effect to certain pro-forma adjustments primarily related to the amortization of acquired intangible assets.
The unaudited pro-forma supplemental information is based on estimates and assumptions that the Company believes are reasonable. The supplemental unaudited pro-forma financial information is presented for comparative purposes only and is not necessarily indicative of what the Company’s financial position or results of operations actually would have been had the Company completed the acquisitions at the dates indicated, nor is it intended to project the future financial position or operating results of the Company as a result of the Purchase Agreement.
| | | | | | | | | | | |
| For the Year Ended |
| 12/31/2021 | | 12/31/2020 |
| | | |
| Pro-forma revenues | $ | 95,867 | | | $ | 88,078 | |
| Pro-forma net loss from continuing operations | (36,454) | | | (1,077) | |
NOTE 18 – COMMITMENTS AND CONTINGENCIES
California and Oregon Operating Licenses
Unrivaled Brands, Inc entities have operated compliantly and have been eligible for applicable licenses and renewals of our licenses.
NOTE 19 – 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 $6.5 million in cash. 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 upon closing of the transaction, which is expected to occur during 2022.
Nevada Dispensaries
On May 8, 2019, MediFarm LLC, a wholly-owned subsidiary of Terra Tech Corp. (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 closed upon receiving all required government approvals during the year ended December 31, 2021. The Company recognized a gain of $5.43 million upon 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 reflected such gain in income from discontinued operations.
On August 19, 2019, MediFarm I LLC, a wholly-owned subsidiary of Terra Tech Corp. (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 closed upon receiving all required government approvals during the year ended December 31, 2021. The Company recognized a gain of $2.37 million upon 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 reflected such gain in income from discontinued operations.
On April 15, 2020, MediFarm LLC, a wholly-owned subsidiary of Terra Tech Corp. (the “Company”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Natural Medicine, LLC, a non-affiliated 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 closed upon receiving all required government approvals during the year ended December 31, 2021. The Company recognized a gain of $5.03 million upon 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 reflected such gain in income from discontinued operations.
Real Estate
As of December 31, 2020, the Company classified real property in Las Vegas, NV as available-for-sale, as it met the criteria of ASC 360-10-45-9. On August 9, 2021, the Company sold the property for $2.60 million in cash to 117 Real Estate Holdings LLC. A loss on the sale of the asset of $0.1 million was recorded during the year ended December 31, 2021 and is presented within net income from discontinued operations.
As of December 31, 2020, the Company classified real property in Santa Ana, CA as available-for-sale, as it met the criteria of ASC 360-10-45-9. 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 $1.7 million. 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. The Company recorded a gain on the sale of the asset of $1.7 million during the year ended December 31, 2021, which is presented within net income from discontinued operations.
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”) pursuant to which the Company agreed to sell and the Buyer agreed to purchase the real property located at 620 East Dyer Road, Santa Ana, CA (the “Property”) for $13.4 million in cash. There is no material relationship between the Company or its affiliates and the Buyer other than in respect of the transactions contemplated by the PSA. The real estate asset was classified as available-for-sale as of December 31, 2021, pending final closing of the PSA.
OneQor
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.
Blum Santa Ana
On February 26, 2020, the Company agreed to transfer governance and control of our dispensary operation located at 2911 Tech Center Drive, Santa Ana, CA to Martin Vivero and Tetra House Co. (“Tetra”), who are unaffiliated third parties. The Company received $2.00 million at closing and $1.45 million during the 3rd Quarter of 2020 in exchange for these assets. MediFarm So Cal Inc. (“MediFarm So Cal”), a wholly-owned subsidiary of the Company, terminated the existing management services agreement with 55 OC Community Collective Inc. (“55 OC”). 55 OC is a mutual benefit corporation which holds a cannabis license with the City of Santa Ana in the State of California. Previously, MediFarm So Cal managed the dispensary known as “Blum Santa Ana” under the license of 55 OC. Control of 55 OC was transferred to Mr. Vivero and Tetra House Co. via a new management services agreement and the appointment of Mr. Vivero to the Board of Directors of 55 OC, which was pending final regulatory approval as of the date of our report.
The Company recognized a loss upon 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 reflected such loss in discontinued operations.
The following table summarizes the transaction:
| | | | | |
| (in thousands) |
| Total consideration | $ | 3,800 | |
| |
| Net book value of assets divested and liabilities transferred | |
| Inventory | 23 | |
| Prepaid and other current assets | 33 | |
| Property, plant & equipment | 98 | |
| Intangible assets and goodwill | 6,565 | |
| Other long-term assets | 54 | |
| Lease liability, net of right-of-use asset | (78) | |
| Net book value of assets divested and liabilities transferred | 6,695 | |
| Loss on sale | $ | (2,895) | |
Edible Garden
On March 30, 2020, Edible Garden Corp. (“Edible Garden”), a wholly-owned subsidiary of Unrivaled Brands, Inc. (the “Company”), entered into and closed an Asset Purchase Agreement (the “Purchase Agreement”) with Edible Garden AG Inc. (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 a five-year $3.00 million secured promissory note bearing interest at 3.5% per annum, which is reflected within the assets under discontinued operations, and 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. 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.
Michael James, the Company’s former Chief Financial Officer, is a principal of the Purchaser. There is no material relationship between the Company or its affiliates and the Purchaser other than as set forth in the previous sentence. The Purchase Agreement contains customary conditions, representations, warranties, indemnities and covenants by, among, and for the benefit of the parties.
The Company recognized a loss upon sale of the assets equal to the difference between the consideration paid and the book value of the assets as of the disposition date and reflected such loss in discontinued operations. The following table summarizes the transaction:
| | | | | |
| (in thousands) |
| Consideration | |
| Fair value of note receivable | $ | 2,960 | |
| Fair value of options | 330 | |
| Less: cash transferred to purchaser | (30) | |
| Total consideration | $ | 3,260 | |
| |
| Net book value of assets divested and liabilities transferred | |
| Accounts receivable | $ | 360 | |
| Inventory | 520 | |
| Other current assets | 80 | |
| Property, plant and equipment | 4,100 | |
| Intangible assets | 70 | |
| | | | | |
| Other long-term assets | 200 | |
| Accounts payable and accrued expenses | (1,700) | |
| Lease liabilities, net of right of use assets | (70) | |
| Net book value of assets divested and liabilities transferred | 3,560 | |
| Loss on sale | $ | (300) | |
The expected and completed sales of our Nevada operations, expected and completed sales of real estate assets, and assets divested during the years ended December 31, 2021 and 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.”
Operating results for discontinued operations were comprised of the following:
| | | | | | | | | | | |
| (in thousands) |
| Year ended December 31, |
| 2021 | | 2020 |
| Total revenues | $ | 12,900 | | | $ | 13,354 | |
| Cost of goods sold | 7,687 | | | 10,905 | |
| | | |
| Gross profit | 5,213 | | | 2,449 | |
| | | |
| Selling, general and administrative expenses | 6,523 | | | 10,495 | |
| Impairment of assets | — | | | 10,359 | |
| Loss on sale of assets | (6,583) | | | 1,962 | |
| | | |
| Income (Loss) from operations | $ | 5,273 | | | $ | (20,367) | |
| | | |
| Interest expense | (976) | | | (565) | |
| Other income (loss) | 7,806 | | | 12 | |
| | | |
| Income (Loss) from discontinued operations | $ | 12,103 | | | $ | (20,920) | |
| | | |
| Income (Loss) from discontinued operations per common share attributable to Terra Tech Corp common stockholders - basic and diluted | $ | 0.02 | | | $ | (0.03) | |
The carrying amounts of the major classes of assets and liabilities for the discontinued operations are as follows:
| | | | | | | | | | | |
| (in thousands) |
| December 31,
2021 | | December 31,
2020 |
| Cash | 1,544 | | | 671 | |
| Accounts receivable, net | 1,553 | | | 483 | |
| Inventory | 1,359 | | | 2,152 | |
| Prepaid expenses and other assets | 39 | | | 23 | |
| Property, equipment and leasehold improvements, net | 17,661 | | | 10,207 | |
| Other assets | 323 | | | 582 | |
| Assets of discontinued operations | $ | 22,479 | | | $ | 14,118 | |
| | | |
| Accounts payable and accrued expenses | $ | 1,170 | | | $ | 1,380 | |
| Short-term Debt | — | | | — | |
| Deferred gain on sale of assets | — | | | 8,783 | |
| Long-term lease liabilities | 184 | | | 335 | |
| Liabilities of discontinued operations | $ | 1,354 | | | $ | 10,498 | |
NOTE 20 – SEGMENT INFORMATION
In 2020 given the limited nature of the company's assets, the Company had only one reportable segment. During 2021, the Company acquired assets and opened new operations, such that it has determined previously insignificant operating segments are now significant and are reportable segments requiring disclosure in accordance with ASC 280. Our reportable segments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands)
Total Revenue | | % of Total Revenue |
| | Year Ended December 31, | | Year Ended December 31, |
| Segment | | 2021 | | 2020 | | 2021 | | 2020 |
| Cannabis Retail | | $ | 24,540 | | | $ | 5,400 | | | 51.5 | % | | 87.6 | % |
| Cannabis Cultivation & Distribution | | $ | 23,131 | | | $ | 460 | | | 48.5 | % | | 7.5 | % |
| Corporate and Other | | $ | 2 | | | $ | 301 | | | — | % | | 4.9 | % |
| Total | | $ | 47,673 | | | $ | 6,161 | | | 100.0 | % | | 100.0 | % |
Cannabis Retail
Either independently or in conjunction with third parties, we operate 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.
Cannabis Cultivation and Distribution
We operate distribution centers in California and Oregon that distribute our own branded products as well as third party products to our own dispensaries and to other non-affiliated medical marijuana and/or adult use cannabis dispensaries.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) |
| | For the Year Ended December 31, 2021 |
| | Cannabis Retail | | Cannabis Cultivation and Distribution | | Corporate and Other | | Total |
| Total Revenues | | $ | 24,540 | | | $ | 23,131 | | | $ | 2 | | | $ | 47,673 | |
| Cost of goods sold | | 13,706 | | | 22,000 | | | — | | | 35,706 | |
| Gross Profit | | 10,834 | | | 1,131 | | | 2 | | | 11,967 | |
| | | | | | | | |
| Selling, general and administrative expenses | | 12,327 | | | 7,961 | | | 27,969 | | | 48,257 | |
| Impairment of Assets | | 6,171 | | | — | | | — | | | 6,171 | |
| (Gain) / Loss on sale of assets | | — | | | 56 | | | (3,189) | | | (3,133) | |
| Loss from operations | | (7,664) | | | (6,886) | | | (24,778) | | | (39,328) | |
| | | | | | | | |
| Other income / (expense): | | | | | | | | |
| Extinguishment of debt income / (expense) | | — | | | 116 | | | (6,092) | | | (5,976) | |
| Gain / (loss) on investments | | — | | | — | | | 5,337 | | | 5,337 | |
| Interest income / (expense) | | (85) | | | (186) | | | (1,505) | | | (1,776) | |
| Other income / (loss) | | 110 | | | 85 | | | (628) | | | (433) | |
| Total other income | | 25 | | | 15 | | | (2,888) | | | (2,848) | |
| | | | | | | | |
| Loss from continuing operations before provision for income taxes | | $ | (7,639) | | | $ | (6,871) | | | $ | (27,666) | | | $ | (42,176) | |
| | | | | | | | |
| Total assets at December 31, 2021 | | $ | 67,821 | | | $ | 476 | | | $ | 203,527 | | | $ | 271,824 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) |
| | For the Year Ended December 31, 2020 |
| | Cannabis Retail | | Cannabis Cultivation and Distribution | | Corporate and Other | | Total |
| Total Revenues | | $ | 5,400 | | | $ | 460 | | | $ | 301 | | | $ | 6,161 | |
| Cost of goods sold | | 2,253 | | | 293 | | | 972 | | | 3,518 | |
| Gross Profit | | 3,147 | | | 167 | | | (671) | | | 2,643 | |
| | | | | | | | |
| Selling, General and Administrative Expenses | | 7,145 | | | 1,307 | | | 10,867 | | | 19,319 | |
| Impairment of Assets | | 19,910 | | | — | | | — | | | 19,910 | |
| (Gain) / Loss on sale of assets | | — | | | — | | | — | | | — | |
| Loss from operations | | (23,908) | | | (1,140) | | | (11,538) | | | (36,586) | |
| | | | | | | | |
| Other income / (expense): | | | | | | | | |
| Interest income/(expense) | | — | | | — | | | (1,394) | | | (1,394) | |
| Unrealized gain/(loss) on investments | | — | | | — | | | 29,045 | | | 29,045 | |
| Other income / (loss) | | 755 | | | 65 | | | 109 | | | 929 | |
| Total other income | | 755 | | | 65 | | | 27,760 | | | 28,580 | |
| | | | | | | | |
| Loss before provision for income taxes | | $ | (23,153) | | | $ | (1,075) | | | $ | 16,222 | | | $ | (8,006) | |
| | | | | | | | |
| Total assets at December 31, 2020 | | $ | 13,342 | | | $ | 37,390 | | | $ | 49,563 | | | $ | 100,294 | |
NOTE 21 – 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 December 31, 2021.
The company is currently involved in a breach of contract action brought by former LTRMN, Inc. (“LTRMN”) employee, Kurtis Magee, alleging that he is owed a severance payment pursuant to his separation agreement with LTRMN (signed July 8, 2019). Magee was employed by LTRMN, Inc. for approximately 90 days as the Chief Administrative Officer of the company. When Magee was released from employment with LTRMN, the company negotiated a separation agreement with him that became payable upon the close of the acquisition of LTRMN by UMBRLA, Inc. Shortly thereafter a dispute arose whether Magee breached the separation agreement by using proprietary and confidential information of LTRMN to solicit LTRMN clients, and Magee filed suit in August 2020 seeking contract damages in the amount of $835,000, the amount of the severance payment. LTRMN, UMBRLA, and BRND HOUSE, Inc. are named as parties (“Defendants”). Defendants have successfully defended against two motions for a writ of attachment and a summary judgment motion. On October 27, 2021, Defendants’ demurrer to the First Amended Complaint (“FAC”) was overruled. Plaintiff's deposition is scheduled for April 6, 2022. Trial in this matter is set for December 5, 2022.
NOTE 22 – RELATED PARTY TRANSACTIONS
On March 30, 2020, Edible Garden Corp. (“Edible Garden”), a wholly-owned subsidiary of Terra Tech Corp. (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”). Michael James, the Company’s former Chief Financial Officer, is a principal of the Purchaser. There is no material relationship between the Company or its affiliates and the Purchaser other than as set forth in the previous sentence. The Purchase Agreement contains customary conditions, representations, warranties, indemnities and covenants by, among, and for the benefit of the parties.
On December 31, 2019, the Company entered into a secured promissory note agreement with the Matthew Lee Morgan Trust, which is affiliated with Matthew Morgan, formerly the Chief Executive Officer of OneQor. The note matured on January 30, 2021, and bears interest at a rate of 10% per annum. The note was converted into the Company’s common stock at maturity.
During the fiscal year ended December 31, 2020, the Company issued promissory notes totaling $1.80 million to OneQor. Derek Peterson and Mike Nahass, formerly the Chief Executive Officer and Chief Operating Officer, respectively, had minority ownership interests in OneQor. At the end of the fiscal year, management made the decision to fully-reserve for these loans due to their confidence in the completion of the merger with OneQor, which would result in the cancellation of these loans.
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 a director of the Company and Mr. Imbimbo was a director of the Company. As such, the Acquisition is a related party transaction.
During the fiscal year ended December 31, 2021, the Company contracted for $0.45 million in goods and services of Greenlane Holdings, Inc. Mr. Kovacevich, a director of the Company, is the CEO of Greenlane Holdings, Inc.
All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors.
NOTE 23 – GOING CONCERN
We have incurred significant losses in prior periods. For the year ended December 31, 2021, we incurred a pre-tax net loss from continuing operations of $42.18 million and, as of that date, we had an accumulated deficit of $250.02 million . For the year ended December 31, 2020, we incurred a net loss from continuing operations of $8.01 million and, as of that date, we had an accumulated deficit of $219.80 million. We expect to experience further significant net losses in 2022 and the foreseeable future. At December 31, 2021, we had a consolidated cash balance of approximately $6.89 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.
We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We are evaluating 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.
The issuance of additional securities may result in a significant dilution 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.
The risks and uncertainties surrounding our ability to continue to raise capital and our limited capital resources raise substantial doubt as to our ability to continue as a going concern for twelve months from the issuance of these financial statements.
NOTE 24 – SUBSEQUENT EVENTS
On January 21, 2022, the Company sold its land in Spanish Springs, Nevada for $0.45 million to an unrelated third party.
On February 1, 2022 the Company granted 294,452 shares Common Stock to Apollo Management Group, Inc. in exchange for the $50,000 Convertible Promissory Note that Apollo Management Group, Inc. held.
On February 8, 2022, the Company paid the outstanding principal and interest on the $1.05 million promissory note held by Michael Nahass. This payment satisfied the obligation and retired the note.
On February 10, 2022, the Company announced the successful closing of the sale of the Company’s non-operating real property and building located on Dyer Road in Santa Ana, CA (the “Dyer Property”) for $13.40 million. The sale results in the Company retiring $9.00 million of outstanding debt on the property. 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. Part of the $9.00 million of outstanding debt, that the Company retired in the Dyer property sale, was the $2.50 million promissory note held by Dominion Capital.
On February 12, 2022 the Company's shelf registration was declared effective by the SEC. The Company filed for a shelf registration renewal on Form S-3 with the SEC on September 17, 2021. Our existing registration statement was extended six months as the SEC reviewed our request. The registration statement will allow the Company to issue, from time to time at prices and on declared terms to be determined at or prior to the time of the offering, shares of our Common Stock, par value $0.001 per share, shares of our preferred stock, par value $0.001 per share (our “Preferred Stock”), debt securities, warrants, rights, or purchase contracts, either individually or in units, with a total value of up to $100.00 million.
On February 16, 2022, the Company received notice of forgiveness of a portion of its PPP loan. Approximately $542,000 of the $562,000 note was forgiven. The remainder is to be paid off over the next three years.
On February 23, 2022 Eric Baum became Chairman of the board of directors for the company, succeeding Nicholas Kovacevich. Mr. Kovacevich remains on the board of directors.
On February 28, 2022, the Company sold 25,000,000 shares for an aggregate sales price of $4,375,000 to Arthur Chan, an unrelated party. The shares were restricted.
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.
On March 10, 2022, the Company terminated the employment of Oren Schauble, the Company’s President. On March 10, 2022, the Company terminated the employment of Uri Kenig, the Company’s Chief Operating Officer, effective as of March 25, 2022. On March 13, 2022, the Company terminated the employment of Francis Knuettel II, the Company’s Chief Executive Officer. Mr. Knuettel will remain a director of the Company. The Company anticipates it will enter into separation agreements (each, a “Separation Agreement”) with each of Mr. Knuettel, Mr. Schauble, and Mr. Kenig regarding the compensation to be granted to each of them regarding their separation from the Company. In addition, the Company anticipates entering into a consulting agreement with Mr. Schauble (the “Schauble Consulting Agreement”) pursuant to which he will continue to provide certain services to the Company through a future agreed upon date. The Company intends to disclose the material terms of the Separation Agreements and the Schauble Consulting Agreement, as required by applicable law, at a later date after those agreements have been finalized and executed.
On March 13, 2022, the Company appointed Tiffany Davis, a director of the Company, as the interim Chief Executive Officer of the Company. Ms. Davis was most recently Chief Executive Officer and Chief Financial Officer of Generation Alpha, Inc. and prior to her appointment as Chief Executive Officer in October 2019, was Generation Alpha’s Chief Operating Officer from February 2018. The Company anticipates entering into a consulting agreement with Ms. Davis (the “Davis Consulting Agreement”) pursuant to which she will provide certain services to the Company through a future agreed upon date. The Company intends to disclose the material terms of the Davis Consulting Agreement, as required by
applicable law, at a later date after that agreement has been finalized and executed. Ms. Davis will remain a director of the Company
On March 17, 2022, the Company entered into a consulting agreement with Oren Schauble, formerly the Conpany's President. The company shall grant 910,623 restricted shares of the Company's Common Stock in four monthly installments. On April 5, 2022, the Company and Mr. Schauble agreed to terms on a separation agreement. The Company agreed to pay Mr. Schauble 50% of the Employee's base salary and continue his medical benefits for a period of six months.
On April 7, 2022, the Company sold its NuLeaf cultivation and production operations in Nevada for $6.50 million.
On April 11, 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) . The company will pay People's California, LLC $3 million upon execution of this amendment and $5 million in June of 2022. The remainder of the promissory note held by People's California, LLC shall be subordinated to a future debt facility. The promissory note becomes convertible to the Company's Common Stock at a yet to be agreed upon exercise price.
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 shall vest immediately. As part of this agreement Mr. Knuettel has 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 $83,333.30 in cash compensation. As part of this agreement Mr. Imbimbo has resigned as a director of the Company and as an Advisor to the company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| Unrivaled Brands, Inc. | |
| | | |
| Date: April 15, 2022 | By: | /s/ Tiffany Davis | |
| | Tiffany Davis | |
| | Chief Executive Officer and Director | |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Tiffany Davis and Jeffrey Batliner, and each of them, as his true and lawful attorney-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K of Unrivaled Brands, Inc. for the fiscal year ended December 31, 2021, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grant unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Power of Attorney has been signed by the following persons in the capacities and on the dates stated.
| | | | | | | | | | | |
| Date: April 15, 2022 | By: | /s/ Eric Baum | |
| | Eric Baum | |
| | Chairman of the Board | |
| | | |
| Date: April 15, 2022 | By: | /s/ Tiffany Davis | |
| | Tiffany Davis
Chief Executive Officer and Director
(Principal Executive Officer) | |
| | | |
| Date: April 15, 2022 | By: | /s/ Nicholas Kovacevich | |
| | Nicholas Kovacevich | |
| | Director | |
| | | |
| Date: April 15, 2022 | By: | /s/ Jeffrey Batliner | |
| | Jeffrey Batliner | |
| | Chief Financial Officer | |
CERTIFICATIONS
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Tiffany Davis, certify that:
1.I have reviewed this annual report on Form 10-K for the year ended December 31, 2021 of Unrivaled Brands, Inc..;
1.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
1.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
1.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
a.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
a.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
a.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
1.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: April 15, 2022 By: /s/ Tiffany Davis
Tiffany Davis
Chief Executive Officer and Director
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Jeffrey Batliner, certify that:
1.I have reviewed this annual report on Form 10-K for the year ended December 31, 2021 of Unrivaled Brands, Inc.;
1.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
1.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
1.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
a.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
a.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
a.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
1.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
a.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 15, 2022 By: /s/ Jeffrey Batliner
Jeffrey Batliner
Chief Financial Officer
EXHIBIT 32.1
Certifications of Chief Executive Officer
Pursuant to 1350 of Chapter 63 of Title 18 of the United States Code
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Unrivaled Brands, Inc. (the "Company") does hereby certify, to the best of such officer's knowledge, that:
a.The Annual Report on Form 10-K of the Company for the year ended December 31, 2021 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
1.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 15, 2022 By: /s/ Tiffany Davis
Tiffany Davis
Chief Executive Officer and Director
EXHIBIT 32.2
Certifications of Chief Financial Officer
Pursuant to 1350 of Chapter 63 of Title 18 of the United States Code
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of Unrivaled Brands, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
1.The Annual Report on Form 10-K of the Company for the year ended December 31, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
1.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 15, 2022 By: /s/ Jeffrey Batliner
Jeffrey Batliner
Chief Financial Officer
Unrivaled Brands (QB) (USOTC:UNRV)
Historical Stock Chart
From Mar 2024 to Apr 2024
Unrivaled Brands (QB) (USOTC:UNRV)
Historical Stock Chart
From Apr 2023 to Apr 2024
