Item 1A. Risk Factors
ITEM 1A. RISK FACTORS.
Investing in our Common Stock involves a high
degree of risk. You should carefully consider the following risks and all other information contained in this Form 10-K, including our
consolidated financial statements and the related notes, before investing in our Common Stock. The risks and uncertainties described below
are not the only ones we face, but include the most significant factors currently known by us that make investing in our Common Stock
speculative or risky. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may
become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations
could be materially harmed. In that case, the trading price of our Common Stock could decline, and you may lose some or all of your investment.
Risks Related to Our Business and Industry
We have a limited operating history in an
evolving industry, which makes it difficult to accurately assess our future growth prospects.
We operate in an evolving industry that may not
develop as expected. Furthermore, our operations continue to evolve under our business plan as we continually assess new strategic opportunities
for our business within our industry. Assessing the future prospects of our business is challenging considering both known and unknown
risks and difficulties we may encounter. Growth prospects in our industry can be affected by a wide variety of factors including:
● Competition from other similar companies;
● Regulatory limitations on the products we can offer and markets we can serve;
● Other changes in the regulation of medical and recreational cannabis use;
● Changes in underlying consumer behavior, which may affect the business of our customers;
● Our ability to access adequate financing on reasonable terms and our ability to raise additional capital
to fund our operations;
● Challenges with new products, services, and markets; and
● Fluctuations in the credit markets and demand for credit.
We may not be able to successfully address these
factors, which could negatively impact our growth, harm our business, and cause our operating results to be worse than expected.
We have a history of losses and may not
achieve profitability in the future.
We generated net losses of approximately $7.1
million and $9.5 million, respectively, in the years ended December 31, 2023 and 2022. As of December 31, 2023, we had an accumulated
deficit of approximately $100.5 million. We will need to generate and sustain increased revenues in future periods to become profitable,
and, even if we do, we may not be able to maintain or increase any such level of profitability.
As we grow, we expect to continue to expend substantial
financial and other resources on:
● personnel, including significant increases to the total compensation we pay our employees as we grow our
employee headcount;
● expenses relating to increased marketing efforts;
● strategic acquisitions of businesses and real estate; and
● general administration, including legal, accounting, and other compliance expenses related to being a
public company.
These expenditures are expected to increase and
may adversely affect our ability to achieve and sustain profitability as we grow. Our efforts to grow our business may also be more costly
than we expect, and we may not be able to increase our revenues enough to offset our higher operating expenses. We may incur losses in
the future for several reasons, including the other risks described in this Report, unforeseen expenses, difficulties, complications and
delays, and other unknown events. If we are unable to achieve and sustain profitability, the market price of our Common Stock may significantly
decrease.
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Cannabis remains illegal under federal law,
and any change in the enforcement priorities of the federal government could render our current and planned future operations unprofitable
or even prohibit such operations.
The cultivation, manufacture, distribution, and
possession of marijuana continues to be illegal under U.S. federal law. The Supremacy Clause of the United States Constitution establishes
that the US Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and state law, the
federal law must be applied. Accordingly, federal law applies even in those states in which the use of marijuana has been legalized. Enforcement
of federal law regarding marijuana would harm our business, prospects, results of operation, and financial condition.
The United States federal government regulates
drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, on one of
five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for
abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances,
and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”).
Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend its use under the First
Amendment.
Currently, numerous U.S. states, the District
of Columbia and U.S. territories have legalized cannabis for medical and/or recreational adult use. Such state and territorial laws conflict
with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled
substance, however, the development of a legal cannabis industry under the laws of these states conflicts with the CSA, which makes cannabis
use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right
to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts
state laws that legalize its use. We would likely be unable to execute our business plan if the federal government were to strictly enforce
federal law regarding cannabis.
Considering such conflict between federal laws
and state laws regarding cannabis, the administration under President Obama had effectively stated that it was not an efficient use of
resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use
and distribution of medical cannabis. For example, the DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued
a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning
cannabis enforcement under the CSA (see “Business—Government and Industry Regulation—The Cole Memo”). In addition,
the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines on February 14, 2014, regarding how financial institutions
can provide services to cannabis-related businesses consistent with their Bank Secrecy Act obligations (see “Business—Government
and Industry Regulation—FinCEN”).
Congress previously enacted an omnibus spending
bill that included a provision (the “Rohrabacher-Blumenauer Amendment”) prohibiting the DOJ from using funds to prevent states
with medical cannabis laws from implementing such laws. This provision is renewed annually by Congress and is current through September
30, 2023. In August 2016, a Ninth Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Blumenauer
Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that
such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access,
Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical
use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule
II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses.
More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to
exclude persons who produce, possess, distribute, dispense, administer, or deliver marijuana in compliance with state laws from the regulatory
controls and administrative, civil, and criminal penalties of the CSA.
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These developments previously were met with a
certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have
yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually,
has not currently been renewed beyond March 11, 2022, and (iii) the ruling in United States v. McIntosh is only applicable precedent
in the Ninth Circuit, which does not include Colorado, the state where we currently primarily operate.
Furthermore, on January 4, 2018, former U.S. Attorney
General, Jeff Sessions, issued a memorandum for all U.S. Attorneys (the “Sessions Memo”) stating that the Cole Memo was rescinded
effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that
govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant
considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent
effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The Sessions Memo went on to state
that given the DOJ’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary
and is rescinded, effective immediately.”
In response to the Sessions Memo, U.S. Attorney
Bob Troy for the District of Colorado, the state in which our principal business operations are presently located, issued a statement
on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles
referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats
to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach
in all our work with our law enforcement partners throughout Colorado.”
It is unclear at this time whether the Sessions
Memo will be rescinded by the Biden administration, and/or the Cole Memo reinstated; nor is it clear whether the Biden administration
will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. US Attorney
General Merrick Garland has indicated his desire to reinstitute a version of the Cole Memo; however, this has not yet occurred. Any significant
change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant
financial damage to us. We may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature
of such change. As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and
dispensary facilities. As a result, strict enforcement of federal prohibitions regarding cannabis could subject the Company to criminal
prosecution.
Additionally, financial transactions involving
proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed
money transmitter statutes and the Bank Secrecy Act. Prior to the DOJ’s rescission of the “Cole Memo”, supplemental guidance
from the DOJ issued under the Obama administration directed federal prosecutors to consider the federal enforcement priorities enumerated
in the “Cole Memo” when determining whether to charge institutions or individuals with any of the financial crimes described
above based upon cannabis-related activity. It is unclear what impact the recent rescission of the “Cole Memo” will have,
but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions
related to cannabis activities.
Additionally, as we are always assessing potential
strategic acquisitions of new businesses, we may in the future also pursue opportunities that include growing and/or distributing medical
or recreational cannabis, should we determine that such activities are in the best interest of the Company and our stockholders. Any such
pursuit would involve additional risks with respect to the regulation of cannabis, particularly if the federal government determines to
strictly enforce all federal laws applicable to cannabis.
Federal prosecutors have significant discretion,
and no assurance can be given that the federal prosecutor in each judicial district where we operate our business will not choose to strictly
enforce the federal laws governing cannabis production or distribution. Any change in the federal government’s enforcement posture with
respect to state-licensed cultivation of medical-use cannabis, including the enforcement postures of individual federal prosecutors in
judicial districts where we purchase properties, would result in our inability to execute our business plan, and we would likely suffer
significant losses, which would adversely affect the trading price of our securities. Furthermore, following any such change in the federal
government’s enforcement position, we could be subject to criminal prosecution, which could lead to imprisonment and/or the imposition
of penalties, fines, or forfeiture.
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The potential regulation of cannabis by
the US Food and Drug Administration could subject us to additional costs and regulatory requirements.
Should the federal government legalize cannabis,
it is possible that the US Food and Drug Administration (FDA), would seek to regulate it under the Food, Drug and Cosmetics Act of
1938. Additionally, the FDA may issue rules and regulations including good manufacturing practices, related to the growth, cultivation,
harvesting and processing of medical cannabis. Clinical trials may be needed to verify efficacy and safety. It is also possible that the
FDA would require that facilities where medical-use cannabis is grown register with the FDA and comply with certain federally prescribed
regulations. If some or all of these regulations are imposed, the impact they would have on the cannabis industry is unknown, including
what costs, requirements and possible prohibitions may be enforced. If we are unable to comply with the regulations or registration as
prescribed by the FDA it may have an adverse effect on our business, operating results, and financial condition.
Any potential growth in the cannabis industry
continues to be subject to new and changing state and local laws and regulations.
Continued development of the cannabis industry
is dependent upon continued legislative legalization of cannabis at the state level, and a number of factors could slow or halt progress
in this area, even where there is public support for legislative action. Any delay or halt in the passing or implementation of legislation
legalizing cannabis use, or its cultivation, sale and distribution, or the re-criminalization or restriction of cannabis at the state
level could negatively impact our business. Additionally, changes in applicable state and local laws or regulations, including zoning
restrictions, permitting requirements, and fees, could restrict the products and services we offer or impose additional compliance costs
on us or our customers and tenants. Violations of applicable laws, or allegations of such violations, could disrupt our business and result
in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations, or applications,
and it is possible that regulations may be enacted in the future that will have be material adverse effects on our business.
Our business, results of operations and
financial condition may be adversely affected by pandemic infectious diseases, particularly COVID-19.
Pandemic infectious diseases, such as COVID-19
and its variants, such as Omicron, may adversely impact our business, consolidated results of operations and financial condition. The
global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent to which COVID-19 impacts
our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict,
including: the duration and scope of the pandemic; governmental, business, and individuals’ actions that have been and continue
to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on
our customers and customer demand our services, products, and solutions; our ability to sell and provide its services and solutions, including
as a result of travel restrictions and people working from home; the ability of our customers to pay for our services and solutions; and
any closures of our offices and the offices and facilities of our customers. COVID-19, as well as measures taken by governmental
authorities to limit the spread of this virus, may interfere with the ability of our employees, suppliers, and other business providers
to carry out their assigned tasks or supply materials or services at ordinary levels of performance relative to the requirements of our
business, which may cause us to materially curtail certain of our business operations. We require additional funding and such funding,
may not be available to us because of contracting capital markets resulting from the COVID-19 pandemic. Any of these events could materially
adversely affect our business, financial condition, results of operations and/or stock price.
The cannabis industry faces significant
opposition, and any negative trends will adversely affect our business operations.
We are substantially dependent on the continued
market acceptance, and the proliferation of consumers, of medical and recreational cannabis. We believe that with further legalization,
cannabis will become more accepted, resulting in growth in consumer demand. However, we cannot predict the future growth rate or future
market potential, and any negative outlook on the cannabis industry may adversely affect our business operations.
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The recreational cannabis industry is highly dependent
upon consumer perception regarding the safety, efficacy and quality of the recreational cannabis produced. Cannabis is a controversial
topic, and consumer perception of our products may be significantly influenced by scientific research or findings, regulatory investigations,
litigation, media attention and other publicity regarding the consumption of recreational cannabis products. There can be no assurance
that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity
will be favorable to the recreational cannabis market or any particular product, or consistent with earlier publicity. Future research
reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or
that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and
our business, results of operations, financial condition, and cash flows. Dependence upon consumer perceptions means that adverse scientific
research reports, findings, regulatory proceedings, litigation, media attention or other publicity, regardless of accuracy or merit, could
have a material adverse effect on our business and results of operations. Further, adverse publicity reports or other media attention
regarding the safety, efficacy, and quality of recreational cannabis in general, or our products specifically, or associating the consumption
of recreational cannabis with illness or other negative effects or events, could have such a material adverse effect. Such adverse publicity
reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’
failure to consume such products appropriately or as directed.
Large, well-funded business sectors may have strong
economic reasons to oppose the development of the cannabis industry. For example, medical cannabis may adversely impact the existing market
for the current “cannabis pill” sold by mainstream pharmaceutical companies. Should cannabis displace other drugs or products,
the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong
and experienced lobby. Any inroads the pharmaceutical, or any other potentially displaced, industry or sector could make in halting or
impeding the cannabis industry could have a detrimental impact on our business.
We operate an agricultural business and
retail stores and are subject to weather and climate conditions.
Our business involves the growing of recreational
cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects,
plant diseases and similar agricultural risks. Further, to the extent that our products are grown outside, we are subject to weather and
climate conditions. Extended cold streaks, rain or snow, or generally cold weather or climate, could materially adversely affect our cannabis
plants. Accordingly, there can be no assurance that natural elements will not have a material adverse effect on any future production
of our products. Further, weather events can impact the ability of our retail stores to remain open and the ability of retail customers
to visit our retail locations.
We operate in a highly competitive industry.
The markets for ancillary businesses in the medical
marijuana and recreational marijuana industries are competitive and evolving. There is no material aspect of our business that is protected
by patents, copyrights, trademarks, or trade names, and we face strong competition from larger companies that may offer similar products
and services to ours. Many of our current and potential competitors have longer operating histories, significantly greater financial,
marketing and other resources, and larger client bases than us, and there can be no assurance that we will be able to successfully compete
against these or other competitors.
Given the rapid changes affecting the global,
national, and regional economies generally and the medical marijuana and recreational marijuana industries, specifically, we may not be
able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to keep pace with any changes
in our markets, particularly, legal, and regulatory changes. Our success will also depend on our ability to respond to, among other things,
changes in the economy, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes
could have a material adverse effect on our financial condition and results of operations.
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Unfavorable tax treatment of cannabis businesses
Under Section 280E of the United States Internal
Revenue Code of 1986 as amended (“ Section 280E ”), “no deduction or credit shall be allowed for any amount paid
or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such
trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances
Act) which is prohibited by Federal law or the law of any state in which such trade or business is conducted.” This provision has
been applied by the U.S. Internal Revenue Service to cannabis operations, prohibiting them from deducting expenses directly associated
with the sale of cannabis. Although the IRS issued a clarification allowing the deduction of certain expenses that can be categorized
as cost of sales, the scope of such items is interpreted very narrowly and include the cost of seeds, plants, and labor related to cultivation,
while the bulk of operating costs and general administrative costs are not permitted to be deducted. Section 280E therefore has a significant
impact on the retail side of cannabis, but a lesser impact on cultivation, processing, production, and packaging operations. A result
of Section 280E is that an otherwise profitable business may, in fact, operate at a loss, after taking into account its U.S. income tax
expenses.
We
may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability.
We have federal and state net operating loss carryforwards that may be
limited or expire unused. Any such limitation or expiration could materially affect our ability to offset future tax liabilities with
net operating losses.
We may be unable to obtain capital to execute our business plan.
To execute on our business plan, we will need
additional capital. However, there can be no assurance that we will be able to obtain financing on agreeable terms, if at all, and any
future sale of our equity securities will dilute the ownership of our existing stockholders and could be at prices substantially below
the price of the shares of Common Stock sold in the past. If we are unable to obtain the necessary capital, we may need to delay the implementation
of or curtail our business plan.
We face risks associated with strategic
acquisitions and our business strategy.
As an important part of our roll-up business strategy,
we strategically acquire businesses and real property, some of which may be material. These acquisitions involve a number of financial,
accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely
affect our results of operations:
● The applicable restrictions on the cannabis industry and its participants limit the number of available
suitable businesses and real properties that we can acquire;
● Any acquired business or real property could under-perform relative to our expectations and the price
that we paid for it, or not perform in accordance with our anticipated timetable;
● We may incur or assume significant debt in connection with our acquisitions;
● Acquisitions could cause our results of operations to differ from our own or the investment community’s
expectations in any given period, or over the long term; and
● Acquisitions could create demands on our management that we may be unable to effectively address, or for
which we may incur additional costs.
Additionally, following any business acquisition,
we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers.
We may record goodwill and other intangible assets
on our consolidated balance sheet in connection with our acquisitions. If we are not able to realize the value of these assets, we may
be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.
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Our ability to grow our business depends
on state laws pertaining to the cannabis industry.
Continued development of the cannabis industry
depends upon continued legislative authorization of cannabis at the state level. The status quo of, or progress in, the cannabis industry
is not assured, and any number of factors could slow or halt further progress in this area. While there may be ample public support for
legislative action permitting the manufacture and use of cannabis, numerous factors impact the legislative process. For example, many
states that voted to legalize medical and/or adult-use cannabis have seen significant delays in the drafting and implementation of industry
regulations and issuance of licenses. In addition, burdensome regulation at the state level could slow or stop further development of
the medical-use cannabis industry, such as limiting the medical conditions for which medical cannabis can be recommended by physicians
for treatment, restricting the form in which medical cannabis can be consumed, imposing significant registration requirements on physicians
and patients or imposing significant taxes on the growth, processing and/or retail sales of cannabis, which could have the impact of dampening
growth of the cannabis industry and making it difficult for cannabis businesses, including our tenants, to operate profitably in those
states. Any one of these factors could slow or halt additional legislative authorization of cannabis, which could harm our results of
operations, business, and prospects.
Applicable state laws may prevent us from
maximizing our potential income.
Depending on the laws of each particular state,
we may not be able to fully realize our potential to generate profit. For example, some states have residency requirements for those directly
involved in the cannabis industry, which may impede our ability to contract with cannabis businesses in those states. Furthermore, cities
and counties are being given broad discretion to ban certain cannabis activities. Even if these activities are legal under state law,
specific cities and counties may ban them.
Assets used in conjunction with cannabis businesses may be forfeited
to the federal government.
Any assets used in conjunction with the violation
of federal law are potentially subject to federal forfeiture, even in states where cannabis is legal. In July 2017, the U.S. Department
of Justice issued a new policy directive regarding asset forfeiture, referred to as the “equitable sharing program.” Under this
new policy directive, federal authorities may adopt state and local forfeiture cases and prosecute them at the federal level, allowing
for state and local agencies to keep up to 80% of any forfeiture revenue. This policy directive represents a reversal of the U.S. Department
of Justice’s policy under the Obama administration and allows for forfeitures to proceed that are not in accord with the limitations imposed
by state-specific forfeiture laws. This new policy directive may lead to increased use of asset forfeitures by local, state, and federal
enforcement agencies. If the federal government decides to initiate forfeiture proceedings against cannabis businesses, our investment
in those businesses may be lost.
Our operating locations could be targets for theft and our physical
security measures may not prevent all security breaches
Our operating locations could be targets for theft.
While we have implemented security measures at our operating locations and we continue to monitor and improve security measures, our cultivation
and processing facilities could be subject to break-ins, robberies, and other breaches in security. If there is a breach in security and
we fall victim to a robbery or theft, the loss of cannabis plants, cannabis oils, cannabis flowers and cultivation and processing equipment
could have a material adverse impact on our business, financial condition, and results of operations.
To the extent that our business involves the movement
and transfer of cash which is collected from locations and deposited into financial institutions, there is a risk of theft or robbery
during the transport of cash. We may engage a security firm to provide security in the transport and movement of large amounts of cash.
While we have taken steps to prevent theft or robbery of cash during transport, there can be no assurance that there will not be a security
breach during the transport and the movement of cash involving the theft of product or cash.
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Our future success depends on our ability
to grow and expand our customer base and operational territory.
Our success and the planned growth and expansion
of our business depend on our products and services achieving greater and broader acceptance, resulting in a larger customer base, and
on the expansion of our operations into new markets. However, there can be no assurance that customers will purchase our products and/or
services, or that we will be able to continually expand our customer base. Additionally, if we are unable to effectively market or expand
our product and/or service offerings, we will be unable to grow and expand our business or implement our business strategy.
Operating in new markets may expose us to new
operational, regulatory, or legal risks and subject us to increased compliance costs. We may need to modify our existing business model
and cost structure to comply with local regulatory or other requirements. Facilities we open in new markets may take longer to reach expected
revenue and profit levels on a consistent basis, may have higher construction, occupancy, or operating costs, and may present different
competitive conditions, consumer preferences and spending patterns than we anticipate. Any of the above could materially impair our ability
to increase sales and revenue.
We and our existing and potential customers,
clients, and tenants have difficulty accessing the service of banks, which may make it difficult for them to operate.
Financial transactions involving proceeds generated
by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter
statute and the Bank Secrecy Act. Previous guidance issued by the FinCen, a division of the U.S. Department of the Treasury, clarifies
how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy
Act. Prior to the DOJ’s announcement in January 2018 of the rescission of the Cole Memo and related memoranda, supplemental guidance
from the DOJ directed federal prosecutors to consider the federal enforcement priorities enumerated in the Cole Memo when determining
whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. It
is unclear what impact the recent rescission of the “Cole Memo” will have, but federal prosecutors may increase enforcement
activities against institutions or individuals that are conducting financial transactions related to cannabis activities. The increased
uncertainty surrounding financial transactions related to cannabis activities may also result in financial institutions discontinuing
services to the cannabis industry.
Because the use, sale, and distribution of cannabis
remains illegal under federal law, many banks will not accept deposits from or provide other bank services to businesses involved with
cannabis. Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships,
which may increase over time. Our inability to maintain our current bank accounts would make it difficult for us to operate our business,
increase our operating costs, and pose additional operational, logistical and security challenges and could result in our inability to
implement our business plan. Furthermore, the inability to open bank accounts may make it difficult for our existing and potential customers,
clients, and tenants to operate and may make it difficult for them to contract with us.
Conditions in the economy, the markets we
serve, and the financial markets generally may adversely affect our business and results of operations.
Our business is sensitive to general economic
conditions. We believe that the state of global economic conditions is particularly uncertain due to recent and expected shifts in political,
legislative, and regulatory conditions concerning, among other matters, international trade and taxation, and the impact of recent or
future natural disasters and/or health and safety epidemics, including the outbreak of COVID-19. An uneven recovery or a renewed global
downturn may put pressure on our sales due to reductions in customer demand as well as customers deferring purchases. Slower economic
growth, volatility in the credit markets, high levels of unemployment, and other challenges that affect the economy adversely could affect
us and our customers and suppliers. If growth in the economy or in any of the markets we serve slows for a significant period, if there
is a significant deterioration in the economy or such markets or if improvements in the economy do not benefit the markets we serve, our
business and results of operations could be adversely affected.
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We depend on our management, certain key
personnel, and board of directors, as well as our ability to attract, retain and motivate qualified personnel.
Our future success depends largely upon the experience,
skill, and contacts of our key personnel, officers and directors, and the loss of the services of these key personnel, officers, or directors,
particularly our chief executive officer and chairman of our board of directors, may have a material adverse effect upon our business.
Additionally, our revenues are largely driven by several employees with particular expertise in cannabis retail and operations. If one
of these key employees were to leave, it would negatively impact our short and long-term results from operations. Shortages in qualified
personnel could also limit our ability to successfully implement our growth plan. As we grow, we will need to attract and retain highly
skilled experts in the cannabis industry, as well as managerial, sales and marketing, and finance personnel. There can be no assurance,
however, that we will be able to attract and retain such personnel.
Our reputation and ability to do business
may be negatively impacted by the improper conduct by our business partners, employees, or agents.
We depend on third party suppliers to produce
and timely ship our orders. Products purchased from our suppliers are resold to our customers. These suppliers could fail to produce products
to our specifications or quality standards and may not deliver units on a timely basis. Any changes in our suppliers to resolve production
issues could disrupt our ability to fulfill orders. Any changes in our suppliers to resolve production issues could also disrupt our business
due to delays in finding new suppliers.
Furthermore, we cannot provide assurance that
our internal controls and compliance systems will always protect us from acts committed by our employees, agents, or business partners
in violation of U.S. federal or state laws. Any improper acts or allegations could damage our reputation and subject us to civil or criminal
investigations and related shareholder lawsuits, could lead to substantial civil and criminal monetary and non-monetary penalties, and
could cause us to incur significant legal and investigatory fees.
Due to our involvement in the cannabis industry, we may have
difficulty obtaining various insurance policies that are desired to operate our business, which may expose us to additional risks and
financial liabilities.
Insurance that is otherwise readily available, such as workers’
compensation, general liability, and directors’ and officers’ insurance, is more difficult for us to find and more expensive,
because of our involvement in the cannabis industry. There are no guarantees that we will be able to find such insurance in the future,
or that the cost will be affordable to us. If we are forced to go without such insurance, it may prevent us from entering certain business
sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities. Moreover, insurance against risks such
as environmental pollution or other hazards encountered in our operations is not generally available on acceptable terms. We might also
become subject to liability for pollution or other hazards which may not be insured against or which we may elect not to insure against
because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material
adverse effect upon its financial performance and results of operations.
We may be subject to product liability claims
We face an inherent risk of exposure to product liability claims, regulatory
action, and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of our products would
involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse
reactions resulting from human consumption of marijuana alone or in combination with other medications or substances could occur. We may
be subject to various product liability claims, including, among others, that our products caused injury or illness or death, include
inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.
A product liability claim or regulatory action against us could result in increased costs, could adversely affect our reputation with
its clients and consumers generally, and could have a material adverse effect on our business, results of operations and financial condition.
There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms or with adequate
coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at
all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of our current or potential products.
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A cybersecurity incident and other technology
disruptions could result in a violation of law or negatively impact our reputation and relationships, our business operations, and our
financial condition.
Information and security risks have generally
increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber-attacks.
We use computers in substantially all aspects of our business operations, and we also use mobile devices and other online activities to
connect with our employees, customers, tenants, suppliers, and other parties. Such uses give rise to cybersecurity risks, including the
risk of security breaches, espionage, system disruption, theft, and inadvertent release of information. Our business involves the storage
and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including employees’,
customers’, tenants’ and suppliers’ personally identifiable information and financial and strategic information about
us.
If we fail to adequately assess and identify cybersecurity
risks associated with our business operations, we may become increasingly vulnerable to such risks. Even the most well protected information,
networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve
and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may
not be detected. Accordingly, we, our customers and our suppliers may be unable to anticipate these techniques or to implement adequate
security barriers or other preventative measures, and thus it is impossible for us, our customers, and our suppliers to entirely mitigate
this risk. Further, in the future we may be required to expend additional resources to continue to enhance information security measures
and/or to investigate and remediate any information security vulnerabilities. We can provide no assurances that the measures we have implemented
to prevent security breaches and cyber incidents will be effective in the event of a cyber-attack.
The theft, destruction, loss, misappropriation
or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems
or the technology systems of third-parties on which we rely, could result in business disruption, negative publicity, violation of privacy
laws, loss of tenants, loss of customers, potential liability and competitive disadvantage, any of which could result in a material adverse
effect on financial condition or results of operations.
We may be required to recognize impairment
charges that could materially affect our results of operations.
We assess our intangible assets, and our other
long-lived assets as and when required by GAAP to determine whether they are impaired. If they are impaired, we would record appropriate
impairment charges. It is possible that we may be required to record significant impairment charges in the future and, if we do so, our
results of operations could be materially adversely affected.
Changes in accounting standards could affect
our reported financial results.
Our management uses significant judgment, estimates,
and assumptions in applying GAAP. New accounting standards that may be applicable to our financial statements, or changes in the interpretation
of existing standards, could have a significant effect on our reported results of operations for the affected periods.
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Risks Related to the Securities Markets and Ownership of Our Common
Stock
The price of our Common Stock is volatile and the value of your
investment could decline.
The market price of our Common Stock has been,
and may in the future, be volatile. Between January 1, 2015, and December 31, 2023, the closing price of our Common Stock has ranged
from a low of $ 0.05 per share to a high of $10.35 per share. Accordingly, it is difficult to forecast the future performance of our Common
Stock. The market price of our Common Stock may be higher or lower than the price you pay, depending on many factors, some of which are
beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your
investment in our Common Stock. Factors that could cause fluctuations in the trading price of our Common Stock include the following:
● regulatory developments at the federal, state or local level;
● announcements of new products, services, relationships with strategic partners, acquisitions, or other
events by us or our competitors;
● changes in general economic conditions;
● price and volume fluctuations in the overall stock market from time to time;
● significant volatility in the market price and trading volume of similar companies in our industry;
● fluctuations in the trading volume of our shares or the size of our public float;
● actual or anticipated changes in our operating results or fluctuations in our operating results;
● major catastrophic events;
● sales of large blocks of our stock; or
● changes in senior management or key personnel.
In addition, if the market for cannabis company
stocks or the stock market in general experiences loss of investor confidence, the trading price of our Common Stock could decline for
reasons unrelated to our business, operating results, or financial condition. The trading price of our Common Stock might decline in reaction
to events that affect other companies in our industry, even if these events do not directly affect us. In the past, following periods
of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that
company. If our stock price continues to be volatile, we may become the target of securities litigation, which could result in substantial
costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business,
operating results, and financial condition.
Trading and listing of securities of cannabis
related businesses, including our Common Stock, may be subject to restrictions.
In the United States, many clearing houses for
major broker-dealer firms, including Pershing LLC, the largest clearing, custody, and settlement firm in the United States, have refused
to handle securities or settle transactions of companies engaged in cannabis related business. This means that certain broker-dealers
cannot accept for deposit or settle transactions in the securities of cannabis related businesses. Further, national securities
exchanges in the United States, including Nasdaq and the New York Stock Exchange, have historically refused to list cannabis related businesses,
including cannabis retailers, that operate primarily in the United States; there is no indication that this proscription will change any
time soon. Accordingly, we continue to be listed on the OTCQB, which as an over-the-counter market, is subject to greater volatility
and less stability than would be the case on a national securities exchange. Our existing operations, and any future operations or investments,
may become the subject of heightened scrutiny by clearing houses and stock exchanges, in addition to regulators and other authorities
in the United States. Any existing or future restrictions imposed by Pershing LLC, or any other applicable clearing house, stock
exchange or other authority, on trading in our Common Stock could have a material adverse effect on the liquidity of our Common Stock.
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We do not intend to pay dividends for the foreseeable future.
We do not currently anticipate paying dividends
in the foreseeable future. The payment of dividends on our Common Stock will depend on our earnings and financial condition, as well as
on other business and economic factors affecting our business, as our board of directors may consider relevant. Our current intention
in the foreseeable future is to apply net earnings, if any, to increasing our capital base and our development and marketing efforts.
There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our Common Stock and,
in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors. As a result, you may only receive
a return on your investment in our Common Stock if the market price of our Common Stock increases compared to the price at which you purchased
our Common Stock, which may never occur.
Were our Common Stock to be considered penny
stock, and therefore become subject to the penny stock rules, U.S. broker-dealers may be discouraged from effecting transactions in shares
of our Common Stock.
Broker-dealers are generally prohibited from effecting
transactions in “penny stocks” unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of
1934 (the “Exchange Act”) and the rules promulgated thereunder. These rules apply to the stock of companies whose shares are
not traded on a national stock exchange, trade at less than $5.00 per share or who do not meet certain other financial requirements specified
by the Securities and Exchange Commission (the “SEC”). Trades in our Common Stock are subject to these rules, which include
Rule 15g-9 under the Exchange Act, which imposes certain requirements on broker/dealers who sell securities subject to the rule to persons
other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special written
determination that the penny stock is a suitable investment for purchasers of the securities and receive the purchaser’s written
agreement to the transaction prior to sale.
The penny stock rules also require a broker/dealer,
prior to effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document
prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. A broker/dealer
also must provide the customer with current bid and offer quotations for the relevant penny stock and information on the compensation
of the broker/dealer and its salesperson in the transaction. A broker/dealer must also provide monthly account statements showing the
market value of each penny stock held in a customer’s account. The bid and offer quotations, and the broker/dealer and salesperson
compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the
customer in writing before or with the customer’s confirmation.
Our securities have in the past constituted “penny
stock” within the meaning of the rules. Were our Common Stock to again be considered penny stock, and therefore become subject to
the penny stock rules, the additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such
broker-dealers from effecting transactions in shares of our Common Stock, which could severely limit the market liquidity of such shares
and impede their sale in the secondary market.
Our stockholders may experience significant
dilution.
We have a significant number of warrants and options
to purchase our Common Stock outstanding, the exercise of which would be dilutive to stockholders. In certain instances, the exercise
prices are subject to adjustment if we issue or sell shares of our Common Stock or equity-based instruments at a price per share less
than the exercise price then in effect. In such case, both the issuance and the adjustment would be dilutive to stockholders.
We may from time to time finance our future operations
or acquisitions through the issuance of equity securities, which securities may also have rights and preferences senior to the rights
and preferences of our Common Stock. We may also grant options to purchase shares of our Common Stock to our directors, employees, and
consultants, the exercise of which would also result in dilution to our stockholders.
We have incurred and will continue to incur
increased costs due to operating as a public company, and our management will be required to devote substantial time to new compliance
initiatives and corporate governance practices.
As a public company we have incurred, and particularly
after we are no longer a smaller reporting company, we will continue to incur significant legal, accounting, and other expenses that we
did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the
listing requirements of the OTCQB Market and other applicable securities rules and regulations impose various requirements on public companies,
including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management
and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations
will increase our legal and financial compliance costs, particularly as we hire additional financial and accounting employees to meet
public company internal control and financial reporting requirements and will make some activities more time-consuming and costly.
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We are evaluating these rules and regulations
and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are
often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to Section 404, we will be required
to furnish a report by our management on our internal control over financial reporting. However, while we remain a smaller reporting company
with less than $100 million in revenue, we will not be required to include an attestation report on internal control over financial reporting
issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period,
we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging.
In this regard, we will need to continue to dedicate internal resources, including through hiring additional financial and accounting
personnel, potentially engage outside consultants, and adopt a detailed work plan to assess and document the adequacy of internal control
over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning
as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our
efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over
financial reporting is effective as required by Section 404. If we identify one or more material weaknesses in our internal control
over financial reporting, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements.