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Item 1A. Risk Factors

2023-03-31 compared with 2022-03-31 · 235 added, 286 removed, 807 unchanged (39% of the section changed)

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Risks Related to Our Business and Industry

Due to our low cash balance and negative cash flow, unless we raise additional capital we may have to further reduce our costs by curtailing future operations to continue as a business, and substantial doubt may be raised about our ability to continue as a going concern.

Global economic conditions, including inflation and supply chain disruptions, could materially and adversely our business, prospects, results of operations, financial condition, or cash flows.

Our business and operations are sensitive to global economic conditions.

General global economic downturns and macroeconomic trends, including heightened inflation, volatility in the capital markets, interest rate and currency rate fluctuations, the ongoing war in Ukraine, and economic slowdown or recession, may result in unfavorable conditions that could negatively affect demand for our products and exacerbate some of the other risks that affect our business, financial condition and results of operations.

Both domestic and international markets experienced significant inflationary pressures in 2022 and inflation rates in the U.S.

are currently expected to continue at elevated levels for the near-term.

In addition, the Federal Reserve has raised, and is expected to continue to raise, interest rates in response to concerns about inflation, which, coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks.

Interest rate increases or other government actions taken to reduce inflation could also result in an economic recession.

A material decline in the economic conditions affecting consumers, which results in a reduction in disposable income for the average consumer, may change consumption patterns, and may result in a reduction in spending on vaporization products and consumption accessories or a switch to cheaper products or products obtained through illicit channels.

Many of our products are relatively new to the market and may be regarded by consumers as a novelty item and expendable.

As such, demand for our vaporizer products may be particularly sensitive to economic conditions such as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment and other factors beyond our control, any combination of which could result in a material adverse effect on our business, results of operations and financial condition.

Our ability to fund our capital requirements will depend on many factors, and if we are unsuccessful in increasing sales and generating positive cash flows we may have to further reduce our costs by curtailing future operations to continue as a business.

Our ability to fund our capital requirements out of our available cash and cash generated from our operations in the future will depend on many factors, but largely on our ability to (i) increase sales of our products, (ii) raise capital on favorable terms, and (iii) generate positive cash flow and/or profits from our operations.

It is possible that we may not be able to find financing in the capital markets or from lenders on acceptable terms or at all in the future.

If we are not successful in generating needed funds from operations or in equity or debt capital raising transactions, we may need to further reduce our costs, which measures could include selling or consolidating certain operations or assets, and delaying, canceling or scaling back product development and marketing programs.

In March 2022, we announced a reduction in headcount and our intent to pursue certain other cost saving initiatives, conducting a sale leaseback of our headquarters, discontinuing lower-margin sales, raising prices and securing an asset backed loan.

We can provide no assurances that we will be successful in executing such cost saving measures or that such cost-saving measures will be sufficient even if successfully effected.

These measures could materially and adversely affect our ability to operate profitably.

In addition, our low cash balance and negative cash flow may cause an inability to pay our vendors on time, purchase all the inventory we need, and meet various other obligations going forward.

Also, if we are not successful in generating funds from operations or from capital raising transactions, substantial doubt may be raised about our status as a going concern.

We will likely be required to seek additional financing sources, which may not be available to us on attractive terms if at all and could restrict our ability to engage in certain business activities .

Because we have not had access to the debt markets on attractive terms, we have been required to issue equity under our at-the-market offering program (“ATM Program”) at prices that are dilutive to stockholders.

If we are required to seek additional financing sources, they may not be available to us on attractive terms if at all and could restrict our ability to engage in certain business activities .

Due to limited access to the debt markets, we have been required to issue equity under our at-the-market offering program (“ATM Program”) at prices that are dilutive to stockholders.

We may be forced to continue to seek equity capital at dilutive prices through our ATM Program or otherwise if other financing is not available to us to fund our working capital needs.

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As a result, indebtedness or other forms of financing may not be available to us on attractive terms or at all.

For example and as described in greater detail below, in December 2021 following negotiation with traditional financial institutions, we elected to enter into a Secured Promissory Note with Aaron LoCascio, our co-founder, former Chief Executive Officer and President, and a current director of the Company, in which Mr.

LoCascio agreed to provide us with an $8.0 million bridge loan at a simple interest rate of 15.0% (the “Bridge Loan”).

Furthermore, we may have to seek financing from non-traditional sources such as private equity and hedge funds, which may require us to give up significant governance or other rights or agree to economic and other terms that are not favorable.

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• require us to satisfy minimum financial coverage ratios, minimum net worth requirements, maximum leverage ratios, or other financial covenants.

Due to the restrictions imposed on us by General Instruction I.B.6 of Form S-3 and our low market capitalization and total public float, we are not able to use our universal shelf registration statement on Form S-3 for a period of time, which limits our liquidity options.

We estimate that we had cash available as of December 31, 2022 of $6.5 million.

In addition, our revenue for the year ended December 31, 2022 was down from prior years and has declined in recent quarters.

If we are unable to access additional liquidity through successful execution of our cost cutting strategic initiatives and revenue goals, we may have significant cash constraints, which would have a material adverse impact on our business, results of operations and ability to pay our debts as they come due.

Our goodwill and other assets have been subject to impairment and may continue to be subject to impairment in the future.

As discussed elsewhere in this Annual Report on Form 10-K, we incurred an impairment charges of approximately $71.4 million during the year ended December 31, 2022 related to the write-down of goodwill and indefinite-lived intangible assets.

We continue to have significant amounts of intangible assets, such as customer relationships acquired in connection with the KushCo merger.

We cannot predict the amount and timing of any future impairments, if any.

We may experience such charges in connection with past or future acquisitions, particularly if business performance declines or expected growth is not realized or the applicable discount rate changes adversely.

It is possible that material changes in our business, market conditions, or market assumptions could occur over time.

Any future impairment of our other intangible assets could have an adverse effect on results of operations, as well as the trading price of our Class A common stock.

For a further discussion of the 2022 impairment charges, please refer to the sections titled “Note 8 — Supplemental Financial Statement Information — Goodwill" “Note 8 — Supplemental Financial Statement Information — Intangible Assets, Net."

We have failed, and may continue to fail, to meet the listing standards of Nasdaq, and as a result our Class A common stock may become delisted, which could have a material adverse effect on the liquidity of our Class A common stock.

If we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance or public float requirements, or the minimum closing bid price requirement, Nasdaq will take steps to de-list our Class A common stock.

As a result of several factors, including but not limited to our financial performance, market sentiment about the cannabis industry, volatility in the financial markets generally due to the tightening of monetary policy by the Board of Governors of the United States Federal Reserve Bank (the “Federal Reserve”) and other geopolitical events, events such as the ongoing war in Ukraine, the per share price of our Class A common stock has declined below the minimum bid price threshold required for continued listing.

Such a de-listing would likely have a negative effect on the price of our Class A common stock and would impair your ability to sell or purchase our Class A common stock when you wish to do so, as well as adversely affect our ability to issue additional securities and obtain additional financing in the future.

For example, on February 25, 2022, we received a deficiency letter from the Listing Qualifications Department of the Nasdaq (the “Nasdaq Staff”), notifying us that, for the last 30 consecutive business days, the closing bid price for our Class A common stock had closed below the minimum $1.00 per share required for continued listing on the Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”).

On August 4, 2022, we filed a Certificate of Amendment to our charter with the Secretary of State of the State of Delaware, which effected a one-for-20 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding shares of Class A common stock and Class B common stock at 5:01 PM Eastern Time on August 9, 2022.

As a result of the Reverse Stock Split, every 20 shares of common stock issued and outstanding were converted into one share of common stock.

We paid cash in lieu of fractional shares, and accordingly, no fractional shares were issued in connection with the Reverse Stock Split.

On August 24, 2022, we were notified by the Nasdaq Staff that we had regained compliance with Rule 5550(a)(2) and that the matter had been closed.

On December 13, 2022, we received a new deficiency letter from the Nasdaq Staff notifying us that we were out of compliance with Rule 5550(a)(2) for a second time.

There are many factors that may adversely affect our minimum bid price.

Many of these factors are outside of our control.

As a result, we may not be able to sustain compliance with Rule 5550(a)(2) in the long term.

Any potential delisting of our Class A common stock from the Nasdaq would likely result in decreased liquidity and increased volatility for our Class A common stock and would adversely affect our ability to raise additional capital or to enter into strategic transactions, in addition to adversely impacting the perception of our financial condition and could cause reputational harm to investors and parties conducting business with us.

Any potential delisting of our Class A common stock from the Nasdaq would also make it more difficult for our stockholders to sell our Class A common stock.

If we do not regain compliance with Rule 5550(a)(2) by June 12, 2023, we may be afforded a second 180 calendar day period to regain compliance.

To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, except for the minimum bid price requirement.

In addition, we would be required to notify Nasdaq of our intent to cure the deficiency during the second compliance period.

In the event of a de-listing, we would take actions to restore our compliance with Nasdaq Marketplace Rules, but we can provide no assurances that the listing of our Class A common stock would be restored, that our Class A common stock will remain above the Nasdaq minimum bid price requirement or that we otherwise will remain in compliance with the Nasdaq Marketplace Rules.

Our narrow margins may magnify the impact of variations in operating costs and of adverse or unforeseen events on operating results.

We are subject to intense price competition.

As a result of this and other factors, our gross and operating margins have historically been narrow, and we expect them to continue to be narrow.

As a result of this and other factors, our gross and operating margins have historically been narrow.

Narrow margins magnify the impact of variations in operating costs and of gross margin and of unforeseen adverse events on operating results.

Continued increases in costs, such as the cost of merchandise, wage levels, shipping rates, import duties and fuel costs, may negatively impact our margins and

profitability.

Continued increases in costs, such as the cost of merchandise, wage levels, shipping rates, import duties and fuel costs, may negatively impact our margins and profitability.

We are not always able to raise the sales price to offset cost increases or to effect increased operating efficiencies in response to increasing costs.

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If our monthly sales fluctuations obscure our ability to track important trends in our key markets, it may have a material adverse effect on our business, results of operations and financial condition.

If we fail to retain key personnel and hire, train and retain qualified employees, we may not be able to compete effectively, which could result in reduced revenue or increased costs.

Our success is highly dependent on the continued services of key management and technical personnel.

Our management and other employees may voluntarily terminate their employment at any time upon short notice.

The loss of the services of any member of the senior management team, including our Chief Executive Officer, Nicholas Kovacevich;

our Chief Financial Officer, William Mote;

our Chief Operating Officer, Rodrigo de Oliveira;

our General Counsel, Douglas Fischer;

or any of the managerial or technical staff may significantly delay or prevent the achievement of product development, our growth strategies and other business objectives.

Additionally, the recently announced departure of Adam Schoenfeld, our Chief Marketing Officer (effective March 31, 2022), may impede the achievement of our objectives.

Our future success will also depend on our ability to identify, recruit and retain additional qualified technical and managerial personnel.

We operate in several geographic locations where labor markets are particularly competitive, where demand for personnel with these skills is extremely high and is likely to remain high.

As a result, competition for qualified personnel is intense, particularly in the areas of general management, finance, engineering and science, and the process of hiring suitably qualified personnel is often lengthy and expensive and may become more expensive in the future.

If we are unable to hire and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced.

Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our common stock.

If we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq will take steps to de-list our Class A common stock.

As a result of several factors, including but not limited to our financial performance, market sentiment about the cannabis industry, the ongoing outbreak of COVID-19, recent volatility in the financial markets generally due to the expectation of a tightening in monetary policy by the U.S.

Federal Reserve and other geopolitical events, the per share price of our Class A common stock has declined below the minimum bid price threshold required for continued listing.

On February 25, 2022, we received a deficiency notice from Nasdaq (the “Deficiency Notice”) informing us that our Class A common stock had failed to comply with the $1.00 minimum bid price required for continued listing under Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”) based upon the closing bid price of our Class A common stock for the 30 consecutive business days prior to the date of the Deficiency Notice.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been given 180 calendar days from February 25, 2022, or until August 24, 2022, to regain compliance with Rule 5550(a)(2).

If at any time before August 24, 2022, the bid price of our Class A common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq will provide written confirmation that we have regained compliance.

If we do not regain compliance with Rule 5550(a)(2) by August 24, 2022, we may be afforded a second 180 calendar day period to regain compliance.

In addition, we would be required to notify Nasdaq of our intent to cure the deficiency during the second compliance period.

We have at times experienced rapid growth, both domestically and internationally, and expect continued future growth, including growth from additional acquisitions.

If we fail to manage our business and growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

Furthermore, our

corporate culture has contributed to our success, and if we cannot maintain this culture, we could lose the innovation, creativity, and teamwork fostered by our culture, and our business may be materially and adversely affected.

Our success will depend, in part, on our ability to manage our business and its growth, both domestically and internationally, including the integration of KushCo following the merger.

Our success will depend, in part, on our ability to manage our business and its growth, both domestically and internationally.

Any growth in, expansion of, or shift in the focus of our business, is likely to continue to place a strain on our management and administrative resources, infrastructure and systems.

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Any failure to preserve our culture could also negatively affect our ability to retain current and recruit new personnel, continue to perform at current levels or execute on our business strategy.

Management and employee turnover creates uncertainties and could harm our business.

We have experienced significant turnover in our executive leadership in recent years.

Changes to strategic or operating goals, which oftentimes occur with the appointment of new executives and board members, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful.

In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of our operations, and friction can result from changes in strategy and management style.

Management turnover inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution.

Until we integrate new personnel, and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our business, and our financial condition and profitability may suffer.

Further, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements.

If we are unable to attract and retain qualified management personnel, our business could suffer.

Our future success will also depend on our ability to identify, recruit and retain additional qualified technical and managerial personnel.

We operate in several geographic locations where labor markets are particularly competitive, where demand for personnel with these skills is extremely high and is likely to remain high.

If we are unable to hire and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced.

The market for vaporizer products and related items is a niche market, subject to a great deal of uncertainty and is still evolving.

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The demand and market acceptance for these products is subject to a high level of uncertainty, including, but not limited to, changes in governmental regulation, developments in product technology, perceived safety and efficacy of our products, perceived advantages of competing products and sale and use of materials that can be vaporized, including in the expanding legal state cannabis markets.

For example, recent concerns about EVALI and youth use of vaporizers have, by some metrics, negatively impacted demand for vaporizers and led to laws and regulations restricting the sale of certain products in different markets.

For example, concerns about EVALI and youth use of vaporizers have, by some metrics, negatively impacted demand for vaporizers and led to laws and regulations restricting the sale of certain products in different markets.

Therefore, we are subject to many of the business risks associated with a new enterprise in a niche market.

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Any interruption in supply and/or consistency of these products may adversely impact our ability to deliver products to our customers, may harm our relationships and reputation with our customers, and may have a material adverse effect on our business, results of operations and financial condition.

Interruptions in supply or consistency of products could arise for a number of reasons, including but not limited to economic and civil unrest, epidemics/pandemics, such as the coronavirus (COVID-19 ) , embargoes, and sanctions.

Interruptions in supply or consistency of products could arise for a number of reasons, including but not limited to economic and civil unrest, public health crises, embargoes, and sanctions.

We may enter into new markets or lines of business that offer new products and services, or may expand existing lines of business, which may subject us to additional risks.

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For example, our merger with KushCo significantly expanded our exposure to the leading MSOs and LPs, as well as a presence on the west coast.

In November 2021 we completed the acquisition of DaVinci, which further supplemented our existing vaporization product offerings.

Our historical experience in these markets does not ensure that we will be able to successfully operate expended lines of business or will be successful in launching new products or entering new markets.

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A significant percentage of our revenue is dependent on sales of products from a relatively small number of key suppliers, and a decline in sales of products from these suppliers could materially harm our business.

A significant percentage of our revenue is dependent on sales of products, primarily vaporizers and related components, that we purchase from a small number of key suppliers, including CCELL, PAX Labs, Grenco Science, and Storz & Bickel.

For example, products manufactured by CCELL represented approximately 15.2% and —% of our net sales in the years ended December 31, 2021 and 2020, respectively, and products manufactured by PAX Labs represented approximately 10.7% and 14.5% of our net sales in the years ended December 31, 2021 and 2020, respectively.

Products manufactured by Grenco Science represented approximately 9.0% and 13.5% of our net sales in the years ended December 31, 2021 and 2020, respectively, and products manufactured by Storz & Bickel represented approximately 9.6% and 12.7% of our net sales in the years ended December 31, 2021 and 2020, respectively.

A decline in sales of any of our key suppliers’ produc t s, whether due to decreases in supply of, or demand for, their products, termination of our agreements with them, regulatory actions or otherwise, could have a material adverse impact on our sales and earnings and adversely affect our business.

For example, products manufactured by CCELL represented approximately 39.1% and 15.2% of our net sales in the years ended December 31, 2022 and 2021, respectively, and products manufactured by Storz & Bickel represented approximately 5.5% and 9.6% of our net sales in the years ended December 31, 2022 and 2021, respectively.

Products manufactured by Grenco Science represented approximately 4.6% and 9.0% of our net sales in the years ended December 31, 2022 and 2021, respectively, and products manufactured by Davinci represented approximately 4.0% and 1.5% of our net sales in the years ended December 31, 2022 and 2021, respectively.

A decline in sales of any of our key suppliers’ products, whether due to decreases in supply of, or demand for, their products, termination of our agreements with them, regulatory actions or otherwise, could have a material adverse impact on our sales and earnings and adversely affect our business.

There is uncertainty related to the regulation of vaporization products and certain other consumption accessories.

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In a final rule effective August 8, 2016 (“Deeming Rule”), the FDA deemed all products that meet the Tobacco Control Act’s definition of “tobacco product,” including components and parts but excluding accessories, to be subject to the tobacco control requirements of the FFDCA and the FDA’s implementing regulations.

Accordingly, as of the Deeming Rule’s effective date, deemed tobacco products that are “new” (i.e., those that were not commercially marketed in the United States as

of February 15, 2007) are subject to the premarket authorization requirements.

Accordingly, as of the Deeming Rule’s effective date, deemed tobacco products that are “new” (i.e., those that were not commercially marketed in the United States as of February 15, 2007) are subject to the premarket authorization requirements.

Deemed new tobacco products that remain on the market without authorization are marketed unlawfully.

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At present, we are not able to predict whether the Tobacco Control Act will impact our business to a greater degree than competitors in the industry, thus affecting our competitive position.

Additionally, as discussed elsewhere in these Risk Factors and under the heading Regulatory Developments, the Consolidated Appropriations Act, 2021 expanded the range of products encompassed by the Prevent All Cigarette Trafficking Act (the "PACT Act") to include ENDS.

This development could severely restrict our ability to ship many of the products we sell, as well as place costly regulatory burdens on such shipments.

At the state level, over 25 states have implemented statewide regulations that prohibit vaping in public places.

As discussed elsewhere in these Risk Factors and under the heading Regulatory Developments, a number of states and cities have also implemented bans or restrictions on the sale of vaporizers and accessories, as well as flavored tobacco products, including vaping liquids and menthol cigarettes.

As discussed elsewhere in these Risk Factors and under the heading Regulatory Developments, a number of states and cities have implemented bans or restrictions on the sale of vaporizers and accessories, as well as flavored tobacco products, including vaping liquids and menthol cigarettes.

There may, in the future, also be increased regulation of additives in smokeless products and internet sales of vaporization products and certain other consumption accessories.

The application of either or both of

current federal, state, and local, laws, and of any new laws or regulations which may be adopted in the future at the federal, state, or local level, to vaporization products, consumption accessories or such additives could result in additional expenses and require us to change our advertising and labeling, and methods of marketing and distribution of our products, any of which could have a material adverse effect on our business, results of operations and financial condition.

The application of either or both of current federal, state, and local, laws, and of any new laws or regulations which may be adopted in the future at the federal, state, or local level, to vaporization products, consumption accessories or such additives could result in additional expenses and require us to change our advertising and labeling, and methods of marketing and distribution of our products, any of which could have a material adverse effect on our business, results of operations and financial condition.

On May 23, 2018, the Tobacco and Vaping Products Act (“TVPA”) became effective, and now governs the manufacture, sale, labeling and promotion of vaping products sold in Canada.

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Vaping products with therapeutic or health-related claims are subject to the Food and Drugs Act and related regulations.

Finally, the TVPA provides the authority to make regulations to collect information from industry about vaping products, their emissions and any research and development (e.g., sales data and information on market research, product composition, ingredients, materials, health effects, hazardous properties and brand elements).

Health Canada is currently developing proposed regulations in this area.

On December 21, 2019, Health Canada issued a Regulatory Impact Analysis Statement titled “Vaping Products Promotion Regulations.” The Impact Analysis addressed two proposed new regulations that would place stricter limits on the advertising and promotion of nicotine vaping products and make health warnings on nicotine vaping products mandatory (the “Proposed Regulations”).

The Proposed Regulations would:

(1) prohibit the promotion of nicotine vaping products and nicotine vaping product-related brand elements by means of advertising that is done in a manner that can be seen or heard by youth, including the display of nicotine vaping products a points of sale where can be seen by youth;

(1) prohibit the promotion of nicotine vaping products and nicotine

vaping product-related brand elements by means of advertising that is done in a manner that can be seen or heard by youth, including the display of nicotine vaping products a points of sale where can be seen by youth;

and (2) require that all nicotine vaping advertising convey a health warning about the health hazards of nicotine vaping product use.

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In addition to federal regulations, several provinces, including Alberta, British Columbia, Nova Scotia, Ontario, Prince Edward Island (“PEI”), Quebec, and Saskatchewan, have passed regulations fully restricting or limiting the advertising and sales of certain types of nicotine vaping products.

Notably, in Prince Edward Island, as of March 1, 2020, the minimum age for purchasing nicotine products increased to age 21, and on August 11, 2020, PEI adopted a regulation to ban the sale of all flavored vaping products, effective March 1, 2021.

Other provinces continue to review the prospect of adopting new regulations addressing nicotine vaping products.

Many provinces have focused their tobacco and vaping control efforts on retail access and have taken action to go beyond the minimum requirements in the TVPA.

For example, Nova Scotia, Newfoundland and Labrador, and the Northwest Territories, have increased the minimum age of sale to 19.

Notably, in Prince Edward Island, as of March 1, 2020, the minimum age for purchasing nicotine products increased to age 21.

British Columbia, Saskatchewan, and Ontario limited the sales of flavored vaping products with exceptions for some flavors to specialty stores, whereas some provinces have banned flavored vaping products, with the exception of tobacco flavor (Nova Scotia and Prince Edward Island).

By way of example, on August 11, 2020, PEI adopted a regulation to ban the sale of all flavored vaping products, effective March 1, 2021.

Quebec is currently considering a ban on flavored products and effective as of March 25, 2022, the sale of flavored vapor products was banned in the Northwest Territories.

Moreover, certain provinces (British Columbia, Newfoundland and Labrador, Saskatchewan, Quebec, Nova Scotia) have implemented an e-cigarette retail licensing system or have guidelines for retailers in order to prevent sales to minors (Alberta, British Columbia, Newfoundland and Labrador, Prince Edward Island, Saskatchewan).

Finally, with respect to the taxation of vaping products, the Canadian government introduced amendments to the Excise Act, 2001 to implement a new excise duty framework on vaping products.

These amendments became law on June 23, 2022.

The new framework applies to vaping products that are manufactured in Canada or imported, and that are intended for use in a vaping device in Canada.

Manufacturers of vaping products are required to get a vaping product license from the Canada Revenue Agency ("CRA").

Importers are required to apply for registration from the CRA.

Manufacturers and importers are also required to register for the vaping stamping regime.

All vaping products entering the Canadian duty-paid market are required to be packaged with an excise stamp affixed to the product.

The excise stamps shows that duties have been paid.

These developments, together with the passed and proposed federal and provincial regulations may have a material adverse effect on our business, results of operations, and financial condition.

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In the event of a disruption to our supply of products, we would have to identify new suppliers that can meet our needs.

Such a disruption may occur for many reasons, including but not limited to the current COVID-19 pandemic.

Only a limited number of suppliers may have the ability to produce certain products we sell at the volumes we need, and it could be costly or time-consuming to locate and approve such alternative sources.

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Any prolonged disruption of these services may have a material adverse effect on our business, financial condition and results of operations.

Rising costs associated with transportation services used by us to receive or deliver our products, including tariffs, as well as delays as a results of factors outside of our control, including the COVID-19 pandemic, have had and may continue to have a material adverse effect on our business, financial condition and results of operations.

Rising costs associated with transportation services used by us to receive or deliver our products, including tariffs, as well as delays as a results of factors outside of our control have had and may continue to have a material adverse effect on our business, financial condition and results of operations.

The Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020, contains provisions that prohibit the mailing of ENDS through the United States Postal Service (“USPS”) and place certain regulatory requirements on shipment of ENDS through other carriers.

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Although we believe there are numerous suppliers with the capacity to supply the products we distribute, the loss of one or more of our major suppliers could have an adverse effect on our product offerings and our business.

Such a loss would require us to rely more heavily on our other existing suppliers, develop relationships with new suppliers or undertake our own manufacturing, which may cause us to pay higher prices for products due to, among other things, a loss of volume discount benefits currently obtained from our major

Any termination, interruption or adverse modification of our relationship with a key supplier or a significant number of other suppliers would likely adversely affect our operating income, cash flow and future prospects.

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Conversely, if we underestimate demand for our products or if we fail to acquire the products that we require at the time we need them, we may experience inventory shortages.

Inventory shortages might delay shipments to customers, reduce revenue, negatively impact customer relationships and diminish brand loyalty, which in turn could have a material adverse effect on our business, results of operations and financial condition.

Inventory shortages might delay shipments to customers, reduce revenue,

negatively impact customer relationships and diminish brand loyalty, which in turn could have a material adverse effect on our business, results of operations and financial condition.

Certain of our suppliers provide us with incentives and other assistance that reduce our operating costs, and any decline in these incentives and other assistance could materially harm our operating results.

Certain of our suppliers, including CCELL, PAX Labs and Storz & Bickel, provide us with trade credit or substantial incentives in the form of discounts, credits and cooperative advertising, among other benefits.

Certain of our suppliers, including CCELL and Storz & Bickel, provide us with trade credit or substantial incentives in the form of discounts, credits and cooperative advertising, among other benefits.

We have agreements with some of our suppliers under which they provide us, or they have otherwise consistently provided us, with market price discounts to subsidize portions of our advertising, marketing and distribution costs based upon the amount of coverage we give to their respective products in our catalogs or other advertising and marketing mediums.

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From time to time, suppliers may be acquired by other companies, terminate our right to sell some or all of their products, modify or terminate our exclusive distributor or preferred distributor status, change the applicable terms and conditions of sale or reduce or discontinue the incentives or supplier consideration that they offer us.

Any termination or reduction of of such terms by our major suppliers, or our failure to build new supplier relationships, could have a negative impact on our operating results.

Any termination or reduction of such terms by our major suppliers, or our failure to build new supplier relationships, could have a negative impact on our operating results.

Further, some products may be subject to allocation by the supplier, which could limit the number of units of those products that are available to us and may adversely affect our operating results.

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Our customers generally place orders on an as-needed basis.

Consistent with industry practice, we do not have long-term contracts with most of our customers, other than certain retail chains in Canada and certain state-licensed cannabis businesses in the United States.

Consistent with industry practice, we do not have long-term contracts with most of our customers, other than certain retail chains or distributors in Canada and abroad and certain state-licensed cannabis businesses in the United States.

In addition, our agreements generally do not commit our customers to any minimum purchase volume.

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These third-party retailers operate physical brick-and-mortar locations to sell our product to consumers.

The current shift in purchasing demographics due to many factors, including the COVID-19 pandemic and the changing preferences of consumers who are moving from in-store purchases to online purchases creates the additional risks of our current revenue streams being impacted negatively and an overall decrease of market share.

We have occasionally experienced and may continue to experience difficulty collecting receivables.

The current shift in purchasing demographics due to many factors and the changing preferences of consumers who are moving from in-store purchases to online purchases creates the additional risks of our current revenue streams being impacted negatively and an overall decrease of market share.

We have experienced and may continue to experience difficulty collecting receivables.

If our customers begin or continue to experience financial challenges, they may not have sufficient funds to pay all amounts owed to us.

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Trends within the vaporization products and consumption accessories industry change often and our failure to anticipate, identify or react to changes in these trends could, among other things, lead to reduced demand for our products.

Factors that have previously and may continue to affect consumer perception of our products include health trends and attention to health concerns associated with tobacco, nicotine, herbs, oils, cannabis or other materials used with vaporizers, price-sensitivity in the presence of competitors’ products or substitute products and trends in favor of new vaporization products or technology consumption accessories products that are currently being researched and produced by participants in our industry.

Factors that have previously and may continue to affect consumer perception of our products include health trends and attention to health concerns associated with herbs, oils, cannabis or other materials used with vaporizers, price-sensitivity in the presence of competitors’ products or substitute products and trends in favor of new vaporization products or technology consumption accessories products that are currently being researched and produced by participants in our industry.

For example, in recent years, we have witnessed a shift in consumer purchases from vaporizers designed for dry herbs to those designed for liquids or wax type concentrates.

A failure to react to similar trends in the future could enable our competitors to grow or establish their brands’ market share in these categories before we have a chance to respond.

A failure to react to similar trends in the future

could enable our competitors to grow or establish their brands’ market share in these categories before we have a chance to respond.

Regulations have recently been and are likely to continue to be enacted in the future that would make it more difficult to appeal to consumers or to leverage the brands that we distribute, own or license.

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The success of our business depends in part upon the positive image that consumers have of the third-party brands we distribute.

Incidents, publicity or events arising accidentally or through deliberate third-party action that harm the integrity or

consumer support of the products we sell could affect the demand for those products.

Incidents, publicity or events arising accidentally or through deliberate third-party action that harm the integrity or consumer support of the products we sell could affect the demand for those products.

Unfavorable media, whether accurate or not, related to our industry, to us, to our customers, or to the products we sell could negatively affect our corporate reputation, stock price, ability to attract high-quality talent, or the performance of our business.

For example, JUUL Labs has been the subject of significant negative publicity.

Additional negative publicity or commentary on social media outlets also could cause consumers to react rapidly by avoiding our products and brands or by choosing brands offered by our competitors, which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to substantial and increasing regulation regarding the tobacco and vaporization industries.

In addition to the FDA regulations concerning tobacco and vaporizer products discussed elsewhere in this Annual Report on Form 10-K, we are subject to regulation by numerous other federal agencies, including the Federal Trade Commission, the Alcohol and Tobacco Tax and Trade Bureau, the Federal Communications Commission, the U.S.

Environmental Protection Agency, the U.S.

We are subject to substantial and increasing regulation regarding the vaporization industry.

In addition to the FDA regulations concerning vaporizer products discussed elsewhere in this Annual Report on Form 10-K, we are subject to regulation by numerous other federal agencies, including the Federal Trade Commission, the Alcohol and Tobacco Tax and Trade Bureau, the Federal Communications Commission, the U.S.

Environmental Protection Agency, the

Department of Agriculture, U.S.

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There have also been adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, which have received widespread public attention.

There can be no assurance as to the ultimate content, timing or effect of any regulation of tobacco or nicotine products by governmental bodies, nor can there be any assurance that potential corresponding declines in demand resulting from negative media attention would not have a material adverse effect on our business, results of operations and financial condition.

Some of the products we sell contain nicotine, which is considered to be a highly-addictive substance, or other chemicals that some jurisdictions have determined to cause cancer and birth defects or other reproductive harm.

Some of our products, like the JUUL nicotine vaporizers, contain nicotine, a chemical that is considered to be highly addictive.

The Tobacco Control Act empowers the FDA to regulate the amount of nicotine found in tobacco products (including vaporizers), but not to require the reduction of nicotine yields of a tobacco product to zero;

similar legislation in Canada empowers the Canadian government and provincial governments to limit the amount of nicotine in tobacco and vaporizer products.

In addition, the State of California has determined that some chemicals found in certain vaporizers, as well as materials frequently consumed by using vaporizers (such as cannabis), cause cancer and birth defects or other reproductive harm.

New federal, state or provincial regulations, whether of nicotine levels or other product attributes, may require us to recall and/or discontinue certain of the products we sell, which may have a material adverse effect on our ability to market our products and have a material adverse effect on our business, results of operations and financial condition.

There can be no assurance as to the ultimate content, timing or effect of any regulation of vaporizer products by governmental bodies, nor can there be any assurance that potential corresponding declines in demand resulting from negative media attention would not have a material adverse effect on our business, results of operations and financial condition.

Significant increases in state and local regulation of our vaporizer products have been proposed and enacted, and are likely to continue to be proposed and enacted in numerous jurisdictions.

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The Canadian federal government, as well as certain provincial governments have passed or propose to pass legislation which will restrict the extent to which e-cigarettes, e-liquid and other vaping products may be displayed or sold.

Additionally,

Canadian laws require health warnings to be placed on certain vaporizer products, which could reduce the appeal of these products.

Additionally, Canadian laws require health warnings to be placed on certain vaporizer products, which could reduce the appeal of these products.

These regulations and future regulations could have a material adverse effect on our business, results of operations and financial condition.

Based on regulations surrounding health-related concerns related to the use of some of our vaporizer products, possible new or increased taxes by government entities intended to reduce use of our products or to raise revenue, additional governmental regulations concerning the marketing, labeling, packaging or sale of some of our products, negative publicity resulting from actual or threatened legal actions against us or other companies in our industry, all may reduce demand for, or increase the cost of, certain of our products, which could adversely affect our profitability and ultimate success.

Public health epidemics, pandemics or outbreaks, including the ongoing COVID-19 pandemic, the recent spread of the Delta variant and Omicron variants and measures intended to prevent their spread, could materially and adversely affect our business.

Public health epidemics, pandemics or outbreaks, and the resulting business or economic disruptions resulting therefrom, could adversely impact our business as well as our ability to raise capital.

In December 2019, COVID-19 was identified in Wuhan, China.

The virus has been declared a pandemic by the World Health Organization.

The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world.

The extent to which COVID-19, the recent spread of the Delta and Omicron variants, impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, spread and intensity of the pandemic, the timing and effectiveness of vaccines and other treatments, possible resurgences in COVID-19 cases, and the duration of government measures to mitigate the pandemic, all of which are uncertain and difficult to predict.

COVID-19 has and will likely continue to result in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate.

While we cannot presently predict the scope and severity of any potential business shutdowns or disruptions, if we or any of the third parties with whom we engage, including the suppliers, manufacturers and other third parties in our global supply chain, were to experience shutdowns or other significant business disruptions, our ability to conduct our business in the manner presently planned could be materially and negatively impacted.

For example, our Higher Standards stores in California and New York were closed for several months in 2020 as a result of COVID-19.

The COVID-19 pandemic has also caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide.

We cannot assure you that conditions in the bank lending, capital and other financial markets will not deteriorate as a result of the pandemic, or that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings.

Adverse U.S., Canadian and global economic conditions could materially and adversely our business, prospects, results of operations, financial condition or cash flows.

Our business and operations are sensitive to global economic conditions.

These conditions include interest rates, energy costs, inflation, international trade relationships, recession, fluctuations in debt and equity capital markets and the general condition of the U.S., Canadian and global economies.

A material decline in the economic conditions affecting consumers, such as the initial downturn in the global economy due to COVID-19 and uneven economic recovery since, which cause a reduction in disposable income for the average consumer, may change consumption patterns, and may result in a reduction in spending on vaporization products and consumption accessories or a switch to cheaper products or products obtained through illicit channels.

Many of our products are relatively new to the market and may be regarded by consumers as a novelty item and expendable.

Our business depends partly on continued purchases by businesses and individuals selling or using cannabis pursuant to state laws in the United States or Canadian and provincial laws.

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Currently, in the United States, 47 states and the District of Columbia permit some form of cannabis cultivation, sales, and use for certain medical purposes (“medical states”).

Eighteen of those states and the District of Columbia have also legalized cannabis for adults for non-medical purposes (sometime referred to as recreational use).

Twenty-one of those states and the District of Columbia have also legalized cannabis for adults for non-medical purposes (sometime referred to as recreational use).

Several medical states may extend legalization to adult use.

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The protection of the Joyce Amendment depends on its continued inclusion in the federal omnibus spending bill, or in some other legislation, and entities’ strict compliance with the state medical cannabis laws.

That protection has been extended through September 30, 2021 through recent appropriations bill.

While industry observers expect Congress to extend the protection in future Omnibus Spending Bills, there can be no assurance that it will do so.

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Government changes the law with respect to cannabis, and particularly if Congress does not extend the protection of state medical cannabis programs, there is a risk that federal authorities could enforce current federal cannabis law.

An increase in federal enforcement against companies

licensed under state cannabis laws would negatively impact the state cannabis industries and, in turn, our revenues, profits, financial condition, and business model.

An increase in federal enforcement against companies licensed under state cannabis laws would negatively impact the state cannabis industries and, in turn, our revenues, profits, financial condition, and business model.

On April 13, 2017, the Government of Canada introduced Bill C-45, which proposed the enactment of the Cannabis Act to legalize and regulate access to cannabis.

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additional Cannabis Regulations took effect on October 17, 2019.

As of December 2022, the Minister of Health and the Minister of Mental Health and Addictions has launched the legislative review of the Cannabis Act.

The review is being conducted by a five-member independent, expert panel, who will report their final conclusions and advice to the Ministers by Spring 2024.

In addition, Health Canada announced that amendments to the Cannabis Act and its regulations concerning cannabis research and testing.

Notably, these amendments increase the public possession limit for cannabis beverages to a level that is similar to other forms of cannabis, such as solid edible cannabis products (i.e.

gummies or chocolate) and the amendments change how Health Canada regulates non-therapeutic cannabis research with human participants.

As for proposed amendments, Health Canada is proposing amendments to the Cannabis Regulations to protect public health and safety, in particular by protecting young persons and others from inducements to use inhaled cannabis extracts.

The proposed amendments would restrict the production, sale, promotion, packaging, or labelling of inhaled cannabis extracts with certain flavors, other than the flavor of cannabis.

While the Cannabis Act provides for the regulation by the federal government of, among other things, the commercial cultivation and processing of cannabis for recreational purposes, it provides the provinces and territories of Canada with the authority to regulate with respect to the other aspects of recreational cannabis, such as distribution, sale, minimum age requirements, places where cannabis can be consumed, and a range of other matters.

The governments of every Canadian province and territory have implemented regulatory regimes for the distribution and sale of cannabis for recreational purposes.

In most provinces and territories, the minimum age is 19 years old, except for Québec and Alberta, where the minimum age is 18.

In most provinces and territories, the minimum age is 19 years old, except for Québec, where the minimum age is 18.

Certain provinces, such as Ontario, have legislation in place that restricts the packaging of vapor products and the manner in which vapor products are displayed or promoted in stores.

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The FDA has also repeatedly stated its position that introducing food or dietary supplements with added CBD (or THC), regardless of source, into interstate commerce is illegal under the FDCA.

Although enforcement under the FDCA may be civil or criminal in nature, the FDA has thus far limited its recent enforcement against companies selling CBD products to warning letters alleging various violations of the FDCA, including that the products bear claims that render the products unapproved and misbranded new drugs, that CBD is excluded from the FDCA’s definition of “dietary supplement,” and that the FDCA prohibits the addition of CBD to food.

and that the FDCA prohibits the addition of CBD to food.

The FDA also tested some of the products, and found that many did not contain the levels of CBD they claimed to contain, which could be the basis for a separate violation of the FDCA.

In addition, some states have taken actions to restrict or prohibit the sale of CBD products under state law.

The FDA has signaled that it will likely issue further guidance and/or issue regulations concerning CBD products, although the contents and timing of such guidance and regulations remain unknown.

We currently distribute products containing hemp-derived CBD and other cannabinoids.

Although the Farm Bill removed hemp and its derivatives from the definition of “marijuana” under the CSA, uncertainties remain regarding the

cultivation, sourcing, production and distribution of hemp and products containing hemp derivatives.

On January 26, 2023, the FDA issued a statement that after careful review, the FDA concluded that a new regulatory pathway for CBD is needed that balances individuals’ desire for access to CBD products with the regulatory oversight needed to manage risks.

The agency is prepared to work with Congress on this matter.

We currently distribute very limited products containing hemp-derived CBD and other cannabinoids.

Although the Farm Bill removed hemp and its derivatives from the definition of “marijuana” under the CSA, uncertainties remain regarding the cultivation, sourcing, production and distribution of hemp and products containing hemp derivatives.

Certain states prohibit the sale of all or certain types of products containing hemp.

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Second, we restrict the sale of certain products — those that may have been primarily intended or designed for use with cannabis — to comply with the Federal Paraphernalia Law’s exemption for sales authorized by state law.

In particular, we (a) do not sell those products at all into the six states that have maintained complete or near complete cannabis prohibition and (b) limit the sale of those products to licensed cannabis businesses, such as dispensaries, cultivators, and manufacturers, in the nine states that authorize sales of cannabis paraphernalia only through state-licensed cannabis businesses.

In particular, we (a) do not sell those products at all into the states that have maintained complete or near complete cannabis prohibition and (b) limit the sale of those products to licensed cannabis businesses, such as dispensaries, cultivators, and manufacturers, in the states that authorize sales of cannabis paraphernalia only through state-licensed cannabis businesses.

Third, we have been in business for many years without facing even threatened legal action under the Federal Paraphernalia Law.

While we believe that our business and sales are legally compliant with the Federal Paraphernalia Law in all material respects, any legal action commenced against us under such law could result in substantial costs and could have an adverse impact on our business, financial condition or results of operations.

impact on our business, financial condition or results of operations.

In addition, changes in cannabis laws or interpretations of such laws are difficult to predict, and could materially and adversely affect our business.

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Officials of the CBP have broad discretion regarding products imported into the United States.

Individual shipments of imported products we distribute, as well as similar products, have been detained or seized by the CBP for a variety of reasons,

including because the CBP officials inspecting the goods believed such goods were marketed as drug paraphernalia and therefore violated the Federal Paraphernalia Law.

Individual shipments of imported products we distribute, as well as similar products, have been detained or seized by the CBP for a variety of reasons, including because the CBP officials inspecting the goods believed such goods were marketed as drug paraphernalia and therefore violated the Federal Paraphernalia Law.

Although we and other suppliers or distributors of such products have at times successfully contested such actions of the CBP, such challenges are costly and time consuming.

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As we expand the availability of these payment methods or offer new payment methods to our customers in the future, we may become subject to additional regulations and compliance requirements.

Further, through our agreement with our third-party credit card processors, we are indirectly subject to payment card association operating rules and certification requirements, including restrictions on product mix and the Payment Card Industry Data Security Standard, 02 PCIDSS.

Further, through our agreement with our third-party credit card processors, we are indirectly subject to payment card association operating rule s and certification requirements, including restrictions on product mix and the Payment Card Industry Data Security Standard, 02 PCIDSS.

We also are subject to rules governing electronic funds transfers.

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We have had a security incident in the past, which we do not believe reached the level of a breach, that would be reportable under state laws or our other obligations;

there can be no assurance that our determination was correct.

however there can be no assurance that our determination was correct.

In the event our determination is challenged and found to have been incorrect, we may be subject to claims by one or more state attorney generals, federal regulators, or private plaintiffs and we may additionally be subject to claims or fines from credit associations.

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While we receive very few cash payments for the products we sell, if we fail to comply with these laws and regulations, the imposition of a substantial penalty could have a material adverse effect on our business, results of operations and financial condition.

Increases in tobacco-related taxes, which at times apply to vaporizers not used with tobacco or nicotine, have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions.

Tobacco products, premium cigarette papers and tubes have long been subject to substantial federal, state, provincial and local excise taxes.

Such taxes have frequently been increased or proposed to be increased, in some cases significantly, to fund various legislative initiatives or further disincentivize smoking.

In addition to federal excise taxes, every state and certain city and county governments have imposed substantial excise taxes on sales of tobacco and vaporization products, and many have raised or proposed to raise excise taxes in recent years.

Tax increases, depending on their parameters, may result in consumers switching between vaporizer products or depress overall vaproizer sales, which is likely to result in declines in overall sales volumes in certain of our products.

Any future enactment of increases in federal, provincial or state excise taxes on tobacco or vaporizer products or rulings that certain of our products should be categorized differently for excise tax purposes could adversely affect demand for our products and may have a material adverse effect on our business, results of operations and financial condition.

If countries, states, and provinces continue the trend of imposing, expanding, and increasing taxes on vaporizer products, it could materially and adversely affect our business.

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The outcome of any government proceedings, investigations, prosecutions, audits, and other contingencies could harm our reputation or the reputations of the brands that we sell, require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition.

There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on our business, financial condition and results of operations.

There can be no assurance that any pending or future regulatory or agency proceedings,

investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on our business, financial condition and results of operations.

We are subject to increasing international control and regulation.

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“Big tobacco” and other well-resourced competitors are continuing to establish its presence in the vaporization products and consumption accessories market.

There can be no assurance that our products will be able to compete successfully

against these companies or any of our other competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels than us.

There can be no assurance that our products will be able to compete successfully against these companies or any of our other competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels than us.

In addition, if large online retailers such as Amazon establish their presence in the vaporization products and consumption accessories market, our sales through both our direct to consumer e-commerce channel and our business-to-business wholesale channel may be harmed.

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For example, we have previously detected low levels of contaminants in certain extraction gasses sold by us.

We keep significant amounts of

inventory of our products in warehouses and it is possible that this inventory could become contaminated prior to arrival at our premises or during the storage period.

We keep significant amounts of inventory of our products in warehouses and it is possible that this inventory could become contaminated prior to arrival at our premises or during the storage period.

If contamination of our inventory or packaged products occurs, whether as a result of a failure in quality control by us or by one of our suppliers, we may incur significant costs in replacing the inventory and recalling products.

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Under the terms of our contracts, we generally impose requirements on our suppliers to maintain quality and comply with product specifications and requirements, and with all federal, state and local laws.

Our suppliers, however, may not continue to produce products that are consistent with our standards or that are in compliance with applicable laws, and we cannot guarantee that we will be able to identify instances in which our suppliers fail to comply with our standards or applicable laws.

Our suppliers, however, may not

continue to produce products that are consistent with our standards or that are in compliance with applicable laws, and we cannot guarantee that we will be able to identify instances in which our suppliers fail to comply with our standards or applicable laws.

A loss of sales volume from a contamination event may occur, and such a loss may affect our ability to supply our current customers and to recapture their business in the event they are forced to switch products or brands, even if on a temporary basis.

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As a result of their relative novelty, electronic cigarette, vaporizer product and other consumption product manufacturers, suppliers, distributors and sellers have only recently become subject to litigation.

While we have not been a party to any product liability litigation, several

lawsuits have been brought against other manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products.

While we have not been a party to any product liability litigation, several lawsuits have been brought against other manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products.

We may be subject to similar claims in the future relating to our vaporizer products.

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For example, California’s Proposition 65 (“Prop 65”) requires the State of California to identify chemicals that could cause cancer, birth defects, or reproductive harm, and businesses selling products in California are then required to warn consumers of any possible exposure to the chemicals on the list.

The State of California and private plaintiffs have been active in enforcing Prop 65 against companies in the tobacco, nicotine, cannabis, and vaporization industries.

The State of California and private plaintiffs have been active in enforcing Prop 65 against companies in the tobacco, nicotine, cannabis, and

vaporization industries.

We may face substantial costs due to increased product liability litigation relating to new regulations or other potential defects associated with our vaporizer and other consumption products, including litigation arising out of faulty devices or improper usage, which could have a material adverse effect on our business, results of operations and financial condition.

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Federal, provincial and state laws require us to safeguard our customers’ financial information, including credit information, as well as our employees' information.

Although we have established security procedures to protect against

identity theft and the theft of information of our customers, distributors, consumers, and employees, our security and testing measures may not prevent security breaches and breaches of privacy may occur, which would harm our business.

Although we have established security procedures to protect against identity theft and the theft of information of our customers, distributors, consumers, and employees, our security and testing measures may not prevent security breaches and breaches of privacy may occur, which would harm our business.

Typically, we rely on encryption and authentication technology licensed from third parties to enhance transmission security of confidential information in relation to financial and other sensitive information that we have on file.

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Any compromise of our security could harm our reputation or financial condition and therefore, our business.

In addition, a party who is able to circumvent our security measures or exploit inadequacies in our security measures, could, among other effects, misappropriate proprietary information, cause interruptions in our operations or expose customers and other entities with which we interact to computer viruses or other disruptions.

in our operations or expose customers and other entities with which we interact to computer viruses or other disruptions.

Actual or perceived vulnerabilities may lead to claims against us.

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As a result, in the future, we may be more sensitive to the risks of exchange rate fluctuations, which may have a material adverse effect on our business, results of operations and financial condition.

There are conflicts of interest among our officers, directors and stockholders.

Certain of our executive officers and directors and their affiliates are engaged in other activities and have interests in other entities on their own behalf or on behalf of other persons.

There are conflicts of interest among certain of our executive officers and our stockholders.

Certain of our executive officers are engaged in other activities and have interests in other entities on their own behalf or on behalf of other persons.

Neither we, nor our stockholders will have any rights in these ventures or their income or profits.

Specifically, we sold $0.1 million and $0 in products and supplies to Unrivaled Brands Inc.

Specifically, we sold $0.4 million and $0.2 million in products and supplies to Unrivaled Brands Inc.

("Unrivaled") in the years ended December 31, 2022 and 2021, respectively.

Nicholas Kovacevich, our Chief Executive Officer, and Dallas Imbimbo, who serves on our Board, are investors in Unrivaled and members of its board of directors.

Adam Schoenfeld, our Chief Marketing Officer and Board Director, has a significant ownership interest in one of our customers, Universal Growing.

Net sales to Universal Growing for the years ended December 31, 2021 and 2020 totaled $0.2 million and $0.1 million, respectively.

Additionally, as described above, in December 2021 we entered into the Bridge Loan with Aaron LoCascio, our co-founder, former Chief Executive Officer and President, and a current director of the Company.

The Bridge Loan is secured by a continuing security interest in all of our assets and properties whether then or thereafter existing or required, including our inventory and receivables (as defined under the Universal Commercial Code) and includes negative covenants restricting our ability to incur further indebtedness and engage in certain asset dispositions until the earlier of June 30, 2022 or the Bridge Loan has been fully repaid.

While we are not aware of any conflict that has arisen or any transaction that has not been conducted on an arm’s length basis to date and the Bridge Loan was approved by the Audit Committee of the Board, Messrs.

Kovacevich, Imbimbo and LoCascio may have conflicting fiduciary duties between us, Unrivaled and their own personal financial interests, for which they must recuse themselves from certain of our decision-making processes.

Total gross accounts receivable due from Unrivaled were approximately $0.4 million and $0.4 million as of December 31, 2022 and 2021, respectively.

Nicholas Kovacevich, our Chief Corporate Development Officer, and a member of our Board until January 6, 2023 is an investor in Unrivaled and a member of its board of directors.

While we are not aware of any conflict that has arisen or any transaction that has not been conducted on an arm’s length basis to date, Mr.

Kovacevich may have conflicting fiduciary duties between us, Unrivaled and his own personal financial interests, for which he must recuse himself from certain of our decision-making processes.

We do not allow a conflicted shareholder, director or executive officer to vote on matters wherein a conflict may be perceived.

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• the terms of transactions with the other entity may not be subject to arm’s length negotiations and therefore may be on terms less favorable to us than those that could be procured through arm’s length negotiations.

If we were to default on the Bridge Loan, Aaron LoCascio, our former Chief Executive Officer and President and a current director, could foreclose on our assets.

As described above, the Bridge Loan is secured by a continuing security interest in all of our assets and properties, including our inventory and receivables, and restricts our ability to incur further indebtedness and engage in certain asset dispositions until the Bridge Loan has been fully repaid.

In the event that we were to default on this debt and Aaron LoCascio foreclosed on our assets, we would be unable to continue our operations as they are presently conducted, if at all.

Our aggregate total debt to Mr.

LoCascio under the Bridge Loan at December 31, 2021 was $8.0 million.

See " Note 6—Debt" of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further discussion of the Bridge Loan.

We are required to comply with laws and regulations in other countries and are exposed to business risks associated with our international operations.

For the years ended December 31, 2022 and 2021, we derived 7.8% and 12.1%, respectively, of our net sales from outside the United States, primarily in Canada and certain European countries.

As a result, we are subject to numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, export controls, competitive practices, labor, health and safety laws, laws regarding controlled substances, laws regarding drug paraphernalia, and regulations in each jurisdiction in which we operate.

As a result, we are subject to numerous

evolving and complex laws and regulations which apply, among other things, to financial reporting standards, corporate governance, data privacy, tax, trade regulations, export controls, competitive practices, labor, health and safety laws, laws regarding controlled substances, laws regarding drug paraphernalia, and regulations in each jurisdiction in which we operate.

We are also required to obtain permits and other authorizations or licenses from governmental authorities for certain of our operations and we or our suppliers’ must protect our intellectual property worldwide.

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Trade Representative (“USTR”) to determine under Section 301 of the U.S.

Trade Act of 1974 (the “Trade Act”) whether to investigate China’s laws, policies, practices or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation or

technology development.

On March 22, 2018, based upon the results of its investigation, the USTR published a report finding that the acts, policies and practices of the Chinese government are unreasonable or discriminatory and burden or restrict U.S.

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Subsequently, the USTR announced an initial proposed list of 1,300 goods imported from China that could be subject to additional tariffs and initiated a dispute with the World Trade Organization against China for alleged unfair trade practices.

On June 15, 2018, the USTR announced a list of products subject to additional tariffs.

The list focused on products from industrial sectors that contribute to or benefit from the “Made in China 2025” industrial policy.

The list of products consists of two sets of tariff lines.

The first set contains 818 tariff lines for which Customs and Border Protection began collecting the additional duties on July 6, 2018.

This list includes some of the products we distribute.

The second set contains 284 proposed tariff lines that remain subject to further review.

On July 10, 2018, the USTR announced that, as a result of China’s retaliation and failure to change its practices, President Trump has ordered the USTR to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports, and on September 17, 2018, President Trump announced that such tariffs would go into effect on September 24, 2018 and would increase to 25 percent on January 1, 2019.

However, in early December 2018, President Trump agreed to leave the tariffs at the 10 percent rate while the United States and China entered into negotiations regarding various trade-related matters.

These new tariffs and the evolving trade policy dispute between the United States and China may have a significant impact on the industries in which we participate.

Many of the products we sell are subject to the 25 percent tariff and such tariff, along with resultant price increases, may negatively impact our pricing and customer demand for these products.

On June 15, 2018, the USTR announced a list of products subject to additional tariffs pursuant to Section 301 of the Trade Act of 1974 (19 U.S.C.

2411)(“the Section 301 tariffs”).

Since that time the Section 301 tariffs have been expanded and applied to four lists of product groups (List 1, List 2, List 3 and List 4).

List 4 was subsequently split into List 4A and List 4B.

With the exception of a limited group of 352 excluded products, the Section 301 tariffs continue at 25% on goods covered under List 1, List 2 and List 3 as well as 7.5% on goods covered under List 4A.

The Section 301 tariffs have been suspended on goods covered under List 4B.

Also, the Section 301 tariff exclusions on the 352 products referenced are due to expire September 30, 2023.

These tariffs and the evolving trade policy dispute between the United States and China may have a significant impact on the industries in which we participate.

Many of the products we sell, including without limitation, certain vaporizer products, aluminum grinders, paper products and plastic products, are subject to the 25 percent tariff and such tariff, along with resultant price increases, may negatively impact our pricing and customer demand for these products.

A “trade war” between the United States and China or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the United States economy or certain sectors thereof and, thus, to adversely impact our businesses and results of operations.

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In addition, changes in environmental, employee health and safety or other laws, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations or give rise to material liabilities, which could have a material adverse effect on our business, financial condition and results of operations.

We are transitioning our business and have engaged, and may continue in engage in, dispositions via sales of our assets or other exit activities and other strategic initiatives and we may face risks related to such transactions.

We have engaged in, and expect to continue to pursue, strategic dispositions and initiatives, as we transition our business.

Dispositions present significant challenges and risks relating the separation of disposed businesses.

Such risks include:

(i) we may incur unanticipated costs or expenses, (ii) we may not be able to successfully separate divested businesses and related obligations from our operations as planned, and (iii) we may not be able to realize anticipated reductions in costs attributable to divested businesses or assets.

Divestitures may also involve continued financial involvement in, or liability with respect to, the divested businesses.

As a result of divestiture transactions, we could incur severance charges for personnel and payments for lease and other commitments, charges from the impairment or write-off of assets, and other financial loss due to the transaction.

Furthermore, there is the risk that we might lose customers.

In addition, we may not realize the degree or timing of benefits we anticipate when we first enter into a transaction.

There can be no assurances that we will manage dispositions or other strategic initiatives successfully, that strategic opportunities will be available to us on acceptable terms or at all, or that we will be able to consummate desired transactions.

Any of the foregoing could materially adversely affect our competitive position, financial condition, results of operations or cash flows.

For more information on the disposition activities we have undertaken to date, please see "Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Overview — Plan to Accelerate Path to Profitability and Capitalize the Business" and “"Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources."

We intend to continue to pursue selective acquisitions to complement our organic growth, which may not be successful and may divert financial and management resources.

We intend to continue to identify appropriate opportunities to acquire or invest in technologies, businesses or assets that are strategically important to our business or form alliances with key participants in the vaporization products, packaging, and consumption accessories industry to further expand our business.

However, we may not be successful in identifying suitable acquisition opportunities or completing such transactions.

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We rely extensively on information systems and technology to manage our business and summarize operating results.

We are in the process of a multi-year implementation of a new ERP system and expect to fully transition to the new ERP during 2022.

This ERP system will replace our existing operating and financial systems.

The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business.

We have substantially completed our multi-year implementation of a new ERP system for our Consumer Products division, which replaced our existing operating and financial systems.

However, we are still in the process of transitioning from the legacy KushCo ERP system for our Industrial Products and certain Consumer Products.

The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the

Company’s management team related to the operation of the business.

The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources.

Although we expect the ERP implementation to increase efficiencies by leveraging a common, cloud-based system throughout all divisions and standardizing processes and reporting, we have experienced complications and disruptions to our business and operations during the transition from our legacy systems.

For example, we have seen our order processing become significantly impacted by this transition.

We may not be able to successfully implement the ERP system without experiencing further delays, increased costs and other difficulties.

If we are unable to successfully design and implement the new ERP system as planned, our financial position, results of operations and cash flows could be negatively impacted.

Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be further delayed.

Changes to the base rate on our floating rate indebtedness could increase our borrowing costs.

As of December 31, 2021, approximately $8.0 million of our outstanding indebtedness bears interest at floating rates based on the London interbank offered rate (“LIBOR”) and has maturity dates beyond December 31, 2021.

The use of LIBOR was phased out at the end of 2021, although the phase out of U.S.

dollar LIBOR has been delayed until mid-2023.

Currently, no official replacement rate has been identified.

It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates.

The nature of any replacement rate and the impact of the transition from LIBOR on us and the financial markets generally are unknown and could result in interest rate increases on our debt, which could adversely affect our cash flow and operating results.

Risks Related to the Integration of KushCo

The combined company incurred and may continue to incur significant transaction and merger-related costs in connection with the merger.

We incurred and may continue to incur costs associated with combining our operations with those of KushCo.

We formulated and are executing on detailed integration plans to deliver planned synergies.

Additional unanticipated costs may be incurred in the integration of our business with that of KushCo.

We may continue to incur substantial expenses in pursuit of completing our plans.

Although we expect the that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and merger-related costs over time, the net benefit may not be achieved in the near term, or at all.

Post-merger integration of the two companies may distract the Company’s management team from its other responsibilities.

Post-merger integration of the two companies could cause our management to focus their time and energies on matters related to integration that otherwise would be directed to our business and operations.

Any such distraction on the part of our management, if significant, could affect our management’s ability to service existing business and develop new business and adversely affect the combined company’s business and earnings.

Post-merger integration and operations may fail to achieve expected results.

The success of the merger with KushCo depends heavily on a smooth post-merger integration and operations of the combined company.

Benefits of the transaction to shareholders may not be realized if the post-merger integration and operations are not well executed or well received by each company’s historical customers.

We may fail to realize the cost savings and synergies we expect to achieve from the merger.

The success of the merger depends, in part, on our ability to realize the estimated cost savings from combining our business with KushCo’s.

While we believe that the cost savings and synergies are achievable, it is possible that the potential cost savings could be more difficult to achieve than we anticipate.

Our cost savings estimates also depend on our ability to combine our business with that of KushCo in a manner that permits those cost savings and synergies to be realized.

If our estimates are incorrect or we are unable to integrate KushCo successfully, the anticipated cost savings and synergies may not be realized fully, or at all, or may take longer to realize than expected.

Combining our business with KushCo’s may be more difficult, costly, or time-consuming than expected.

We and KushCo operated, until the completion of the merger, independently.

Since the completion of the merger, the combination process could result in the loss of key employees, the disruption of our ongoing business, and inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to maintain relationship with customers and employees or achieve the anticipated benefits of the merger.

As with any merger, there may also be disruptions that cause the combined company to lose customers or other unintended consequences that could have a material adverse effect on our results of operations or financial condition.

Although we expect the ERP implementation to increase efficiencies by leveraging a common, cloud-based system throughout all divisions and standardizing processes and reporting, we have and may continue to experience complications and disruptions to our business and operations during the transition from our legacy systems.

For example, we saw our order processing become significantly impacted by this transition in early 2022.

We may not be able to successfully operate the ERP system without experiencing further delays, increased costs and other difficulties.

If we are unable to successfully utilize the new ERP system as planned, our financial position, results of operations and cash flows could be negatively impacted.

Additionally, if the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be further delayed.

We are subject to risks associated with public health crises, such as pandemics and epidemics, including the COVID-19 pandemic, which may have a material adverse effect on our business.

The nature and extent of future impacts are highly uncertain and unpredictable.

We are subject to risks associated with public health crises, such as pandemics and epidemics, including the COVID-19 pandemic.

While many countries around the world have removed or reduced the restrictions taken in response to the COVID-19 pandemic, the emergence of new variants of COVID-19 virus may result in new governmental lockdowns, quarantine requirements or other restrictions to slow the spread of the virus.

In addition, any such measures could also impact the global economy more broadly, for example by leading to further economic slowdowns.

While COVID-19 case volumes have decreased in the U.S and certain other countries, the global outlook remains uncertain as case counts fluctuate and vaccination and booster rates remain relatively low in many parts of the world.

If we or any of the third parties with whom we engage, including the suppliers, manufacturers and other third parties in our global supply chain, were to experience shutdowns or other significant business disruptions, our ability to conduct our business in the manner presently planned could be materially and negatively impacted.

For example, our Higher Standards stores in California and New York were closed for several months in 2020 as a result of COVID-19.

The scope and duration of any future public health crisis, including the potential emergence of new variants of the COVID-19 virus, the pace at which government restrictions are imposed and lifted, the scope of additional actions taken to mitigate the spread of disease, global vaccination and booster rates, the speed and extent to which global markets and utilization rates for our products fully recover from the disruptions caused by such a public health crisis, and the impact of these factors on our business, financial condition and results of operations, will depend on future developments that are highly uncertain and cannot be predicted with confidence.

To the extent the COVID-19 pandemic or other public health crises adversely affect our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described herein.

Risks Related to Our Organizational Structure

Our principal asset is our interest in the Operating Company, and, accordingly, we depend on distributions from The Operating Company to pay our taxes and expenses, including payments under the Tax Receivable Agreement (the “TRA”).

Our principal asset is our interest in the Operating Company, and, accordingly, we depend on distributions from the Operating Company to pay our taxes and expenses.

The Operating Company’s ability to make such distributions may be subject to various limitations and restrictions.

We are a holding company and have no material assets other than our ownership of Common Units of the Operating Company.

As such, we will have no independent means of generating revenue or cash flow.

Our ability to pay our operating expenses, including taxes and payments under the TRA, or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of the Operating Company and its subsidiaries and distributions we receive from the Operating Company.

We are a holding company and have no material assets other than our ownership of all of the Common Units of the Operating Company.

As such, we have no independent means of generating revenue or cash flow.

Our ability to pay our operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of the Operating Company and its subsidiaries and distributions we receive from the Operating Company.

There can be no assurance that the Operating Company and its subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants, in any future debt instruments, will permit such distributions.

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federal income tax.

Instead, taxable income is allocated to holders of Common Units, including us.

Accordingly, we will incur income taxes on our allocable share of any net taxable income of the Operating Company.

Under the terms of the Fourth Amended and Restated Agreement of the Operating Company (the “Operating Agreement”), the Operating Company will be obligated to make tax distributions to holders of Common Units, including us.

In addition to tax expenses, we will also incur expenses related to our operations, including payments under the TRA, which we expect could be significant.

We intend, as its manager, to cause the Operating Company to make cash distributions to the owners of Common Units in an amount sufficient to (i) fund their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses, including payments under the TRA.

Instead, taxable income is allocated to holders of Common Units.

As of December 31, 2022, we hold all of the outstanding Common Units.

Accordingly, we will incur income taxes on any net taxable income of the Operating Company.

Under the terms of the Fourth Amended and Restated Agreement of the Operating Company (the “Operating Agreement”), the Operating Company is obligated to make tax distributions to holders of Common Units.

In addition to tax expenses, we will also incur expenses related to our operations which we expect could be significant.

We intend, as its manager and sole member, to cause the Operating Company to make cash distributions to us in an amount sufficient to (i)

fund our tax obligations in respect of taxable income allocated to us and (ii) cover our operating expenses.

However, the Operating Company’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which the Operating Company is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering the Operating Company insolvent.

If we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders.

To the extent that we are unable to make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid;

provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.

The TRA requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial.

Under the TRA we entered into with the Operating Company and the members, including our co-founders and current directors, Mr.

LoCascio and Mr.

Schoenfeld, we are required to make cash payments to the members of the Operating Partnership equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) the increases in the tax basis of assets of the Operating Company resulting from any redemptions or exchanges of Common Units from the members and (ii) certain other tax benefits related to our making payments under the TRA.

Although the actual timing and amount of any payments that we make to the members under the TRA will vary, we expect those payments will be significant.

Any payments made by us to the members under the TRA may generally reduce the amount

of overall cash flow that might have otherwise been available to us.

Furthermore, our future obligation to make payments under the TRA could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the TRA.

Payments under the TRA are not conditioned on any member’s continued ownership of Common Units or our Class A common stock.

The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the amount of gain recognized by such holders of Common Units, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.

Our co-founders, Aaron LoCascio and Adam Schoenfeld, have substantial influence over all stockholder decisions because collectively they hold a substantial percentage of the voting power of our Class A common stock and Class B common stock.

This will limit your ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.

Aaron LoCascio and Adam Schoenfeld each serve as members of our Board, and they and their affiliates beneficially owned approximately 17% of our Class A common stock and Class B common stock, and thereby collectively controlled approximately 17% of the voting power of our common stock as of December 31, 2021.

As a result, Messrs.

Schoenfeld and LoCascio will have the ability to substantially influence us, including the ability to substantially influence any action requiring the approval of our stockholders, including, but not limited to, the election of directors, the adoption of amendments to our amended and restated certificate of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets.

This concentration of ownership and voting power may also delay, defer or even prevent an acquisition by a third party or other change of control of us and may make some transactions more difficult without their support, even if such events are in the best interests of other stockholders.

This concentration of voting power with Messrs.

Schoenfeld and LoCascio may have a negative impact on the market price of our Class A common stock.

As members of our Board, Messrs.

LoCascio and Schoenfeld owe fiduciary duties to our company, including those of care and loyalty, and must act in good faith and with a view to the interests of the corporation.

However, Delaware law provides that a director or officer shall not be personally liable to a corporation for a breach of fiduciary duty except for an act or omission constituting a breach and which involves intentional misconduct, fraud or a knowing violation of law.

As a stockholder, each of Messrs.

LoCascio and Schoenfeld is entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests of our stockholders generally.

Because Messrs.

LoCascio and Schoenfeld hold their economic interest in our business through the Operating Company, rather than through the public company, they may have conflicting interests with holders of shares of our Class A common stock.

For example, Messrs.

LoCascio and Schoenfeld may have different tax positions from us, which could influence their decisions regarding whether and when we should dispose of assets or incur new or refinance existing indebtedness, especially in light of the existence of the TRA, and whether and when we should undergo certain changes of control within the meaning of the TRA or terminate the TRA.

In addition, the significant ownership of Messrs.

LoCascio and Schoenfeld in us and their resulting ability to influence us may discourage someone from making a significant equity investment in us, or could discourage transactions in which you as a holder of shares of our Class A common stock might otherwise receive a premium for your shares over the then-current market price.

Under certain circumstances, redemptions of Common Units by members will result in dilution to the holders of our Class A common stock.

Redemptions of Common Units by members in accordance with the terms of the Greenlane Operating Agreement will result in a corresponding increase in our membership interest in the Operating Company, an increase in the number of shares of Class A common stock outstanding and a decrease in the number of shares of Class B common stock outstanding.

As of December 31, 2021, the Operating Company members own 21,744,500 shares of Class B common stock, which are exchangeable for an equal amount of shares of Class A common stock in connection with a redemption of the corresponding Common Units, which would represent approximately 20.3% of our total outstanding Class A common stock if all members exchanged their Common Units for Class A common stock, and the members' corresponding Class B common stock were canceled.

We are party to a registration rights agreement between us and the members, which will require us to effect the registration of their shares in certain circumstances.

Furthermore, we cannot predict the timing of any redemption of Common Units or the effect that such redemptions will have on the market price of our Class A common stock.

Our organizational structure, including the TRA, confers certain benefits upon the members that will not benefit Class A common stockholders to the same extent as it will benefit the members.

Our organizational structure, including the TRA, confers certain benefits upon the members that will not benefit the holders of our Class A common stock to the same extent as it will benefit the members.

The TRA provides for the payment by us to the members of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of (1) the increases in the tax basis of assets of the Operating Company resulting from any redemptions or exchanges of Common Units from the members and (2) certain other tax benefits related to our making payments under the TRA.

Although we will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.

In certain cases, payments under the TRA to the members may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the TRA.

The TRA provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control or if, at any time, we elect an early termination of the TRA, then our obligations, or our successor’s obligations, under the TRA to make payments thereunder would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA.

As a result of the foregoing, (i) we could be required to make payments under the TRA that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the TRA, and (ii) if we elect to terminate the TRA early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.

In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.

There can be no assurance that we will be able to fund or finance our obligations under the TRA.

We will not be reimbursed for any payments made to the members under the TRA in the event that any tax benefits are disallowed.

Payments under the TRA will be based on the tax reporting positions that we determine, and the IRS or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take, and a court could sustain such challenge.

If the outcome of any such challenge would reasonably be expected to materially affect a recipient’s payments under the TRA, then we will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each member that directly or indirectly owns at least 10% of the outstanding Common Units.

We will not be reimbursed for any cash payments previously made to the members under the TRA in the event that any tax benefits initially claimed by us and for which payment has been made to a member are subsequently challenged by a taxing authority and are ultimately disallowed.

Instead, any excess cash payments made by us to a member will be netted against any future cash payments that we might otherwise be required to make to such member under the terms of the TRA.

However, we might not determine that we have effectively made an excess cash payment to a member for a number of years following the initial time of such payment and, if any of our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the TRA until any such challenge is finally settled or determined.

As a result, payments could be made under the TRA in excess of the tax savings that we realize in respect of the tax attributes with respect to a member that are the subject of the TRA.

The Tax Receivable Agreement (the "TRA") may require us to make cash payments to the members of the Operating Company in respect of certain tax benefits to which we may become entitled.

Under the TRA we entered into with the Operating Company and its members, we are required to make cash payments to the members of the Operating Partnership equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) the increases in the tax basis of assets of the Operating Company resulting from any redemptions or exchanges of Common Units from the members and (ii) certain other tax benefits related to our making payments under the TRA.

Although we held all of the outstanding Common Units as of December 31, 2022, payments under the TRA are not conditioned on any member’s continued ownership of Common Units or our Class A common stock.

The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the amount of gain recognized by prior holders of Common Units, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.

Fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets may result in volatility of our operating results.

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• general market conditions, including conditions that are outside of our control, such as actions or proposed actions of the current U.S.

Presidential administration, international trade disputes and broader supply chain delays, such as those currently impacting global distribution that disrupt our supply chain and the impact of health and safety concerns, such as the current COVID-19 outbreak the recent spread of the Delta and emergence of the Omicron variants and the potential spread of other future variants and measures intended to prevent their spread;

novel and unforeseen market volatility and trading strategies, such as the massive short squeeze rally caused by retail investors on retail trading platforms;

Presidential administration and the Federal Reserve to curb inflation or the impact of future public health crises;

novel and unforeseen market volatility and trading strategies, such as the short squeeze rallies caused by retail investors on retail trading platforms;

• our financing activities, including the issuance of additional securities;

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• the market perception of our industry;

• management turnover;

• the impact, or perceived impact, of new regulations applicable to us, our suppliers or our customers;

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• our ability to successfully execute our merger and acquisition strategy;

• significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or

involving us or our competitors;

• significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;

• strategic actions by our competitors or our suppliers;

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• sales of our Class A common stock by us or other stockholders, or the perception that such sales may occur;

• the issuance of Class A common stock upon redemption of Common Units by members in the Operating Company;

• the future incurrence of debt;

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Your percentage ownership will be diluted in the future.

Your percentage ownership will be diluted in the future as a result of equity awards that we expect will be granted to our directors, officers and employees, as well as any shares of our Class A common stock, or securities convertible into shares of our Class A common stock, we issue in connection with future capital raising, strategic transactions or pursuant to our use of the ATM Program at prices that are dilutive to shareholders.

Our Amended and Restated 2019 Equity Incentive Plan provides for the grant of equity-based awards to our directors, officers and employees.

Your percentage ownership will be diluted in the future as a result of equity awards that we expect will be granted to our directors, officers and employees, as well as any shares of our Class A common stock, or securities convertible into shares of our Class A common stock, we issue in connection with future capital raising or strategic transactions at prices that are dilutive to shareholders.

Our Second Amended and Restated 2019 Equity Incentive Plan provides for the grant of equity-based awards to our directors, officers and employees.

The issuance of any shares of Class A common stock will dilute the proportionate ownership and voting power of existing security holders.

Substantial sales and issuances of our Class A common stock have and may continue to occur, or may be anticipated, which have and could continue to cause our stock price to decline.

The market price of shares of our Class A common stock could decline further as a result of substantial sales of our Class A common stock, particularly sales by our directors, executive officers, and significant shareholders pursuant to plans of disposition adopted in accordance with Rule 10b5-1 of the Exchange Act, issuances of Class A common stock under the ATM Program at prices that are dilutive to stockholders, a large number of shares of our Class A common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares.

For instance, subject to certain limitations and exceptions, the members of the Operating Company may redeem their Common Units for shares of Class A common stock (in which case, their shares of Class B common stock will be cancelled on a one-to-one basis upon any such issuance), and then sell those shares of Class A common stock.

Additionally, we expect that we will seek to raise additional capital from time to time in the future, which may involve the issuance of additional shares of our Class A common stock, or securities convertible into shares of our Class A common stock in subsequent public or private offerings, or we may be forced to continue to seek equity capital at dilutive prices through our ATM Program or otherwise if debt is not available to us to fund our working capital needs.

The market price of shares of our Class A common stock could decline further as a result of substantial sales of our Class A common stock, particularly sales by our directors, executive officers, and significant shareholders pursuant to plans of disposition adopted in accordance with Rule 10b5-1 of the Exchange Act, issuances of Class A common stock at prices that are dilutive to stockholders, a large number of shares of our Class A common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares.

Additionally, we expect that we will seek to raise additional capital from time to time in the future, which may involve the issuance of additional shares of our Class A common stock, or securities convertible into shares of our Class A common stock in subsequent public or private offerings at dilutive prices if debt is not available to us to fund our working capital needs.

We cannot predict the effect, if any, that these sales, or anticipation of such sales, will have on the market price of our common stock or the timing of any redemption of Common Units.

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Complying with these reporting and other regulatory requirements is time-consuming and expensive and could have a negative effect on our business, results of operations and financial condition.

As a public company, we are subject

to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the requirements of the Sarbanes-Oxley Act of 2002 (“SOX”).

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the requirements of the Sarbanes-Oxley Act of 2002 (“SOX”).

The cost of complying with these requirements may place a strain on our systems and resources.

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Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel.

Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Our management, including our Chief Executive Officer and Chief Financial and Legal Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.

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The existence of any future material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations, and cause investors to lose confidence in our reported financial information, any of which could lead to a decline in the per share trading price of our common stock.

Under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021.

Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting described in Item 9A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2020, which have not yet been fully remediated as of December 31, 2021.

As described in Item 9A of Part II of this Annual Report on Form 10-K, we are continuing to implement our remediation plan to address the identified material weaknesses, and our management continues to be actively engaged in the remediation efforts.

The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

As previously disc losed, in 2020, we began a multi-year implementation of a new ERP system, which will replace our existing core financial systems, and which we expect will be completed in 2022.

Manag ement is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures, based upon which, management expects to focus its allocation of organizational resources to ensure the successful implementation of the new ERP system, including as it relates to designing and implementing effective control activities.

Conversely, management expects that additional efforts related to re-designing user access roles and permissions in the existi ng ERP system, which is expected to be decommissioned in 2022, will be limited.

As previously disclosed, in 2020, we began a multi-year implementation of a new ERP system, which we substantially completed for our Consumer Products division in 2022.

However, we are still in the process of transitioning from the legacy KushCo ERP system for our Industrial Products division and certain Consumer Products.

The ERP system will replace our existing core financial systems, and which we expect will be completed in 2023.

Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures, based upon which, management expects to focus its allocation of organizational resources to ensure the successful implementation of the new ERP system, including as it relates to designing and implementing effective control activities.

Conversely, management expects that additional efforts related to re-designing user access roles and permissions in the existing ERP system, which is expected to be decommissioned in 2023, will be limited.

Based on these considerations, and subject to management’s ongoing assessment, we do not expect that the previously reported material weaknesses related to ineffective user access controls will be considered remediated until we complete the implementation of our new ERP system.

Additionally, we are in process of integrating KushCo into our system of internal control over financial reporting following the closing of the merger on August 31, 2021.

As a result of these integration activities, certain processes, controls and procedures will be evaluated and may be revised.

Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company.

In conducting our evaluation of the effectiveness of our internal control over financial reporting, we excluded KushCo from our evaluation as of December 31, 2021.

Because we are an "emerging growth company" under the JOBS Act, our independent registered public accounting firm is not be required to attest to the effectiveness of our internal control over financial reporting for so long as we are an emerging growth company.

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If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A stock could decrease, which might cause the market price and trading volume of our Class A common stock to decline.

We have a large number of authorized but unissued shares of stock, which could negatively impact a potential investor if they purchase our Class A common stock.

On August 9, 2022, we effected the Reverse Stock Split.

The Reverse Stock Split did not change the par value of our Class A common stock or the number of shares of Class A common stock or preferred shares authorized by our amended and restated certificate of incorporation.

Because the number of authorized shares of our Class A common stock was not reduced proportionally, the Reverse Stock Split increased our Board’s ability to issue authorized and unissued shares without further stockholder action.

As of December 31, 2022, our amended and restated certificate of incorporation provides for 600,000,000 shares of authorized Class A common stock, 30,000,000 shares of authorized Class B common stock and 10,000,000 shares of authorized preferred stock and we have 15,985,637 shares of Class A common stock outstanding, 18,752,297 shares reserved for exercise or vesting of outstanding warrants and options to purchase shares of Class A common stock and 886,424 shares of Class A common stock reserved for future grant under the Company’s equity incentive plan.

No shares of Class B common stock or preferred stock are outstanding.

With respect to authorized but unissued and unreserved shares, we could also use such shares to oppose a hostile takeover attempt or delay or prevent changes in control or changes in or removal of management.

The issuance of additional shares of Class A common stock or securities convertible into Class A common stock may have a dilutive effect on earnings per share and relative voting power and may cause a decline in the trading price of our Class A common stock.

We could use the shares that are available for future issuance in dilutive equity financing transactions, or to oppose a hostile takeover attempt or delay or prevent changes in control or changes in or removal of management, including transactions that are favored by a majority of the stockholders or in which the stockholders might otherwise receive a premium for their shares over then-current market prices or benefit in some other manner.

Anti-takeover provisions in our certificate of incorporation and amended and restated bylaws and Delaware law could discourage a takeover.

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Our amended and restated certificate of incorporation and our amended and restated bylaws provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, other than any action or proceeding that, under applicable law, may only be commenced or prosecuted in another forum, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to the Delaware General Corporation Law or our amended and restated certificate of incorporation or bylaws (iv) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation.

We are a “smaller reporting company” under federal securities laws and we cannot be certain whether the reduced reporting requirements applicable to such companies will make our Class A common stock less attractive to investors.

We are a “smaller reporting company” under federal securities laws.

For as long as we continue to be a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

Generally, we will remain a smaller reporting company so long as our public float remains less than $250 million as of the last business day of our most recently completed second fiscal quarter.

We cannot predict if investors will find our Class A common stock less attractive because we may rely on these exemptions.

If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may decline or be more volatile.

UNRESOLVED STAFF COMMENTS

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors