What changed in this filing

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Item 1A. Risk Factors

2023-03-16 compared with 2022-03-10 · 96 added, 102 removed, 198 unchanged (50% of the section changed)

RISKS RELATING TO OUR BUSINESS

The COVID-19 pandemic and the efforts to mitigate its impact may have an adverse effect on our business, liquidity, results of operations, financial condition and price of our securities.

The pandemic involving the novel strain of coronavirus, or COVID-19, including mutations and variants thereof, and the measures taken to combat it, may have an adverse effect on our business.

Public health authorities and governments at local, state, national and international levels have announced various measures to respond to this pandemic.

Some measures that directly or indirectly impact our business include:

• voluntary or mandatory quarantines;

• restrictions on travel;

• public health directives and testing and vaccine mandates;

• social distancing measures;

• supply chain disruptions.

Although we have been deemed an “essential” business by state and local authorities in the areas in which we operate, we have undertaken measures in an effort to mitigate the spread of COVID-19, including limiting store business hours, providing sick leave and encouraging employees to work remotely if possible, which may make maintaining our normal level of revenue generation, human capital retention, corporate operations, quality controls and internal controls difficult.

Moreover, the COVID-19 pandemic has caused disruptions in our supply chains, including increased cost of freight and inventory and delays in the delivery of our inventory.

Further, the COVID-19 pandemic and mitigation efforts have adversely affected our customers’ financial condition, resulting in reduced spending for the products we sell and potential increased collection risk.

As events are rapidly changing, we do not know how long the COVID-19 pandemic and the measures that have been introduced to respond to it will disrupt our operations or the full extent of that disruption.

Further, once we are able to restart normal business hours and operations, doing so may take time and will involve costs and uncertainty.

We also cannot predict how long the effects of COVID-19 and the efforts to contain it will continue to impact our business after the

pandemic is under control.

Governments could take additional restrictive measures to combat the pandemic that could further impact our business or the economy in the geographies in which we operate.

It is also possible that the impact of the pandemic and response on our suppliers, customers and markets will persist for some time after governments ease their restrictions.

These measures have negatively impacted, and may continue to impact, our business and financial condition as the responses to control COVID-19 continue.

Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other consequences that may adversely impact our business and results of operations.

Acquisitions, strategic alliances and other investments could result in operating difficulties, dilution, and other consequences that may adversely impact our business and results of operations.

Acquisitions are an important element of our overall corporate strategy, and these transactions could entail material investments by us and be material to our financial condition and results of operations.

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• reliance on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational matters;

• failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;

• failure to obtain required governmental approvals on a timely basis, if at all, or conditions placed upon approval, under competition and antitrust laws, could, among other things, delay or prevent us from completing a transaction or otherwise restrict our ability to realize expected financial or strategic goals of an acquisition;

• cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;

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Economic conditions could adversely affect our business.

Uncertain global economic conditions, in particular in light of the COVID-19 pandemic, could adversely affect our business.

Uncertain economic conditions both in the U.S.

and globally, driven by circumstances such as rising interest rates, uncertainty around cannabis reforms at the federal level, war in Ukraine and lingering effects of the COVID-19 pandemic, could adversely affect our business.

Negative global economic trends, such as decreased consumer and business spending, high inflation and interest rates and declining consumer and business confidence, pose challenges to our business and could result in declining revenues, profitability and cash flow.

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Our competitors may also introduce new hydroponic growing equipment, and manufacturers may sell equipment direct to consumers.

Due to this competition, there is no assurance that we will not encounter difficulties in increasing revenues and maintaining and/or increasing market share.

Due to this competition, there is no assurance that

we will not encounter difficulties in increasing revenues and maintaining and/or increasing market share.

In addition, increased competition may lead to reduced prices and/or margins for products we sell.

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We identified material weaknesses in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

In connection with the audit of our financial statements for fiscal year ended December 31, 2021, we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that constituted material weaknesses.

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As part of management's independent assessment, we identified material weaknesses in our internal control over financial reporting and our independent registered public accounting firm issued an adverse opinion on internal control over financial reporting.

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Our management identified certain material weaknesses as discussed in Item 9A of this report.

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We can give no assurance that additional material weaknesses in our internal control over financial reporting will not be identified in the future.

Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.

Our failure to implement and maintain effective internal control over financial reporting could result in errors in our consolidated financial statements that could result in a restatement of our consolidated financial statements and cause us to fail to meet our reporting obligations.

If we are unable to hire and retain employees, we may not be able to implement our business plan and our business may be materially adversely affected.

Our future success depends to a large extent on our ability to attract, hire, train and retain qualified managerial, operational and other personnel.

At present, we believe we have the necessary key personnel to carry out our business plans, but if we are unable to hire and retain qualified personnel, our business will be materially adversely affected.

We face significant competition for diverse, qualified and experienced employees in our industry and from other industries and, as a result, we may be unable to attract and retain the personnel needed to successfully conduct and grow our operations.

The COVID-19 pandemic has also exacerbated these risks, and its impact on labor markets may continue to disrupt our ability to attract and retain personnel for an extended period of time.

The COVID-19 pandemic and inflation have exacerbated these risks, and the impact on labor markets may continue to disrupt our ability to attract and retain personnel for an extended period of time.

In addition, we do not maintain key man life insurance on any of our executive officers and directors.

Key personnel, including members of management, may leave and compete against us.

If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all.

Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers.

Key personnel, including members of management, may leave and compete against us, or may not perform well in their roles with us.

If one or more of our executive officers are unable or unwilling to

continue in their present positions, we may not be able to replace them readily, if at all, and may face disruption in our operations and incur additional expenses, including to recruit and retain new talent, as a result.

Litigation may adversely affect our business, financial condition and results of operations.

From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required.

From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our consolidated financial statements as a whole or may negatively affect our operating results if changes to our business operation are required.

The cost to defend such litigation may be significant and may require a diversion of our resources.

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Legal Proceedings for discussion of current legal proceedings and accruals.

The COVID-19 pandemic and the efforts to mitigate its impact may have an adverse effect on our business, liquidity, results of operations, financial condition and price of our securities.

The pandemic involving the novel strain of coronavirus, or COVID-19, including mutations and variants thereof, and the measures taken to combat it, may have an adverse effect on our business.

Public health authorities and governments imposed, altered and/or revoked various measures to respond to this pandemic.

Some measures that directly or indirectly impacted our business include:

• voluntary or mandatory quarantines;

• restrictions on travel;

• public health directives and testing and vaccine mandates;

• social distancing measures;

• supply chain disruptions, including increased cost of freight and inventory and delays in the delivery of our inventory.

Although many impacts of the COVID-19 pandemic appear to have alleviated, the pandemic has not yet been eliminated, and we cannot predict future impacts of the COVID-19 pandemic, if any, on markets generally or on our operations or the operations of our customers and suppliers.

It is possible that some impacts of the pandemic on markets will persist for some time.

These measures have negatively impacted, and may continue to impact, our business and financial condition as the responses to control COVID-19 continue.

We may not successfully develop new products or improve existing products, or successfully manage various risks that we may be exposed to in connection with our proprietary brand offerings.

We expect to continue to grow our portfolio of proprietary brand offerings and have invested in development and procurement resources and marketing efforts relating to our proprietary brand offerings to meet evolving consumer needs.

We cannot be certain that we will be successful in developing, manufacturing and marketing new products or product innovations which satisfy consumer needs or achieve market acceptance, or that we will develop, manufacture and market new products or product innovations in a timely manner.

We may not be successful in developing, manufacturing and marketing new products or product innovations that satisfy consumer needs or regulatory requirements in a timely manner.

If we fail to successfully develop, manufacture and market new products or product innovations, or if we fail to reach existing and potential consumers, our ability to maintain or grow our market share may be adversely affected, which in turn could materially adversely affect our business, financial condition and results of operations.

In addition, the development and introduction of new products and product innovations require substantial development and marketing expenditures, which we may be unable to recoup if such new products or innovations do not achieve market acceptance.

In addition, the development and introduction of new products and product innovations require development and marketing expenditures, which we may not recoup if such new products or innovations do not achieve market acceptance.

Although we believe that our proprietary brand products offer value to our customers at each price point and provide us with higher gross margins than comparable third-party branded products we sell, the expansion of our proprietary brand offerings also subjects us to certain specific risks in addition to those discussed elsewhere in this section, such as:

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Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

As a result of building and continuing to build our proprietary brands and new product technologies, we may become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property or proprietary rights with respect to our products and technology, including proceedings before the United States Patent and Trademark Office and/or non-U.S.

Patent and Trademark Office and/or non-U.S.

opposition proceedings.

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Any efforts to enforce or protect our intellectual property and proprietary rights related to trademarks, trade names and service marks may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.

Certain of our products may be purchased for use in new and emerging industries or segments and/or be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.

We sell hydroponic gardening products that end users may purchase for use in new and emerging industries or segments, including the growing of cannabis, that may not grow or achieve market acceptance in a manner that we can predict.

The demand for these products depends on the uncertain growth of these industries or segments.

In addition, we sell products that end users may purchase for use in industries or segments, including the growing of cannabis, that are subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.

For example, certain countries and 36 U.S.

states have adopted frameworks that authorize, regulate, and tax the cultivation, processing, sale, and use of cannabis for medicinal and/or non-medicinal use, while the U.S.

Controlled Substances Act and the laws of other U.S.

states prohibit growing cannabis.

Our hydroponic gardening products are multi-purpose products designed and intended for growing a wide range of plants and are generally purchased from retailers by end users who may grow any variety of plants, including cannabis.

Although the demand for our products may be negatively impacted depending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions develop, we cannot reasonably predict the nature of such developments or the effect, if any, that such developments could have on our business.

Compliance with, or violation of, environmental, health and safety laws and regulations, including laws pertaining to the use of pesticides, could result in significant costs that adversely impact our reputation, businesses, financial position, results of operations and cash flows.

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In addition, certain of our pesticide products are subject to complex and overlapping laws and regulation by various international, federal, state, provincial and local environmental and public health agencies.

Even if we are able to comply with all such laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products could nonetheless be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances.

Even if we are able to comply with all such laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products could

nonetheless be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances.

The costs of compliance, noncompliance, investigation, remediation, combating reputational harm or defending civil or criminal proceedings, products liability, personal injury or other lawsuits could have a material adverse impact on our reputation, businesses, financial position, results of operations and cash flows.

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Even if we obtain product liability insurance in the future, we may have to pay amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

Damage to our reputation could have an adverse effect on our business.

Maintaining our strong reputation is a key component in our success.

Product recalls, disputes and litigation, unauthorized employee statements on social media, our inability to ship, sell or transport our products and other matters may harm our reputation and acceptance of our products, which may materially and adversely affect our business operations, decrease sales and increase costs.

In addition, perceptions that the products we distribute and market are not safe could adversely affect us and contribute to the risk we will be subjected to legal action.

We distribute and market a variety of products, such as nutrients and growing media.

On occasion, allegations or news reports may be made that some of these products have failed to perform up to expectations or have caused damage or injury to individuals or property.

In addition, our products or their use by our

customers may be alleged to be damaging to the environment.

Public perception that the products we distribute or market harm human health or the environment could impair our reputation, involve us in litigation, damage our brand names and have a material adverse effect on our business.

Our operations may be impaired if our information technology systems, or those of our third-party vendors, fail to perform adequately or if we or our third-party vendors are the subject of a data breach or cyber-attack.

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As a result, we are subject to the risk that cyber-attacks on, or other security incidents affecting, our third-party vendors may adversely affect our business even if an attack or breach does not directly impact our systems.

Cost-cutting measures could be insufficient to drive profitability and could have unanticipated negative consequences, including hindering strategic initiatives and future growth of our business.

In response to a significant and prolonged industry downturn, the Company has undergone and expects to continue to undergo various cost-cutting measures, including store consolidations and staffing reductions.

While management believes such measures are prudent to improve results, they may not be sufficient to return the Company to profitability.

In addition, cost-cutting measures may have unanticipated negative consequences, such as customer and employee attrition.

Reducing costs also means fewer resources are available for strategic initiatives and operational improvements to support future growth once demand recovers, such as improvements to supply chain operations and information technology systems, which could have a negative impact on our business and results of operations.

We may be required to record impairment charges against the carrying value of our goodwill and other intangible assets in the future.

We are required to test for impairment of the carrying value of our goodwill and intangible assets at least annually and whenever evidence of impairment exists.

We have recorded impairment charges in the current year.

We may be required in the future to record additional impairment charges that could have a material adverse effect on our reported results.

We occupy many of our facilities under long-term non-cancellable leases, and we may be unable to renew our leases at the end of their terms.

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The estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could prove inaccurate.

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

We cannot assure, however, that our estimates, or the assumptions underlying them, will not change over time or otherwise prove inaccurate.

Any potential

litigation related to the estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could have a material adverse effect on our financial results, harm our business, and cause our share price to decline.

In order to increase our sales and marketing infrastructure, we will need to grow the size of our organization, increase our product offerings and expand our sales channels, and we may experience difficulties in managing this growth.

As we continue to work to expand our business, we will need to expand the size of our employee base for managerial, operational, sales, marketing, financial and other resources, increase our product offerings, including the development of our own proprietary brands, and expand our sales channel, such as expansion of e-commerce methods and opening of new stores.

Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees and customer and vendor relationships.

In addition, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities.

Our future financial performance and our ability to continue to grow our operation and compete in the hydroponics industry effectively will depend, in part, on our ability to effectively manage any future growth.

Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability and cash flows.

We are subject to income and other taxes in the U.S.

federal jurisdiction and various local, state and foreign jurisdictions.

Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets (such as net operating losses and tax credits) and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process.

In particular, the carrying value of deferred tax assets, which are predominantly related to our operations in the U.S., is dependent on our ability to generate future taxable income of the appropriate character in the relevant jurisdiction.

From time to time, tax proposals are introduced or considered by the U.S.

Congress or the legislative bodies in local, state and foreign jurisdictions that could also affect our tax rate, the carrying value of our deferred tax assets, or our tax liabilities.

Our tax liabilities are also affected by the amounts we charge for inventory, services, licenses and funding.

We are subject to ongoing tax audits in various jurisdictions.

In connection with these audits (or future audits), tax authorities may disagree with our determinations and assess additional taxes.

We regularly assess the likely outcomes of our audits in order to determine the appropriateness of our tax provision.

As a result, the ultimate resolution of our tax audits, changes in tax laws or tax rates, and the ability to utilize our deferred tax assets could materially affect our tax provision, net income and cash flows in future periods.

Any potential litigation related to the estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could have a material adverse effect on our financial results, harm our business, and cause our share price to decline.

If we need additional capital to fund our operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.

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If we cannot obtain sufficient capital to fund our operations, we may be forced to limit the scope of our expansion.

We are subject to a number of risks related to credit card and debit card payments we accept.

We accept payments through credit card and debit card transactions, and such payment methods are becoming increasingly popular with our customers.

For credit card and debit card payments, we pay interchange and other fees, which may increase over time.

An increase in those fees would require us to either increase the prices we charge for our products which could cause us to lose customers or suffer an increase in our operating expenses, either of which could harm our operating results.

If we or any of our processing vendors have problems with our billing software, or the billing software malfunctions, it could have an adverse effect on our customer satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products.

In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our customers’ credit cards, debit cards or bank accounts on a timely basis or at all, we could lose revenues, which would harm our operating results.

If we fail to adequately control fraudulent credit card and debit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card and debit card related costs, each of which could adversely affect our

business, financial condition and results of operations.

The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.

We are subject to collection risk that can impact the results of our operations.

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Such new markets or partners may present higher risk.

The ongoing conflict between Russia and Ukraine could create or exacerbate certain risks we face to our business, financial condition and results of operations.

Russia’s invasion of Ukraine and the global response, including the imposition of financial and economic sanctions by the United States and other countries, has created supply constraints and driven inflation that could impact our operations and could create or exacerbate other risks facing our business.

A significant interruption in the operation of our or our suppliers’ facilities could impact our capacity to produce products and service our customers, which could adversely affect revenues and earnings.

If our suppliers are unable to source raw materials in sufficient quantities, on a timely basis, and at acceptable costs, our ability to sell our products may be harmed.

Operations at our suppliers’ facilities are subject to disruption for a variety of reasons, including fire, flooding or other natural disasters, disease outbreaks or pandemics, acts of war, terrorism, government shut-downs and work stoppages.

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Because of the inherent nature of estimates, there could be significant differences between our estimates and the actual amounts of products we require, which could harm our business and results of operations.

Disruptions in availability or increases in the prices of raw materials sourced by suppliers could adversely affect our results of operations.

Disruptions in availability or prices of materials sourced by suppliers could adversely affect our results of operations.

We and our suppliers source certain of our products and/or components thereof from outside of the U.S.

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A significant disruption in the availability of any of our key products or components thereof could negatively impact our business.

In addition, increases in the prices of key commodities and other raw materials could adversely affect our ability to manage our cost structure.

In addition, increases in the prices of key commodities and other materials could adversely affect our ability to manage our cost structure.

Market conditions may limit our ability to raise selling prices to offset increases in product or raw material costs.

For certain products, new sources of supply may have to be qualified under regulatory standards, which can require additional investment and delay bringing a product to market.

If our suppliers that currently, or in the future, sell directly to the retail market in which we conduct our current or future business, enhance these efforts and cease or decrease their sales through us, our ability to sell certain products could be harmed.

Our distribution and sales and marketing capabilities provide significant value to our suppliers.

Distributed brand suppliers sell through us in order to access thousands of retail and commercial customers with short order lead times, no minimum order quantity on individual items, free or minimal freight expense and trade credit terms.

Based on our knowledge and communication with our suppliers, we believe some of our suppliers sell directly to the retail market.

If these suppliers were to cease working with us, or proceed to enhance their direct-to-customer efforts, our product offerings, reputation, operation and business could be materially adversely effected.

Our products may be purchased for use in new and emerging industries or segments subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.

We sell products that end users may purchase for use in new and emerging industries or segments, including the growing of cannabis, that are subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.

For example, certain countries and 37 U.S.

states have adopted frameworks that authorize, regulate, and tax the cultivation, processing, sale, and use of cannabis for medicinal and/or non-medicinal use, while the U.S.

Controlled Substances Act and the laws of other U.S.

states prohibit growing cannabis.

Damage to our reputation could have an adverse effect on our business.

Maintaining our strong reputation is a key component in our success.

In addition, perceptions that the products we distribute and market are not safe could adversely affect us and contribute to the risk we will be subjected to legal action.

We distribute and market a variety of products, such as nutrients and growing media.

On occasion, allegations or news reports may be made that some of these products have failed to perform up to expectations or have caused damage or injury to individuals or property.

In addition, our products or their use by our customers may be alleged to be damaging to the environment.

Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability and cash flows.

We are subject to income and other taxes in the U.S.

federal jurisdiction and various local, state and foreign jurisdictions.

From time to time, tax proposals are introduced or considered by the U.S.

Congress or the legislative bodies in local, state and foreign jurisdictions that could also affect our tax rate, the carrying value of our deferred tax assets, or our tax liabilities.

Our tax liabilities are also affected by the amounts we charge for inventory, services, licenses and funding.

We are subject to ongoing tax audits in various jurisdictions.

In connection with these audits (or future audits), tax authorities may disagree with our determinations and assess additional taxes.

We regularly assess the likely outcomes of our audits in order to determine the appropriateness of our tax provision.

Climate change and other environmental, social and governance issues could adversely affect our brands, business, results of operations and financial condition.

Climate change continues to receive increasing global attention.

The possible effects of climate change could include changes in rainfall patterns, changing temperature levels and changes in legislation, regulation and international accords.

These changes could over time affect, for example, the availability and cost of raw materials, commodities and energy, which in turn may impact our ability to procure goods or services required for the operation of our business at the quantities and levels we require.

Consumers also may change their behavior as a result of the impact of climate change, governmental regulations and public perceptions.

Additionally, climate change may present physical risks to our operations, such as damage to facilities, which could disrupt our operations or those of our customers or suppliers.

There has also been increasing focus by investors, regulators and other constituencies on environmental, social and governance (“ESG”) matters.

As a result, we may face demands or requirements to make disclosure or commitments or take other action with respect to ESG issues.

Our results of operations and financial condition may be adversely impacted if we are unable to effectively manage the risks or costs to us, our brands and our supply chain associated with ESG matters.

RISKS RELATING TO THE CANNABIS INDUSTRY

We are subject to a number of risks associated with the cannabis industry because cannabis is illegal under federal law.

Under the United States Controlled Substances Act of 1970 (the “CSA”), the U.S.

Government lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.

The United States Supreme Court has ruled in 2001 that the federal government has the right to regulate and criminalize cannabis, even for medical purposes.

Under the Controlled Substances Act of 1970 (the “CSA”), the federal government lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.

Supreme Court has ruled in 2001 that the federal government has the right to regulate and criminalize cannabis, even for medical purposes.

The illegality of cannabis under federal law preempts state laws that legalize its use.

Therefore, strict enforcement of federal law regarding cannabis would likely adversely affect our revenues and results of operations.

Recent bankruptcy rulings have denied bankruptcies for cannabis dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would violate the CSA.

Federal courts have denied bankruptcies for cannabis businesses upon the bases that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and that courts cannot ask a bankruptcy trustee to take possession of and distribute cannabis assets, as such action would violate the CSA.

Therefore, we may have difficulties collecting outstanding payments if any of our customers in the cannabis industry declare bankruptcy.

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Participants in the cannabis industry have difficulty accessing the service of banks, which makes it difficult for us to operate.

Despite rules issued by the United States Department of the Treasury mitigating the risk to banks that do business with cannabis companies permitted under state law, as well as guidance from the United States Department of Justice, banks remain wary to accept funds from businesses in the cannabis industry or serving the cannabis industry, such as ours.

Despite rules issued by the U.S.

Department of the Treasury mitigating the risk to banks that do business with cannabis companies permitted under state law, as well as guidance from the U.S.

Department of Justice, banks remain wary to accept funds from businesses in the cannabis industry or serving the cannabis industry, such as ours.

So far we have been able to find certain banking institutions willing to provide banking services to us;

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If we do not manage to successfully compete in such an environment, our revenues and results of operations will be adversely affected.

Risks Related to Our Common Stock

RISKS RELATING TO OUR COMMON STOCK

There are risks, including stock market volatility, inherent in owning our common stock.

The market price and volume of our common stock have been, and may continue to be, subject to significant fluctuations.

These fluctuations may arise from general stock market conditions, the impact of risk factors described herein on our

results of operations and financial position, or a change in opinion in the market regarding our business prospects or other factors, many of which may be outside our immediate control.

These fluctuations may arise from general stock market conditions, the impact of risk factors described herein on our results of operations and financial position, or a change in opinion in the market regarding our business prospects or other factors, many of which may be outside our immediate control.

In addition, COVID-19 and related government responses to address the COVID-19 pandemic may cause sudden and extreme changes in our stock price.

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Such issuance of additional securities would dilute the ownership stake in us held by our existing stockholders and could adversely affect the value of our securities.

As of the date hereof, we had outstanding warrants to purchase an aggregate of 331 thousand shares of our common stock at a weighted average exercise price of $ 22.14 per share, and options to purchase an aggregate of 906 thousand shares of our common stock (out of which 836 thousand are vested as of this date) at a weighted average exercise prices of $ 4.38 per share.

As of the date hereof, we had outstanding warrants to purchase an aggregate of 33 thousand shares of our common stock at a weighted average exercise price of $15.82 per share, and options to purchase an aggregate of 604 thousand shares of our common stock (all of which are vested as of this date) at a weighted average exercise prices of $3.97 per share.

The exercise of such outstanding options and warrants will result in substantial dilution of our security holders.

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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