Item 1A. Risk Factors
ITEM
1A. RISK FACTORS
The
Company’s business is subject to numerous risks, including but not limited to those set forth below. The Company’s
operations and performance could also be subject to risks that do not exist as of the date of this report but emerge thereafter
as well as risks that the Company does not currently deem material.
Risks
Related to the Company’s Operations
Our
business, operations, financial condition, and liquidity have been and may continue to be affected by the outbreak of COVID-19.
In
March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The spread of COVID-19 in
the United States and the measures to contain it—including business shutdowns, indoor capacity restrictions, social distancing,
and diminished travel—have negatively impacted the economy and created significant volatility and disruption in financial
markets. Business shutdowns in certain states in response to stay-at-home orders and related measures had temporarily eliminated
access to our dispensaries by certain customers, principally non-medical use customers, impacting sales during this restricted
period. Further, the volatility in the financial markets and investor uncertainty has delayed our financing efforts and the implementation
of our Consolidation Plan. As a result, our business, operations, financial condition, and liquidity have been and may
continue to be impacted. Further, the disruption to the global economy and to our business, along with the decline in our stock
price, may also negatively impact the future carrying values of certain assets, including inventories, accounts receivables, intangibles,
and goodwill.
Marijuana
remains illegal under federal law.
Marijuana remains illegal under federal law.
It is a Schedule I controlled substance. Even in those jurisdictions in which the use of medical marijuana has been legalized
at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled that it is the federal
government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing
the use of marijuana trumps state laws that legalize its use for even medicinal purposes. At present the states are standing tall
against the federal government, maintaining existing laws and passing new ones in this area. States continue to exert this freedom,
with more states considering legalization. However, we continually face election cycles, and a new administration or the United
States Congress could introduce a less favorable policy. A change in the federal attitude towards enforcement could cripple the
industry. There is currently broad support for changes in the federal law for improved banking, investing, and the potential
legalization of cannabis. However, there is no certainty what will get changed or when. The medical and recreational
marijuana industries are our primary markets, and if these industries were to be unable to operate, we would
lose our potential clients and licenses, which would have a significantly negative impact on our business, operations,
and financial condition.
Future
growth is dependent on additional states legalizing marijuana.
Continued
development of the marijuana market is dependent upon continued legislative authorization of marijuana at the state level for
medical and adult recreational use. Any number of factors could slow or halt the progress. Further, progress, while encouraging,
is not assured and the process normally encounters set-backs before achieving success. While there may be ample public support
for legislative proposal, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous
factors impact the legislative process. Any one of these factors could slow or halt the progress and adoption of marijuana for
medical and/or recreational purposes, which would limit the market for our products and negatively impact our ability to grow
into other states.
( 8 )
It
will be difficult for you to evaluate us based on our past performance because we are transitioning our business in a new emerging
industry with a limited operating history.
We
have been actively engaged in the marijuana related business for a relatively short period of time and, accordingly, have only
limited financial results on which you can evaluate our company and operations. In addition, the components of our revenue and
costs are changing as we move away from a fee-based-only business to seed-to-sale operations. We are subject to, and must be successful
in addressing, the risks typically encountered by companies operating in the rapidly evolving cannabis marketplace, including
those risks relating to:
●
the
failure to develop brand name recognition and reputation;
●
the
failure to achieve market acceptance of our services;
●
a
slowdown in general consumer acceptance of legalized marijuana; and
●
an
inability to grow and adapt our business to evolving consumer demand.
The
medical cannabis industry faces strong opposition from traditional medicines.
It
is believed by many that existing, entrenched, well-funded, businesses may have a strong economic opposition to the medical marijuana
industry as currently formed. For example, we believe that the pharmaceutical industry does not want to cede control of any compound
that could become a strong selling drug. Specifically, medical marijuana will likely adversely impact the existing market for
Marinol, the current “marijuana pill” sold by mainstream pharmaceutical companies. Further, the medical marijuana
industry could face a material threat from the pharmaceutical industry should marijuana displace other drugs or simply encroach
upon the pharmaceutical industry’s market share for compounds such as marijuana and its component parts. The pharmaceutical
industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads
the pharmaceutical industry makes in halting or rolling back the medical marijuana movement could have a detrimental impact on
the market for our products and thus on our business, operations and financial condition.
Our
clients may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and
services.
As
discussed above, the use of marijuana is illegal under federal law. Therefore, there are banks that will not accept for deposit
funds from sale of cannabis and may choose not to do business with our clients. While there is pending legislation in the United
States Senate that will allow banks to transact business with state-authorized medical marijuana businesses, there can be no assurance
his legislation will be successful, that banks will decide to do business with medical marijuana retailers, or that in the absence
of legislation state and federal banking regulators will not create issues on banks handling funds generated from an activity
that is illegal under federal law. Notwithstanding, the Company has been able to secure state-chartered banks that are in compliance
with federal law and provide certain banking services to companies in the cannabis industry. The inability of potential clients
in our target market to open accounts and otherwise use the service of banks may make it difficult for them to purchase our products
and services.
We
may not be able to economically comply with any new government regulation that may be adopted with respect to the cannabis industry.
New
legislation or regulation, or the application of existing laws and regulations to the medical and consumer cannabis industries
could add additional costs and risks to doing business. We are subject to regulations applicable to businesses generally and laws
or regulations directly applicable to communications over the Internet and access to e-commerce. Although there are currently
few laws and regulations regulating the cannabis products, it is reasonable to assume that as cannabis use becomes more mainstream
that the FDA and or other federal, state and local governmental agencies will impose regulations covering the cultivation, purity,
privacy, quality control, security and many other aspects of the industry, all of which will likely raise the cost of compliance
thereby reducing profits or even making it more difficult to continue operations, either of which scenarios, if they occur, could
have a negative impact on our business and operations.
Our
relatively small size and limited resources may restrict our ability to manage any growth we may experience.
Growth
of our business may place a significant strain on our management systems and resources and may require us to implement new operating
and financial systems, procedures and controls. Our failure to manage our growth and expansion could adversely affect our business,
results of operations and financial condition. Failure to implement new systems effectively or within a reasonable period of time
could adversely affect our business, results of operations and financial condition. The Company is constantly looking to add additional
qualified talent to the management team to support its growth, but there is no assurance we will be successful in identifying
and/or hiring such people.
The
market may not readily accept our products.
Demand
and market acceptance for our licensed branded new cannabis-infused products are subject to a high level of uncertainty. The successful
introduction of any new product requires a focused, efficient strategy to create awareness of and desire for the products. For
example, in order to achieve market acceptance for our marijuana products we will need to gain market and patient acceptance.
Despite management’s efforts to gather data before introducing new products as a means to minimize the risk of product non-acceptance,
no assurance can be given that our efforts will be successful.
Our
marketing strategy may be unsuccessful and is subject to change as a result of a number of factors, including changes in market
conditions (including the emergence of new market segments which in our judgment can be readily exploited through the use of our
technology), the nature of possible license and distribution arrangements and strategic alliances which may become available to
us in the future and general economic, regulatory and competitive factors. There can be no assurance that our strategy will result
in successful product commercialization or that our efforts will result in initial or continued market acceptance for our proposed
products.
( 9 )
If
we are unable to protect our intellectual property rights, competitors may be able to use our technology or trademarks, which
could weaken our competitive position.
We
rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual
property rights. We enter into confidentiality or license agreements with our employees, consultants and customers, and control
access to and distribution of our products, and other proprietary information. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our products.
If
we lose our key employee or fail to hire and retain other talented employees when necessary, our operations could be harmed.
The
success of our business is currently dependent, in large part, on the personal efforts of Messrs. Robert Fireman, Jon R. Levine,
and Timothy Shaw, our chief executive officer, chief financial officer, and chief operating officer, respectively. The loss of
their services could have a material adverse effect on our business. The success of our business is currently dependent, in large
part, upon our ability to hire and retain additional qualified management, marketing, technical, financial, and other personnel
if and when our growth so requires. Competition for qualified personnel is intense and we may not be able to hire or retain such
additional qualified personnel. Any inability to attract and retain qualified management and other personnel would have a material
adverse effect on our ability to grow our business and operations.
( 10 )
We
face competition from entities with greater resources than we have.
There
is potential that the Company will face intense competition from other companies, some of which can be expected to have longer
operating histories and more financial resources and experience than the Company. Increased competition by larger and better-financed
competitors could materially and adversely affect the business, financial condition, results of operations or prospects of the
Company.
Because
of the early stage of the industry in which the Company operates, the Company expects to face additional competition from new
entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The
Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive
basis which could materially and adversely affect the business, financial condition, results of operations or prospects of the
Company.
The
introduction of a recreational model for cannabis production and distribution may impact the medical marijuana market. The impact
of this potential development may be negative for the Company, and could result in increased levels of competition in its existing
medical market and/or the entry of new competitors in the overall cannabis market in which the Company operates.
A
change in federal laws regarding the classification of cannabis as a controlled substance, interstate cannabis commerce, banking
for entities in the cannabis industry, or other related regulations may have a significant impact on the Company’s business.
Results
of clinical research, if unfavorable, could have a negative impact on the industries in which we operate and consequently on our
business model.
Research
in Canada, the United States and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social
acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few
clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although the Company believes that
the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and
social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns
regarding, and perceptions relating to, cannabis. Future research studies and clinical trials may reach negative conclusions regarding
the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis,
which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material
adverse effect on the Company’s business, financial condition, results of operations or prospects.
We
face the prospect of claims of product liability if anyone is harmed by our products.
The
Company’s products will be produced for sale directly to end consumers, and therefore there is an inherent risk of exposure
to product liability claims, regulatory action and litigation if the products are alleged to have caused loss or injury. In addition,
the production and sale of the Company’s products involves the risk of injury to end users due to tampering by unauthorized
third parties or product contamination. Previously unknown adverse reactions resulting from human or animal consumption of the
Company’s products alone or in combination with other medications or substances could occur. The Company may be subject
to various product liability claims, including, among others, that its products caused injury or illness, include inadequate instructions
for use or include inadequate warnings concerning possible side effects or interactions with other substances. While the Company
has product liability insurance coverage in place and works with third party providers to ensure they do as well, a product liability
claim or regulatory action against the Company could exceed our insurance coverage, and could adversely affect the Company’s
reputation and have a material adverse effect on its business and operational results.
We
are subject to compliance with environmental regulations which can be onerous and costly.
The
Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations
mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations
on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in
a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors
and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s
operations.
Government
environmental approvals and permits are currently, and may in the future, be required in connection with the Company’s operations.
To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from implementing its proposed
business activities or from proceeding with the development of its operations as currently proposed.
Failure
to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions thereunder,
including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective
measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required
to compensate those suffering loss or damage due to its operations and may have civil or criminal fines or penalties imposed for
violations of applicable laws or regulations which could have a material adverse effect on its business and operational results.
( 11 )
We
are subject to potential risks related to, and arising from, acquiring companies.
The
Company is in the process of acquiring several companies and intends to acquire other companies in the future. There are risks
inherent in any such acquisition. Specifically, there could be unknown or undisclosed risks or liabilities of such companies for
which the Company is not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely
affect the Company’s financial performance and results of operations. The Company could encounter additional transaction
and integration related costs or other factors such as the failure to realize all of the benefits from such acquisitions. All
of these factors could cause dilution to the Company’s earnings per share or decrease or delay the anticipated accretive
effect of the acquisition and cause a decrease in the market price of the Company’s securities. The Company may not be able
to successfully integrate and combine the operations, personnel and technology infrastructure of any such acquired company with
its existing operations. If integration is not managed successfully by the Company’s management, the Company may experience
interruptions in its business activities, deterioration in its employee and customer relationships, increased costs of integration
and harm to its reputation, all of which could have a material adverse effect on the Company’s business, financial condition
and results of operations. The Company may experience difficulties in combining corporate cultures, maintaining employee morale
and retaining key employees. The integration of any such acquired companies may also impose substantial demands on the Management.
There is no assurance that these acquisitions will be successfully integrated in a timely or cost-efficient manner, or at all.
In
the event we are sued for any reason, we would face potential cost and interference with our business operations.
The
Company is, and may from time to time become, party to litigation in the ordinary course of business which could adversely affect
its business. Should any litigation in which the Company is, or becomes, involved be determined against the Company, such a decision
could adversely affect the Company’s ability to continue operating. Even if the Company is involved in litigation and wins,
litigation can redirect significant Company resources. Litigation may also create a negative perception of the Company’s
brand.
( 12 )
Risks
Related to the Company’s Common Stock
Possible
issuances of the Company’s capital stock would cause dilution to its existing shareholders.
The
Company currently has approximately 319.1 million shares of common stock outstanding and it is authorized to issue up to 500 million
shares. Therefore, the Company will be able to issue a substantial number of additional shares without obtaining shareholder approval.
In the event the Company elects to issue additional shares of common stock in connection with any financing, acquisition or otherwise,
current shareholders could find their holdings substantially diluted, which means they will own a smaller percentage of the Company.
In addition, the Company currently has approximately 4.9 million shares of Series B preferred stock and approximately 6.2 million
shares of Series C preferred outstanding and we it authorized to issue up to 50 million shares that the board of directors can
issue under any terms it wants and without any shareholder approval.
The
exercise or conversion of outstanding warrants and options into common stock will dilute the percentage ownership of the Company’s
other shareholders. The sale of such common stock or other common stock in the open market could adversely affect the market price
of the Company’s common stock.
As
of December 31, 2020, there were approximately 26.7 million of potentially dilutive securities in the form of outstanding
options and warrants. Also on such date, there was $1.3 million of outstanding convertible debentures payable and $350,000 of
outstanding convertible promissory notes that were potentially dilutive, whose conversion into common stock is based on a discount
to the market value of common stock on or about the future conversion date. More convertible securities will likely be granted
in the future to the Company’s officers, directors, employees or consultants and as part of future financings. The exercise
of outstanding stock options and warrants and conversion of notes and debentures will dilute the percentage ownership of the Company’s
other shareholders. Sales, or the expectation of sales, of a substantial number of shares of the Company’s common stock
in the private or public markets could adversely affect the prevailing market price of the Company’s common stock.
Potential
Volatility of Common Share Price
The
market price of the Company’s common stock could be subject to significant fluctuations. Some of the factors that may cause
the market price of the common stock to fluctuate include:
(a)
the
public’s reaction to the Company’s press releases, announcements and filings with regulatory authorities and those
of its competitors;
(b)
fluctuations
in broader stock market prices and volumes;
(c)
changes
in market valuations of similar companies;
(d)
investor
perception of the Company, its prospects or the industry in general;
(e)
additions
or departures of key personnel;
(f)
commencement
of or involvement in litigation;
(g)
changes
in the regulatory landscape applicable to the Company, the dietary supplement and/or the cannabis and hemp industries;
(h)
media
reports, publications or public statements relating to, or public perceptions of, the regulatory landscape applicable to the
Company, the cannabis or the hemp industry, whether correct or not;
(i)
announcements
by the Company or its competitors of strategic alliances, significant contracts, new technologies, acquisitions, commercial
relationships, joint ventures or capital commitments;
(j)
variations
in the Company’s quarterly results of operations or cash flows or those of other comparable companies;
(k)
revenues
and operating results failing to meet the expectations of securities analysts or investors in a particular period;
( 13 )
(l)
changes
in the Company’s pricing policies or the pricing policies of its competitors;
(m)
future
issuances and sales of the Company’s common stock;
(n)
sales
of the Company’s common stock by insiders of the Company;
(o)
third
party disclosure of significant short positions;
(p)
demand
for and trading volume of the Company’s common stock;
(q)
changes
in securities analysts’ recommendations and their estimates of the Company’s financial performance;
(r)
short-term
fluctuation in stock price caused by changes in general conditions in the domestic and worldwide economies or financial markets;
and
(s)
the
other risk factors described in this section or other sections of this 10-K.
The
realization of any of these risks and other factors beyond the Company’s control could cause the market price of the common
stock to decline significantly.
In
addition, broad market and industry factors may harm the market price of the Company’s common stock. Hence, the price of
the common stock could fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations
could materially reduce the price of the common stock regardless of the Company’s operating performance. In the past, following
a significant decline in the market price of a company’s securities, there have been instances of securities class action
litigation having been instituted against that company. If the Company were involved in any similar litigation, it could incur
substantial costs, Management’s attention and resources could be diverted and it could harm the Company’s business,
operating results and financial condition.
In
the event the Company requires additional financing and access to capital, covenants and restrictions in existing agreements may
limit the Company’s options.
Certain
of the Company’s existing financing agreements contain covenants that restrict its ability to incur additional debt, pay
dividends or redeem shares of its stock. If the Company seeks to raise additional capital or financing, there can be no assurance
that such capital or additional financing will be available on terms that comply with existing covenants and are satisfactory
to the Company.
The
Company has no plans to pay dividends on its common stock.
The
Company does not expect to declare or pay dividends on the common stock in the foreseeable future. In addition, the payment of
cash dividends is limited by the terms of the Company’s financing agreements.
( 14 )
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.