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Item 1A. Risk Factors

2023-12-22 compared with 2022-12-15 · 39 added, 50 removed, 209 unchanged (30% of the section changed)

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We have a history of losses from operations and there are no assurances we will report profitable operations in future periods or continue as a going concern.

We reported losses from operations of $78,177,746 and $19,615,990 for fiscal 2022 and fiscal 2021, respectively.

Included in our loss from operation is a non-cash $56,670,970 and $0 impairment of goodwill for fiscal 2022 and fiscal 2021, respectively as well as an impairment of $4,285,000 and $0 on our trade names for fiscal 2022 and 2021, respectively.

Not included in our loss from operations for fiscal 2022 and fiscal 2021 is non-cash income of $8,473,999 and non-cash expense of $6,687,439 for fiscal 2022 and fiscal 2021, respectively, reflecting a change in value of the contingent liability associated with the Earnout Shares (as hereinafter defined) primarily as a result of the change in the market price of our common stock.

We reported losses from operations of $24.2 million and $78.3 million for fiscal year 2023 and fiscal year 2022, respectively.

Included in our loss from operation is a non-cash $0 and $56.6 million impairment of goodwill for fiscal year 2023 and fiscal year 2022, respectively as well as an impairment of $13.2 and $4.3 million on our trade names for fiscal 2023 and 2022, respectively.

Not included in our loss from operations for fiscal 2023 is a $0.70 million impairment non-cash charge pertaining to our ownership interest in Steady State, LLC  as well as a non-cash income of $0.19 million and non-cash expense of $8.47 million for fiscal 2023 and fiscal 2022, respectively, reflecting a change in value of the contingent liability associated with the Earnout Shares (as hereinafter defined) primarily as a result of the change in the market price of our common stock.

Until such time, if ever, that we are successful in generating gross profits which are sufficient to pay our operating expenses it is likely we will continue to report losses from operations in future periods.

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The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and cash flow and the ability to acquire additional funding.

These and other factors raise potential concern about the Company’s ability to continue as a going concern within twelve months after the date that the annual financial statements are issued.

These and other factors raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that the annual financial statements are issued.

These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern.

Our historical growth rates may not be sustainable or indicative of future growth and we may not be able to effectively manage our growth.

Historically we expanded our operations rapidly, however in the last year we have seen challenges maintaining revenue.

Net sales decreased $9 million, or 20%, to $35.4 million in 2022, as compared to $44.5 million in 2021.

In the event our revenues do not increase, we will need to raise additional capital to fund our operations in furtherance of our business plan.

Until we are profitable, we will need to raise additional capital during the current fiscal year in order to fund our operations in furtherance of our business plan.

A potential financing may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, debt securities, units consisting of the foregoing securities, equity investments from strategic development partners or some combination of each.

Any additional equity financings may be financially dilutive to, and will be dilutive from an ownership perspective to, our stockholders, and such dilution may be significant based upon the size of such financing.

Additionally, we cannot assure that such funding will be available on a timely basis, in needed quantities, or on terms favorable to us, if at all.

Our current capitalization limits our ability to make strategic or accretive acquisitions or attract new investors .

Our management has engaged in several strategic discussions for both soliciting strategic investment as well as mergers and acquisitions (“M&A”).

Our outstanding shares of Series A Preferred Stock continues to substantially limit opportunities to negotiate strategic investment or M&A.

Potential investors and merger candidates view both the dividend obligation as well as the $50 million in Series A Preferred Stock liquidation preference a challenging burden, which impacts management’s ability to negotiate potential opportunities at reasonable terms and conditions. Additionally, the change of control rights of the Series A Preferred, which provide for a $55 million redemption right, effectively prevents any future third party from making a bona fide offering to acquire our company or our assets which could provide value to our shareholders.

As we continue to act on our plan to rebuild revenues and seek accretive acquisition opportunities and working capital (although as of the date of this report we currently do not have any pending or potential acquisitions or financing alternatives), our outstanding shares of Series A Preferred Stock negatively affect our ability to seek, engage and conduct strategic transactions or raise capital that could have a significant positive impact for its shareholders.

Our recent negative growth rates may continue.

We have now had 2 consecutive fiscal years of revenue declines as the industry and Company have faced numerous headwinds. 

Net sales decreased $11.2 million or 32% to $24.2 million in fiscal 2023 and $9.0 million, or 20%, to $35.4 million in 2022, as compared to $44.5 million in 2021.

This decrease was primarily driven by a decrease in total orders year over year in both our direct to consumer and wholesale divisions and we believe associate with (i) changes in social algorithms and IOS that affect effectiveness and cost of marketing and acquiring new customers, (ii) access to certain channels, (iii) ongoing competitive environment, (iv) statements from the FDA that negatively impacted retailer interest in the category, (v) significant inflationary pressures on consumers and businesses alike and (vi) a significant reduction in marketing spend as we rationalize expenses. 

Despite this reduction in revenue, we have made consistent reduction of quarterly cash consumed by the business over this 2 year period.

We believe that our revenue growth will depend upon, among other factors:

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International expansion.

With ongoing COVID variants, we continue to assess the situation on a regular basis and adjust our business, priorities, and processes to enable us to continue to operate effectively. 

We are unable to predict the future impact of COVID-19 and any subsequent variant and when, or if, our sales to B2B brick and mortar customers will return to prior levels.

We have a limited history operating our business at its current scale.

As a result of our growth, our employee headcount and the scope and complexity of our business have increased substantially, and we are continuing to implement policies and procedures that we believe are appropriate for a company of our size.

We may continue to experience difficulties as we continue to implement changes to our business and related policies and procedures to keep pace with our recent growth and, if our operations continue to grow at a rapid pace, in managing such growth and building the appropriate processes and controls in the future.

Continued growth may increase the strain on our resources, and we could experience operating difficulties, including without limitations, difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs.

We made significant changes to our headcount to rationalize our expenses. 

We are continuing to implement policies and procedures that we believe are appropriate for a company of our size.

We may continue to experience difficulties as we continue to implement changes to our business and related policies and procedures to manage our business to positive cash flow.

 This process may increase the strain on our resources, and we could experience operating difficulties, including without limitations, difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs.

If we do not adapt to meet these evolving challenges, the strength of our brand may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our corporate culture may be harmed.

In addition, we may make investments in our research and development and sales and marketing organizations, expand our operations and infrastructure both domestically and internationally, design and develop new products, and enhance our existing products with newly developed products and through acquisitions.

If our sales do not increase at a sufficient rate to offset our operating expenses, our profitability may decline in future periods.

If our sales do not increase at a sufficient rate to offset our operating expenses, our losses may increase in future periods.

Our business depends on maintaining and strengthening our brand and generating and maintaining ongoing demand for our products, and a significant reduction in such demand could harm our results of operations.

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A large part of our success depends on our ability to attract new customers in a cost-effective manner.

We have made, and may continue to make, significant investments in attracting new customers through increased advertising spends on social media, radio, podcasts, and targeted email communications, other media and events, sponsorships, and influencer sponsorships.

We have made, and may continue to make, significant investments in attracting new customers through advertising spends on social media, radio, podcasts, targeted email communications, other media and events, sponsorships, and influencer sponsorships.

Marketing campaigns can be expensive and may not result in the cost-effective acquisition of customers.

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We have no control over these third parties and if these relationships are disrupted our results of operations in future periods will be adversely impacted.

We currently hold short term supply contracts with unaffiliated third-party vendors for our critical raw materials.

We currently hold short-term supply and manufacturing agreements with unaffiliated third-party vendors for our critical raw materials.

In addition, our products are manufactured, compounded, and packaged by unaffiliated third parties and the use of these third-parties changes from time to time due to customer demand and the composition of our product mix and product portfolio.

We do not have any long-term contracts with any of these third parties, and we expect to compete with other companies for raw materials, production and imported packaging material capacity.

We do not have any long-term committed contracts with any of these third parties, and we expect to compete with other companies for raw materials, production and imported packaging material capacity.

If we experience significant increased demand or need to replace an existing raw material supplier or third-party manufacturer, there can be no assurances that replacements for these third-party vendors will be available when required on terms that are acceptable to us, or at all, or that any manufacturer or compounder would allocate sufficient capacity to us in order to meet our requirements.

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There can be no assurance that our current management team, or any new members of our management team, will be able to successfully execute our business and operating strategies.

If our goodwill, other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings.

During fiscal 2022, we incurred $56,670,970 of Goodwill impairment and $4,285,000 of Intangible impairment as noted in Note 5 of our financial statements.

We may be required to record future impairments of goodwill, other intangible assets, or fixed assets to the extent the fair value of these assets falls below their book value.

If our other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings.

During fiscal year 2023 and 2022, we incurred $0 and $56.67 million, respectively of goodwill impairment and $13.22 and $4.29 million, respectively, of intangible impairment as noted in Note 5 of our financial statements.

We may be required to record future impairments of other intangible assets, or fixed assets to the extent the fair value of these assets falls below their book value.

Our estimates of fair value are based on assumptions regarding future cash flows, gross margins, expenses, discount rates applied to these cash flows, and current market estimates of value.

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RISKS RELATED TO THE REGULATORY ENVIRONMENT FOR CBD

Changes to Federal or state laws pertaining to industrial hemp could slow the use of industrial hemp which would materially impact our revenues in future periods.

Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, expansion of current state approvals for hemp products, and further amendment or supplementation of legislation at the federal level, including re-authorization and expansion of the hemp language in the upcoming 2023 Farm Act.

Lack of clarity and changes to Federal or state laws pertaining to industrial hemp could slow the use of industrial hemp which would materially impact our revenues in future periods.

Any number of events or occurrences could slow or halt progress all together in this space.

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RISKS RELATED TO OWNERSHIP OF OUR SECURITIES

The impact of changes in the fair value of our non-cash contingent liabilities associated with the Earnout Shares has, and may continue to, materially impact our results of operations in future periods.

As described in Note 6 to the notes to our consolidated financial statements appearing later in this report, at September 30, 2022, we have a contractual obligation to issue up to an additional 3,928,797 shares of our common stock (the “Earnout Shares”) as additional consideration for our acquisition of Cure Based Development LLC in December 2018.

generally accepted accounting principles (“GAAP”) we are required to record a non-cash contingent liability associated with the Earnout Shares and at September 30, 2022, the total of this contingent liability was $276,000.

Under GAAP we are obligated to reassess the obligations associated with the Earnout Shares on a quarterly basis and, in the event our estimate of the fair value of the contingent consideration changes, we will record increases or decreases in the fair value as an adjustment to earnings.

In particular, changes in the market price of our common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact our net loss or profit for the period.

The application of the accounting treatment for the fair valuing of the Earnout Shares, in addition to the issuance of earnout shares for the first, second, third and fourth marking periods, at September 30, 2022 resulted in a decrease in the amount of this non-cash contingent liability of $8,473,999 for fiscal 2022 as compared to an increase of $6,6,87,439 for fiscal 2021.

While we do not believe investors should place undue reliance on the impact of these non-cash changes when evaluating our results of operations in future periods, as they have no impact on the operations of the business, we expect that the fair valuing of the Earnout Shares will continue to have a material impact on our results of operations and our shareholders’

equity in future periods, which may materially impact the market price of our securities.

We are currently in the Fourth Marking Period which runs from July 2022 through November 2023.

Based on the net revenue multipliers, the Company would need to generate over $162 million in net revenue for all the remaining Earnout Shares to vest during this final marking period.

We are subject to the continued listing standards of the NYSE American and our failure to satisfy these criteria may result in de-listing of our securities.

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If the NYSE American delists either our common stock and/or our Series A Convertible Preferred Stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain any additional financing to fund our operations that we may need.

The issuances of the Earnout Shares will significantly dilute our existing shareholders.

The possible issuance of the remaining Earnout Shares will increase our issued and outstanding shares of common stock by approximately 6.5%.

In addition, assuming the possible issuance of all of the additional remaining 3,928,797 Earnout Shares but giving effect to no other change to the number of shares of our common stock issued and outstanding, the members of Cure Based Development from the merger, which includes our former Co-CEO and current board member, Mr.

Scott Coffman and together with other members of our board of directors and management, would own approximately 32% of our then outstanding shares of common stock.

The issuance of all or a portion of the Earnout Shares will dilute the ownership interests of our common shareholders and may adversely impact the market price of our common stock.

The Series A Convertible Preferred Stock ranks junior to all of our indebtedness and other liabilities and is effectively junior to all indebtedness and other liabilities of our subsidiaries.

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If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of the Series A Convertible Preferred Stock then outstanding.

We may not be able to pay dividends on the Series A Convertible Preferred Stock.

Our ability to pay cash dividends on the Series A Convertible Preferred Stock requires us to (i) either be able to pay our debts as they become due in the usual course of business, or (ii) have total assets that are greater than the sum of our total liabilities plus the amount that would be needed if we were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Further, notwithstanding these factors, we may not have sufficient cash to pay dividends on the Series A Convertible Preferred Stock.

Our ability to pay dividends may be impaired if any of the risks described in this report were to occur.

Also, payment of our dividends depends upon our financial condition and other factors as our board of directors may deem relevant from time to time.

We are currently unable to pay dividends on the Series A Convertible Preferred Stock.

During August 2023, the Company’s board of directors suspended dividend payment on the Series A Convertible Preferred Stock.

We do not anticipate paying any accrued or future dividends on our Series A Convertible Preferred Stock in the future. In order for us to be eligible to pay the dividend, state law requires us to (i) either be able to pay our debts as they become due in the usual course of business, or (ii) have total assets that are greater than the sum of our total liabilities plus the amount that would be needed if we were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Payment of our dividends depends upon our financial condition and other factors as our board of directors may deem relevant from time to time.

We cannot assure you that our businesses will generate sufficient cash flow from operations in an amount sufficient to enable us to make distributions on our common stock and preferred stock, including the Series A Convertible Preferred Stock, or to fund our other liquidity needs.

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Holders of shares of Series A Convertible Preferred Stock, voting as a class, are also entitled to vote if we should seek to issue or create any class or series of capital stock ranking senior to the Series A Convertible Preferred Stock with respect to dividends or distributions, in which event the consent of holders of at least two thirds of the then outstanding Series A Convertible Preferred Stock is required.

The consent of the holders of a majority of the Series A Convertible Preferred Stock, voting as a class, is required if we were to seek to adopt any amendment to our articles of incorporation or bylaws that would materially affect existing terms of the Series A Convertible Preferred Stock, or increase the number of authorized shares of that series, other than in connection with the anti-dilution provisions, or if we seek to create a series or class which ranks pari passu with the Series A Convertible Preferred Stock.

The consent of the holders of two thirds of the Series A Convertible Preferred Stock, voting as a class, is required if we were to seek to adopt any amendment to our articles of incorporation or bylaws that would materially affect existing terms of the Series A Convertible Preferred Stock, or increase the number of authorized shares of that series, other than in connection with the anti-dilution provisions, or if we seek to create a series or class which ranks pari passu with the Series A Convertible Preferred Stock.

Other than these limited circumstances and except to the extent required by law, holders of Series A Convertible Preferred Stock do not have any voting rights.

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The issuance of shares upon exercise of our outstanding options, restricted stock awards and warrants, or the conversion of the Series A Convertible Preferred Stock may cause immediate and substantial dilution to our existing shareholders.

In addition to our obligation to issue the Earnout Shares if the goals are met, we presently have options, unvested restricted stock awards and warrants that if exercised would result in the issuance of an additional 4,175,417 shares of our common stock, and our Series A Convertible Preferred Stock is presently convertible into an additional 8,335,000 shares of common stock.

We presently have options, unvested restricted stock awards and warrants that if exercised would result in the issuance of an additional 93,222 shares of our common stock, and our Series A Convertible Preferred Stock is presently convertible into an additional 185,223 shares of common stock.

The issuance of shares upon exercise of warrants and options and/or the conversion of shares of our Series A Convertible Preferred Stock will result in dilution to the interests of other shareholders.

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s ongoing legal challenges with the SEC could impact customers and investors perception of the Company.

In May of 2022, our former Co-CEO was indicted civily by the SEC for activities prior to 2019.

In May of 2022, our former Co-CEO was indicted civilly by the SEC for activities prior to 2019.

While the Company was not named as a defendant and we strongly believe no improprieties occurred by the Company, his ongoing legal proceedings and any association could impact customers and investors perception of the Company.

Our executive officers, directors and their affiliates may exert control over us and may exercise influence over matters subject to shareholder approval.

Our executive officers and directors, together with their respective affiliates, beneficially own approximately 31% of our outstanding common stock as of December 1, 2022.

Accordingly, these shareholders, if they act together, may exercise substantial influence over matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger.

This concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discourage a potential acquirer from attempting to obtain control over us, which in turn could have a material adverse effect on the market value of our common stock.

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