ITEM
1. BUSINESS.
Throughout
this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “registrant,” and “Company”
refer to Banner Energy Services Corp., a Nevada corporation.
Cautionary
Note Regarding Forward Looking Statements
This
Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements
regarding our entrance into the cannabis industry through the operation of cannabis distribution licenses, the anticipated acquisition
of Treehouse Company, Inc. and our ability to pay the full purchase price and obtain regulatory approval for the transfer of licenses,
our planned operations under our Joint Venture Agreement with 7Seeds Inc., and Firebreak Associates, Inc. and our ability to use the
license thereunder to establish and operate cannabis retail stores at one or more locations, our ability to develop and grow our
sporting goods and apparel business or generate revenue therefrom, our working capital needs, potential financings through the sale of
our common stock or other securities, the subsequent use and sufficiency of the proceeds from any capital raising methods we may undertake
to fund our operations, our further development and implementation of our business plan and our ability to locate sources of
capital necessary to meet our business needs and objectives. All statements other than statements of historical facts contained in this
report, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management
for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,”
“anticipate,” “intend,” “should,” “plan,” “could,” “target,”
“potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to
us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations
and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business
strategy and financial needs.
The
results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that
may cause actual results to differ materially from these forward-looking statements include those described in Item 1A. – Risk
Factors. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information,
future events or otherwise.
Summary
of Risk Factors
Investing
in our securities involves a high degree of risk. Investors should carefully consider the risks described below concerning our planned
cannabis operations, in addition to the risks described under “Item 1A – “Risk Factors,” before deciding to invest
in our securities.
Set
forth below is a summary of some of the principal risks we face with respect to our business:
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Our ability to continue as a going concern is in doubt
unless we obtain adequate new debt or equity financing and achieve sufficient sales levels; |
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We
are a new participant in the cannabis industry and the sporting goods industry, and we may be unsuccessful in completing
the necessary transactions or obtaining the requisite acquisitions or licenses and permits needed to operate as planned. |
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Because
of our lack of operating history and the relative infancy of the cannabis industry, investors may be unable to evaluate our prospects
or an investment in us. |
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We intend to focus our operations on a small number
of industries, with a present intent to focus on cannabis operations, and the lack of diversification exposes us to risk, particularly
given the regulatory uncertainty in that industry. |
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Our
management lacks experience operating a cannabis business, and we will need to attract, hire and compensate qualified personnel to
meet our business objectives. |
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We
face intense competition in a relatively new and rapidly evolving industry from larger competitors with longer operating histories,
greater access to capital and human resources and vertically integrated cannabis operations, as well as smaller unregulated market
participants. |
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Cannabis
remains illegal under U.S. federal law which preempts more permissive state and local laws to the extent federal laws are enforced,
and legislation, regulation and enforcement policies of cannabis could change in manners adverse to us and the industry. |
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We
may be subject to action by the U.S. federal government through a number of agencies for participation in the cannabis industry,
including the FDA, DEA, ATF and IRS. |
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U.S.
state and local regulation of cannabis is robust, uncertain and constantly evolving, and uniform compliance across jurisdictions
may be difficult or impossible to achieve. |
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State
regulatory agencies may require us to post bonds or significant fees to operate. |
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We
will be subject to limitations, challenges and associated costs imposed by state and local governments on the ownership, operation
and maintenance of cannabis licenses. |
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Because
cannabis is illegal under U.S. federal law, we may be unable to access to certain benefits available to non-cannabis companies, such
as access to financial institutions and federal tax exemptions. |
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Because
our contracts will involve cannabis and related activities, which are not legal under U.S. federal law, we may face difficulties
in enforcing our contracts. |
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We
may be subject to varying restrictions on marketing the cannabis products we attempt to sell in varying state and local jurisdictions. |
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The
results of future clinical research and scientific articles may be unfavorable to cannabis products, which may have a material, adverse
effect on the demand for our products. |
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Inconsistent
public opinion and perception of cannabis could hinder market growth and state adoption of permissive laws regulating its use. |
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If
our operations are found to be in violation of applicable anti-money laundering laws and our revenues or proceeds are viewed as proceeds
of crime, we may be unable to effect distributions or reinvest amounts we receive into our business. |
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We
anticipate requiring additional financing to operate and expand our cannabis business, and we may face difficulties acquiring additional
financing on favorable terms, or at all, and any financing we undertake could substantially dilute our existing investors or otherwise
have an adverse impact on their holdings. |
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Disparate
state-by-state regulatory landscapes may require us to implement operational, transactional or corporate structures that expose us
to revenue-related and other risks. |
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The
success of our business will depend, in part, on our ability to successfully acquire complementary cannabis businesses and assets,
integrate acquired businesses and navigate other risks inherent in acquisitions in the cannabis industry and in general. |
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We
will face security risks related to our planned cannabis dispensaries and operations, including with respect to both physical locations
and information technology with respect to data privacy and security and related laws and regulations. |
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We
face exposure to fraudulent or illegal activity by employees, contractors, consultants, and agents, which may subject us to investigations
and actions. |
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We
face risks related to the novelty of the cannabis industry, and the resulting lack of information regarding comparable businesses,
unanticipated expenses, difficulties and delays, and the offering of new products in a relatively untested market. |
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We
will be dependent on obtaining, developing and sustaining an attractive product line and brand portfolio, and we may be unsuccessful
in doing so on economically feasible terms or at all. |
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We
face risks related to our need for adequate insurance coverage and the possibility for uninsured or underinsured losses. |
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Our
ability to operate as intended will be dependent upon third party suppliers, and may be negatively impacted by or our suppliers’
inability to produce and ship products at the necessary quality levels or within prescribed timeframes. |
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We
are subject to risks and uncertainties posed by the COVID-19 pandemic, including due to reduced demand, economic hardship and our
expected focus on retail cannabis sales. |
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We
may be subject to product liability or intellectual property which may be costly and/or divert management’s time and attention
from important operational matters. |
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Our
intellectual property rights may be difficult to protect. |
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Our
products may be subject to product recalls, which may result in expenses, legal proceedings, regulatory action, loss of sales, reputational
harm, and diversion of management’s attention. |
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Synthetic
products from the pharmaceutical industry may compete with cannabis use and products. |
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Due to factors beyond our control, our stock price may
be volatile. |
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Trading in our common stock is limited, and sales of
our common stock may dilute our current investors’ holdings and/or depress our stock price. |
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Future issuances of our common stock, which we may effect
to raise capital or for other reasons, could dilute the interests of our existing shareholders. |
These
and other material risks we face are described more fully in Item 1A. – Risk Factors, which investors should carefully review prior
to making an investment decision with respect to the Company or its securities.
Description
of Business
The
terms “we,” “us,” “our,” “registrant,” “Fortium Holdings”, and the “Company”
refer to Fortium Holdings Corp. (formerly Banner Energy Services, Corp. “Banner Energy”)), a Nevada corporation. Set forth
below is an overview of the Company’s corporate history and business development. Because of our focus on our new cannabis business,
much of the following discussion, including regarding the competitive and regulatory environment we face, is focused on that business
and the cannabis industry.
On
November 18, 2019, the Company merged with Banner Midstream Corp., a Delaware corporation (“Banner Midstream”). Banner Midstream
then had two operating subsidiaries: Pinnacle Frac Transport LLC, a Texas limited liability company (“Pinnacle Frac”)
and Capstone Equipment Leasing LLC, a Texas limited liability company (“Capstone”) as of November 18, 2019.
Additionally,
immediately following the closing of the merger, the Company and its secured debt holders finalized an agreement whereby the debt
holders took possession of the Company’s biotechnology assets and assumed certain other Company obligations in lieu of payment
by the Company of the amounts due in the secured debt instruments.
On
March 27, 2020, Banner Midstream was acquired by Ecoark Holdings, Inc., (“Ecoark”) pursuant a Stock Purchase Agreement, dated
March 27, 2020 (the “Banner Purchase Agreement”), between Ecoark and Banner Energy. Pursuant to the Banner Purchase Agreement,
Ecoark acquired 100% of the outstanding capital stock of Banner Midstream in consideration for 1,789,041 shares of common stock of Ecoark
valued at $2.72 per share and assumed approximately $11,774,000 in short-term and long-term debt of Banner Midstream and its subsidiaries.
As
a result of the Banner Purchase Agreement, the Company did not have any operating subsidiaries from March 28, 2020 until March 18, 2021,
when the Company formed Norr LLC (“Norr”),
a Nevada limited liability company and wholly-owned subsidiary of the Company, and commenced operations as a sports equipment and apparel
manufacturer and retailer. Prior to organization of Norr, the Company’s Chief Executive Officer had explored this business opportunity
and commenced preparation of a business plan for the business. On March 23, 2021, the Company engaged the services of two consultants
and entered into consulting agreements through Norr pursuant to which each consultant provides services to Norr which were subsequently
replaced in December 2021 when we also added a third independent contractor to assist in our Norr business. The terms of these services
and compensation are more fully described below.
On
September 9, 2021, the Company formed Elysian Premium Corp., a Colorado corporation (“Elysian”). On September 14, 2021, Elysian
entered into a Stock Purchase Agreement (“SPA”) with Treehouse Company, Inc. (“Treehouse”), and its sole shareholder
Alex Gosselin (the “Seller”) pursuant to which Elysian agreed to purchase 80% of the capital stock of Treehouse from
the Seller for $200,000. Treehouse’s key assets consist of two licenses for commercial cannabis distribution in the State of California,
license numbers C11-0000999 and C9-0000379. The acquisition of Treehouse will close
upon delivery of the $200,000 purchase price to the escrow agent
to be held until release upon receipt of the requisite regulatory approval for the transaction. As of March 9, 2022, the acquisition
has not closed.
Simultaneously
with the SPA, Elysian and the Seller entered into a Memorandum of Understanding with Treehouse pursuant to which the parties agreed
that Elysian will purchase the remaining 20% of the capital stock of Treehouse for an additional $200,000 and enter into a second Stock
Purchase Agreement on substantially similar terms to the SPA in connection therewith, subject to state and local regulatory
clearance of the transfer of ownership of the two cannabis licenses owned by Treehouse. The SPA provides that if required state and
local regulatory clearance is not obtained, the SPA will terminate, Elysian will return the Treehouse capital stock to the Seller
and the Seller will return the $200,000 purchase price to Elysian.
On
December 2, 2021, Elysian, the Company, 7Seeds Inc. (“7Seeds”), and Firebreak Associates, Inc. (“Firebreak”)
(collectively, the “Parties”) entered into a joint venture agreement (the “JVA”). Pursuant to the JVA, 7Seeds,
Firebreak and Elysian agreed to cooperate in the opening and operation of cannabis distribution facilities as follows: (i) 7Seeds agreed
to provide consulting services to Elysian for an initial term of 36 months, including identifying locations to open new commercial
cannabis businesses, including without limitation dispensaries, delivery stores, and other businesses engaging in cannabis related activities
(the “Elysian Stores”), securing proper state and local licensure, planning commercial cannabis business operations at those
locations in exchange for the compensation described below, and (ii) Firebreak, as the owner of certain trademarks and service marks
(the “CannaBlue Marks”), licensed the CannaBlue Marks to Elysian for an initial term of five years, pursuant to
which Elysian obtained the option to open the Elysian Stores under the name “CannaBlue” and making use of the CannaBlue
Marks. The Elysian Stores will be owned and operated entirely by Elysian or its affiliates. The license for the CannaBlue Marks under
the JVA is for use in connection with retail Elysian Stores and related activities in the United
States, subject to the following exceptions: (i) a 99-mile radius from each of Oakland, CA and South Lake Tahoe, CA are excluded from
the permitted territory in which Elysian may use the license; (ii) the license excludes the use of CannaBlue Marks for online stores
and related activities from the permitted uses, and (iii) the license to use the Cannablue marks is non-exclusive with respect to (A)
the online promotion, advertising, and sales of products bearing the Cannablue Marks; and (B) the sale and distribution of Firebreak’s
private label products by licensed cannabis distributors.
In
exchange for the license, Elysian has agreed to pay Firebreak a $5,000 annual license fee, and a quarterly royalty fee equal to the greater
of 6% of gross sales or $5,000 for each Cannablue-branded Elysian Store that did not directly result from the consulting
services of 7Seeds. In exchange for the consulting services, Elysian has agreed to pay 7Seeds a monthly fee beginning at
$5,000 to be incrementally increased up to $15,000 during the initial term of the services. Further, for each Elysian Store
for which 7Seeds directly assists in obtaining a cannabis license (exclusive of California license numbers C11-0000999 and C9-0000379),
Elysian has agreed to pay 7Seeds a one-time issuance of $50,000 in shares of Fortium’s common stock and
a quarterly royalty fee of 6% of gross sales.
In
December 2021, Norr entered into a term sheet for an Advisory Agreement with three individual contractors. The Advisory Agreements, were
effective upon the signing of the definitive documents on January 24, 2022 and are for a period of five years. If any advisor
voluntarily or involuntarily terminates his services, his agreement will automatically terminate. All advisors will be
paid $1,000 per month for the first eighteen months immediately following execution of the Advisory Agreement. In addition to the cash
compensation, the Company shall compensate the advisors who have not terminated their relationship with Norr based on the following
events (amounts have been aggregated among the advisors):
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Upon
the first $1 of revenue generated within Norr, the advisors will vest in 5% ownership of Norr; |
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Upon
the first $100,000 of revenue generated within Norr, the advisors will vest in an additional 5% ownership of Norr; |
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Upon
the first $250,000 of revenue generated within Norr, the advisors will vest in an additional 5% ownership of Norr; |
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Upon
the first $500,000 of revenue generated within Norr, the advisors will vest in an additional 5% ownership of Norr; |
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Upon
the first $1,000,000 of revenue generated within Norr, the advisors will vest in an additional 5% ownership of Norr; |
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Upon
the first $1,000,000 of net operating free cash flow generated within Norr, the advisors will vest in $200,000 of common stock in
the Company; and |
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Upon
the first $2,500,000 of net operating free cash flow generated within Norr, the advisors will vest in an additional $300,000 of common
stock in the Company; and |
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Upon
the first $5,000,000 of net operating free cash flow generated within Norr, the advisors will vest in an additional $400,000 of common
stock in the Company. |
The
maximum ownership the advisors may collectively in Norr shall be 25%.
In addition, the advisors may receive shares of
Fortium common stock based on meeting enumerated net operating free cash flow thresholds ranging from $1,000,000 to $5,000,000, for a
total potential Fortium equity compensation to these advisors of up to $900,000 of shares of Fortium common stock.
On March 8, 2022, the Company entered into a stock purchase agreement
whereby the Company paid a non-refundable $50,000 purchase price to Firebreak Associates, Inc. in exchange for a total of 5% equity in
any of the corporations that Firebreak Associates, Inc. controls if they are selected through the State of California’s retail
cannabis license lottery process in Encinitas, California.
The
Company is subject to a number of risks, including the need to develop the Elysian and Norr businesses and/or acquire and
successfully operate a new business, the risk of our need for additional capital and potentially attempting to raise such capital
through equity and/or debt financings. See Part II, Item 1A, herein and Item 1A “Risk Factors” included in the Annual Report
on Form 10-K for the year ended December 31, 2020 filed February 4, 2021.
On
July 31, 2020, Mr. Jay Puchir notified the Board of Directors (the “Board”) that he was resigning as the Chairman of the
Board and Chief Executive Officer of the Company. On July 31, 2020, the Board appointed Mr. Richard Horgan as the Chief Executive Officer,
and as our sole director and Chairman of the Board, effective August 1, 2020.
On
January 7, 2021, shareholders of the Company representing approximately 57% of the outstanding common shares, acted by written consent
in lieu of a meeting to approve an amendment to the Company’s Articles of Incorporation to change the name of the Company to Fortium
Holdings Corp. The Financial Industry Regulatory Authority approved the name change on May 18, 2021.
Competition
and Market Conditions
We
will face substantial competition in our efforts to grow our operations, particularly as we shift our focus towards the retail sale of
cannabis products. The cannabis retail industry is fiercely competitive, as a growing number of companies, including many larger, well-capitalized
cannabis retail companies, have entered the market in an attempt to capitalize on more lenient government restrictions in the United
States compared to prior periods. We also face competition from companies which offer a broader range of products than we intend to market
in our cannabis operations, such as tobacco, alcohol, cosmetic products and wellness products. Among the barriers to entry is the requirement
to be licensed in state and local jurisdictions. To this end, we are in the process of acquiring two commercial cannabis licenses in
California.
Numerous
other factors are expected to be critical to our ability to be competitive in this endeavor, including product quality and prices, brand
strength, production and distribution capabilities and geographic scope of operations and market presence. Additionally, market conditions
can shift demand for cannabis products, such as competitive pricing, the effects of inflation, regulatory changes and economic or geopolitical
turmoil. In the short-term we intend to focus our commercial cannabis efforts in a single state, California, which may render us at a
relative competitive disadvantage when compared to other cannabis retail companies whose operations expand into a larger geographic territory
for a number of reasons including longer operating histories, greater access to capital, industry relationships, brand recognition and
others. In addition, many competitors are able to commercialize their cannabis products through online sales, which we will not be able
to do using the Cannablue Marks due to restrictions in the JVA that provides for the license. Additionally, many of our competitors are
more vertically integrated, including some with “seed-to-sale” operations in which they cultivate, produce, sell or distribute
their cannabis or cannabis-related products entirely or mostly in-house or by using a well-structured network of interrelated parties,
which allows them to enjoy reduced operational costs and a higher volume of sales than is anticipated for our planned cannabis operations.
Alternatively, we expect to depend on third parties to obtain products to sell at our stores, and on the development and maintenance
of key business and industry relationships in order to execute our business plan, including opening new stores and potentially expanding
to new regions in the future.
With
respect to our Norr operations, we face competition from larger competitors with longer operating
histories, greater access to capital and human resources and vertically integrated sporting goods operations, including many larger retail
and online companies which offer a broader range of sporting and athletic gear and apparel than our Norr product offerings. We also face
competition from smaller online and retail businesses which offer similar products to ours. Because of these competitive conditions and
our limited capital, we currently focus on online sales for our Norr products.
Government
Regulation
Below
is a discussion of the federal and state-level regulatory regimes in the jurisdictions where the Company is currently operating through
its subsidiaries.
U.S.
Federal Regulation of Cannabis
The
U.S. federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances,
including cannabis, in a schedule. Cannabis is classified as a Schedule I controlled substance. A Schedule I controlled substance is
defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision
and a high potential for abuse. Schedule I controlled substances are federally illegal and the manufacturing, sale and use of cannabis
is a violation of federal law.
Due
to the conflicting views between state legislatures and the federal government regarding cannabis, cannabis businesses are subject to
inconsistent laws and regulations. The Obama Administration attempted to address these inconsistencies in the Cole Memorandum that Deputy
Attorney General James Cole sent to all U.S. Attorneys in August 2013, which outlined certain priorities for the Department of Justice
relating to the prosecution of cannabis offenses. The Cole Memorandum noted that, in jurisdictions that have enacted laws legalizing
cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation,
processing, distribution, sale and possession of cannabis, conduct in compliance with such laws and regulations was not a prosecution
or enforcement priority for the Department of Justice. However, the Department of Justice did not provide (and has not provided since)
specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole Memorandum. However, on January
4, 2018, then U.S. Attorney General Jeff Sessions issued a new memorandum which rescinded the Cole Memorandum, largely restoring the
uncertainty as to potential federal regulatory enforcement on the cannabis industry.
While
there have been efforts to reform federal cannabis law, including bills proposed in Congress which would address multiple issues regarding
the cannabis industry, from banking and tax reform to full legalization, as of the date of this Report, none have been passed into law.
Therefore, as of the date of this Report, cannabis remains illegal under federal law, although federal enforcement policies have largely
deferred to state regulations which are discussed below.
State
Cannabis Law
State
laws that permit and regulate the production, distribution and use of cannabis for medicinal and adult use are in direct conflict with
federal law. Although certain states and territories of the U.S. authorize medical and/or adult use cannabis production and distribution
by licensed or registered entities, under U.S. federal law, the possession, use, cultivation and transfer of cannabis and any related
drug paraphernalia are criminal acts under the Controlled Substances Act. Although the Company plans to only engage in cannabis-related
activities that are compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis
may not absolve us of liability or enforcement actions under U.S. federal law, nor may it provide a defense to any proceeding that may
be brought against the Company.
California
Our
initial cannabis operations are planned to commence in California, subject to satisfaction of closing and post-closing conditions including
the receipt of the required regulatory approval of our acquisition of Treehouse and its two licenses. In
September 2015, the California legislature passed three bills collectively known as the Medical Cannabis Regulation and Safety Act (“MCRSA”).
The MCRSA established a licensing and regulatory framework for medical marijuana businesses in California. In 2016, voters in
California passed Proposition 64, the Adult Use of Marijuana Act (“AUMA”) creating an adult use marijuana program for adults
21 years of age or older. Senate Bill No. 94, known as Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”)
in June 2017, essentially combining the AUMA with the MCRSA to provide a single set of regulations to govern a medical and adult use
licensing. MAUCRSA went into effect on January 1, 2018.
In
order to legally operate a medicinal or adult use cannabis business in California, the operator must have both a local and state license.
This requires license holders to operate in cities with cannabis licensing programs. Municipalities in California are allowed to determine
the number of licenses they will issue to cannabis operators or can choose to ban cannabis businesses outright.
There
are three principal license categories in California: (1) cultivation, (2) processing and (3) retailer. Each of the two Treehouse licenses
are retailer licenses, which permit the sale of cannabis and cannabis products to both medical patients and adult use customers. Only
certified physicians may provide medicinal marijuana recommendations. An adult use retailer license permits the sale of cannabis and
cannabis products to any adult 21 years of age or older.
We
intend to follow all regulatory requirements regarding the reporting of inventory movement and sale, as well as all other data reporting
and record retention requirements mandated by California.
Employees
As
of the date of this Report, we have one employee, our Chief Executive Officer.
ITEM
1A. RISK FACTORS.
Investing
in our common stock involves a high degree of risk. Investors should carefully consider the following Risk Factors before deciding whether
to invest in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also
impair our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial
condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of
our common stock could decline.
Risks
Related to our Planned Operations in the Cannabis Industry
We
currently have a SPA to acquire two cannabis licenses, and the closing of this transaction and the subsequent use thereof are
subject to contractual and regulatory contingencies over which we have little to no control.
As
of March 10, 2022, the Company’s acquisition of a majority of the ownership interest of Treehouse has not closed. We will
need to acquire ownership of Treehouse in order to commence our initial cannabis retail operations in California. Treehouse’s main
assets consist of two cannabis licenses. The initial purchase agreement, which contemplates the acquisition of an 80% ownership interest
in Treehouse, requires that we pay $200,000. We will also need to pay an additional $200,000 to obtain the remaining 20% Treehouse ownership
under a subsequent purchase agreement if it is executed. Since we have sold the remaining Ecoark common stock we previously held,
we will need to raise additional capital to complete these transactions. We have also committed to substantial financial obligations
under our JVA with 7Seeds and Firebreak in order to capitalize on the Treehouse acquisition through Elysian Stores using the Cannablue
Marks, which will be dependent on the acquisition closing and receiving the regulatory approval. Also by virtue of the JVA, we will be
highly dependent on 7Seeds to establish and expand our market presence and on Firebreak for branding, and the JVA precludes us from selling
cannabis products online using the CannaBlue Marks. Further, the purchase of the licenses under the Treehouse SPA is conditioned
upon Elysian and Treehouse obtaining the required regulatory approval for the transfer of the licenses from each of the California Department
of Cannabis Control and the City of Oakland, which we may be unable to obtain. There can therefore be no assurance that the transaction
will close or that we will be successful on capitalizing on the licenses if we do obtain them, in which case our planned cannabis
operations and prospects will be materially adversely affected and you could lose all or part of your investment.
We
lack an operating history in the commercial cannabis space, and our proposed business is subject to a number of significant risks and
uncertainties which affect its future viability.
As
of March 10, 2022, we have invested and agreed to invest amounts exceeding the current value of our assets towards
the development of our future cannabis business. That business, Elysian, has been formed and we have entered into a SPA
to acquire two cannabis licenses in California and a separate JVA to use those licenses, but has not commenced material operations.
If we are able to proceed, we must acquire a lease or purchase land for our first cannabis dispensary in California, as well as hire
qualified personnel and implement information technology and infrastructure to track inventory and sales and develop online sales capabilities.
We also expect to incur significant expenditures to obtain intellectual property rights and enter into other arrangements to develop
our brand, stores and marketing. These plans will require additional capital that will have a dilutive effect on our shareholders
and could have a depressive effect on our stock price. Among the risks and uncertainties are:
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Our
team has no experience in commercial cannabis operations, and we will need to hire qualified personnel to further our growth strategy
in the cannabis industry; |
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We
have yet to acquire the requisite licenses for our planned cannabis business; |
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If
the pending acquisition of cannabis licenses closes, we will initially only be legally permitted to sell in one jurisdiction, California,
which will limit our prospects and expose us to the risk of lack of market diversification; |
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Because
our initial operations will be limited to retail sales as envisioned under the JVA, we will be highly dependent upon third
parties, particularly 7Seeds and Firebreak as well as other third party to manufacture or provide private labelling for us
to sell cannabis products and generate revenue, and we may be unable to procure such sources on favorable terms or at all; |
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We
will have minimal control over the third parties we hire or collaborate with, which exposes us to liability risk; |
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There
are a growing number of well capitalized, vertically integrated cannabis businesses, and the competition within the industry is intense; |
If
any if these risks come to fruition, or if we are unable to overcome the challenges they may pose, our ability to generate revenue and
as a result our financial condition would be materially adversely affected.
We
require additional financing to commence and expand operations as intended, and we may face difficulties acquiring financing on terms
acceptable to us or at all.
We
will need additional capital to establish and grow our planned cannabis operations and will need to seek further financing to do so.
To this end, as of March 1, 2022 we have sold the remaining Ecoark common stock we held with the intention of using some or all of
the proceeds to complete the Treehouse SPA, which when combined with our commitments under the JVA and advisors’ compensation for
Norr, necessitates us locating additional capital to fund our current and planned operations. If we fail to raise additional capital
as and when needed, our ability to implement our business could be compromised. To date, our efforts to enter the cannabis industry have
been limited to executing an agreement to acquire two cannabis licenses which if closed would enable us to sell cannabis products in
California. However, we require additional capital to fund the acquisition, which will be for a total purchase price of $400,000, and
for working capital purposes, including operational expenses such as obtaining licenses, compensating employees and service providers
to assist in sales, compliance and other matters, and capital expenditures and infrastructure including obtaining rights and inventory
in cannabis products to sell. Management estimates needing at least $10 million to fund our planned expenditures and operations over
the next 12 months.
The
terms of securities we issue in future capital raising transactions may be more favorable to new investors, and may include liquidation
preferences, superior voting rights or the issuance of other derivative securities, which could have a further dilutive effect on or
subordinate the rights of our current investors. Any additional capital raised through the sale of equity securities will likely dilute
the ownership percentage of our shareholders and could have a depressive effect on our stock price. Additionally, any debt securities
we issue would likely create a liquidation preference superior that of our current investors and, if convertible into shares of common
stock, would also pose the risk of dilution. If we fail to obtain the necessary financing when needed, on favorable terms or at all,
we may be forced to discontinue operations, and your investment could become worthless. Further, if the securities we issue are dilutive
or otherwise negatively impact existing investors’ rights, our business and prospects, and/or your investment in us could be materially
harmed.
We
face intense competition in a rapidly developing industry by larger, vertically integrated competitors with more experience and financial
resources than we have, as well as numerous smaller and/or unlicensed market participants.
We
face intense competition from other cannabis companies, many of which have longer operating histories and more financial resources and
marketing experience than us, and/or have vertically integrated seed-to-sale cannabis businesses. Increased competition by larger and
better financed competitors could materially and adversely affect our business, financial condition and results of operations. Because
we are a new entrant in the cannabis industry and our operations will initially be focused on retail cannabis sales, the competitive
forces pose a greater risk to us. Additionally, because of the early stage of the industry, we face additional competition from new entrants.
If the number of consumers of cannabis in the states in which we operate increases, the demand for products will increase and we expect
that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products.
To become and remain competitive, we will require a continued high level of investment in product acquisition, branding, marketing and
sales efforts. We may not have sufficient resources to maintain these efforts in a competitive, cost-effective or timely manner, which
could materially and adversely affect the business, financial condition and results of our operations.
We
also face competition from illegal dispensaries and the black market that are unlicensed and unregulated, and that are selling cannabis
and cannabis products, including products with higher concentrations of active ingredients, and using delivery methods that we are prohibited
from offering to individuals as they are not currently permitted by U.S. state or federal law. Any inability or unwillingness of law
enforcement authorities to enforce existing laws prohibiting the unlicensed cultivation and sale of cannabis and cannabis-based products
could result in the perpetuation of the black market for cannabis and/or have a material adverse effect on the perception of cannabis
use. Any or all these events could have a material adverse effect on our business, financial condition and results of operations.
Cannabis
remains illegal under U.S. federal law, and enforcement of U.S. cannabis laws could change.
Cannabis
is illegal under U.S. federal law. In those states in which the use of cannabis has been legalized, its use remains a violation of federal
law pursuant to the Controlled Substances Act. The Controlled Substances Act classifies cannabis as a Schedule I controlled substance,
and as such, medical and recreational cannabis use is illegal under U.S. federal law and federal authorities may enforce such federal
laws. If that occurs, we may be deemed to be dispensing cannabis and drug paraphernalia in violation of federal law. Since federal law
criminalizing the use of cannabis preempts state laws that legalize its use, enforcement of federal law regarding cannabis is a material
risk and would greatly harm our business, prospects, revenue, results of operation and financial condition.
Our
cannabis-related activities will be subject to evolving regulation by governmental authorities. We will be engaged in the cannabis industry
in the United States where local and state law permits such activities, and cannabis remains illegal for some or all uses and circumstances
in many states. The legality of the sale of cannabis differs among states in the United States. Due to the current regulatory environment
in the United States, new risks may emerge, and management may not be able to predict all such risks.
Because
our planned activities in the cannabis industry may be illegal under the applicable federal laws of the United States, there can be no
assurances that the U.S. federal government will not seek to enforce the applicable laws against us. The consequences of such enforcement
would be materially adverse to us and our business, including our reputation, profitability and the market price of our common stock,
and could result in the forfeiture or seizure of all or substantially all of our assets.
Due
to the conflicting views between state and federal governments regarding cannabis, cannabis businesses are subject to inconsistent laws
and regulations. The prior U.S. administration attempted to address the inconsistent treatment of cannabis under state and federal law
in the Cole Memorandum that Deputy Attorney General James Cole sent to all U.S. Attorneys in August 2013, which outlined certain priorities
for the U.S. Department of Justice (“DOJ”) relating to the prosecution of cannabis offenses. The Cole Memorandum noted that,
in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory
and enforcement systems to control the cultivation, processing, distribution, sale and possession of cannabis, conduct in compliance
with such laws and regulations was not a priority for the DOJ. However, the DOJ did not provide (and has not provided since) specific
guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole Memorandum. During the Trump Administration,
the Cole Memorandum was rescinded. However it is expected that the Biden Administration will either reinstate the Cole Memorandum or
otherwise take a stance on cannabis that is more lenient than the Trump Administration’s stated policies. Nonetheless, the timing
and scope that the Biden Administration’s policy changes, if any, remain unclear, including whether these policies will be more
lenient on commercial cannabis operations such as ours as opposed to merely easing enforcement practices against individual cannabis
users.
There
can be no assurance that the federal government will not enforce federal laws relating to cannabis and seek to prosecute cases involving
cannabis businesses that are otherwise compliant with state laws in the future. While most states that have legalized cannabis continue
to craft their regulations pursuant to the Cole Memorandum and federal enforcement agencies have taken limited action against state-compliant
cannabis businesses, the DOJ may change its enforcement policies at any time, with or without advance notice.
The
uncertainty of U.S. federal enforcement practices going forward and the inconsistency between U.S. federal and state laws and regulations
present material risks for us, and adverse developments in regulatory enforcement policies and efforts could have a material adverse
effect on our business.
There
is a substantial risk of regulatory or political change.
The
success of our business strategy depends on the legality of the cannabis industry in the United States. The political environment surrounding
the cannabis industry in the United States in general can be volatile and the regulatory framework in the United States remains in flux.
Despite the currently implemented laws and regulations in the U.S. and its territories to legalize and regulate the cultivation, processing,
sale, possession and use of cannabis, and additional states that have pending legislation regarding the same, the risk remains that a
shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting our
ability to successfully invest and/or participate in the selected business opportunities.
Further,
there is no guarantee that legislative bodies and/or voting constituents will not repeal, overturn or limit any such legislation legalizing
the sale, disbursement and consumption of medical or recreational use of cannabis. It is also important to note that local and city ordinances
may strictly limit and/or restrict disbursement of cannabis in a manner that will make it extremely difficult or impossible to transact
business that is necessary for the continued operation of the cannabis industry even if state governments do not.
Cannabis
remains illegal under U.S. federal law, and the U.S. federal government could bring criminal and civil charges against us or our subsidiaries
or our investments at any time. Federal actions against any individual or entity engaged in the cannabis industry or a substantial repeal
of cannabis-related legislation could have a material adverse effect on our business, financial condition or results of operations.
We
may be subject to action by the U.S. federal government through various government agencies for participation in the cannabis industry.
Since
the cultivation, processing, production, distribution and sale of cannabis for any purpose, medical or recreational use or otherwise,
remain illegal under U.S. federal law, it is possible that we or third parties with which we do business and/or on which we rely may
be forced to cease any such activities. The U.S. federal government, through, among others, the DOJ, its sub-agency the U.S. Drug Enforcement
Agency (the “DEA”) and the U.S. Internal Revenue Service (the “IRS”), has the right to actively investigate,
audit and shut down cannabis-related businesses such as us. The U.S. federal government may also attempt to seize our property. Any action
taken by the DOJ, the DEA and/or the IRS to interfere with, seize or shut down our operations will have an adverse effect on our business,
prospects, revenue, results of operation and financial condition.
Since
federal law criminalizing the use of cannabis preempts state laws that legalize its use, the federal government can seek to enforce criminal
violations of federal law despite state laws permitting the use of cannabis. Despite a relatively passive stance on cannabis activity
by the federal law enforcement agencies in recent years, the stated position of the current federal Administration is hostile to legal
cannabis. As the rescission of the Cole Memorandum and the implementation of the Sessions Memorandum demonstrate, the DOJ may at any
time issue additional guidance that directs federal prosecutors to devote more resources to prosecuting cannabis-related businesses.
In the event that the DOJ under the U.S. Attorney General aggressively pursues financiers or equity owners of cannabis-related businesses,
and U.S. Attorneys follow the DOJ policies through pursuing prosecutions, then we could face:
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seizure
of our cash and other assets used to support or derived from our cannabis subsidiaries; |
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the
arrest of our employees, directors, officers, managers or investors; and |
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ancillary
criminal violations under the Controlled Substances Act or related laws or regulations for aiding and abetting, and conspiracy to
violate such laws and regulations by providing financial support to cannabis businesses that operate, supply or service state-licensed
cannabis businesses. |
Because
the Cole Memorandum was rescinded by the Sessions Memorandum, the DOJ under the current administration or an aggressive federal prosecutor
could allege that the Company, our board of directors and, potentially, our shareholders, “aided and abetted” violations
of federal law by providing finances and services to our portfolio cannabis companies. Under these circumstances, federal prosecutors
could seek to seize our assets, and to recover the “illicit profits” previously distributed to shareholders resulting from
any of our financing or services.
Violations
of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements
arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not
limited to, disgorgement of profits, cessation of business activities or divestiture. These results could have a material adverse effect
on us, including our reputation and ability to conduct business, our holding (directly or indirectly) of cannabis licenses in the United
States, the listing of our securities on stock markets or exchanges, our financial position, operating results, profitability or liquidity
or the market price of our common stock.
State
and local regulation of cannabis is uncertain and changing.
As
described above, to date the cannabis industry has been primarily regulated at the state and local levels of government. While we
intend to initially only operate in California and to comply with all applicable state and local laws in any jurisdiction in which we
operate, there can be no assurance that state laws legalizing and regulating the sale and use of cannabis will not be repealed or
overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions.
Further, state and local cannabis laws and regulations are subject to preemption by related federal laws and regulations, such that if
the federal government enforces its laws, compliance state and local laws will not protect us from criminal claims and liability. Therefore,
if the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently
legal, or if existing state laws are repealed or curtailed, our business or operations in those states or under those laws would be materially
and adversely affected. Federal actions against any individual or entity engaged in the cannabis industry or a substantial repeal of
favorable cannabis-related legislation could materially adversely affect us, our business and our assets or investments.
The
rulemaking process at the state level that applies to cannabis operators in any state will be ongoing and result in frequent changes.
As a result, an effective compliance program will be essential to manage regulatory risk. We intend to develop and implement operating
policies and procedures that are compliance-based and derived from the state regulatory structure governing ancillary cannabis businesses
and their relationships to state-licensed or permitted cannabis operators. However, notwithstanding our efforts and diligence, regulatory
compliance and the process of obtaining regulatory approvals can be costly and time-consuming. No assurance can be given that we will
receive the requisite licenses, permits or cards to continue operating our business or otherwise take action necessary to comply with
all applicable laws and regulations.
State
regulatory agencies may require us to post bonds or significant fees.
There
is a risk that a greater number of state regulatory agencies will begin requiring entities engaged in certain aspects of the cannabis
industry to post a bond or significant fees when applying, for example, for a dispensary license or renewal, as a guarantee of payment
of sales and franchise taxes. We are not able to quantify at this time the potential scope of such bonds or fees in the states in which
we currently operate or may in the future operate, but they may be materially negative to our results of operations, financial condition
and ultimate business success, individually or in the aggregate.
We
may face state limitations on ownership of cannabis licenses.
Jurisdictions
in which we plan operate may limit the number of cannabis licenses and certain economic or commercial interests in the entity that holds
the license that can be held by one entity within that state. For example, the two California licenses we are in the process of acquiring
require a two-step approach wherein we purchase 80% of the entity holding the licenses in Step 1 and the remaining 20% in Step 2 following
state and local regulatory approval. While we are still in the process of paying the purchase price for Step 1, this process, which is
the product of California regulatory requirements, has delayed and may further delay our ability to obtain and operate these licenses
and generate revenue. Similar delays or difficulties in the future with respect to other businesses or licenses we may undertake to acquire
could materially adversely affect our growth strategy and prospects.
Further,
as a result of the completion of certain acquisition transactions that we have entered into or may enter into in the future, we may potentially
hold more than the prescribed number of licenses or economic interests in a licensed entity in certain states, and accordingly may be
required to divest certain licenses or entities that hold such license in order to comply with applicable regulations. The divestiture
of certain licenses or entities that hold such licenses may result in a material, adverse effect on our business, financial condition,
or results of operations.
We
may become subject to FDA or ATF regulation.
Cannabis
remains a Schedule I controlled substance under U.S. federal law. If the federal government reclassifies cannabis to a Schedule II controlled
substance, it is possible that the U.S. Food and Drug Administration (the “FDA”) would seek to regulate cannabis under the
Food, Drug and Cosmetics Act of 1938 (the “FDCA”). The FDA is responsible for ensuring public health and safety through regulation
of food, drugs, supplements and cosmetics, among other products, through its enforcement authority pursuant to the FDCA. FDA’s
responsibilities include regulating the ingredients as well as the marketing and labeling of drugs sold in interstate commerce. Because
cannabis is federally illegal to produce and sell, and because it has no federally recognized medical uses, the FDA has historically
deferred enforcement related to cannabis to the DEA; however, the FDA has enforced the FDCA with regard to industrial hemp-derived products,
especially cannabidiol, or CBD, derived from industrial hemp sold outside of state-regulated cannabis businesses. The FDA has
recently affirmed its authority to regulate CBD derived from both cannabis and industrial hemp, and its intention to develop a framework
for regulating the production and sale of CBD derived from industrial hemp. It is also possible that the federal government could seek
to regulate cannabis under the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”). The ATF may issue rules
and regulations related to the use, transporting, sale and advertising of cannabis or cannabis products. Any such developments could
materially adversely affect us, either directly or by negatively impacting third parties on whom we rely to operate.
Cannabis
businesses are subject to enhanced anti-money laundering laws and regulations and have restricted access to banking and other financial
services.
The
Company and its subsidiaries will be subject to a variety of laws and regulations in the U.S. that involve money laundering, financial
record-keeping and proceeds of crime, including the Bank Secrecy Act and the rules and regulations thereunder, and any related or similar
rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. Further, under U.S. federal
law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business
loan, or any other service could be found guilty of money laundering, aiding and abetting, or conspiracy.
If
our operations, the revenue we generate or the capital we raise in the future were found to be in violation of money laundering laws,
such transactions may be viewed as proceeds from a crime (the sale of a Schedule I drug) under the Bank Secrecy Act’s money laundering
provisions. This may restrict our ability to declare or pay dividends or effect other distributions.
As
a result of the robust regulation on banking practices as they relate to the funding of cannabis companies, most banks and other financial
institutions in the United States have developed that restrict or limit the provision of banking services to cannabis-related businesses.
In addition to the foregoing, banks may refuse to process debit card payments and credit card companies may refuse to process credit
card payments for cannabis-related businesses. As a result, we may have limited or no access to banking or other financial services in
the United States. In addition, federal money laundering statutes and Bank Secrecy Act regulations discourage financial institutions
from working with any organization that sells a controlled substance, regardless of whether the state it operates in permits cannabis
sales. The inability or limitation of our ability to open or maintain bank accounts, obtain other banking services and/or accept credit
card and debit card payments may make it difficult for us to operate and conduct our business as planned or to operate efficiently. Banks
and other depository institutions are currently hindered by federal law from providing financial services to cannabis businesses, even
in states where those businesses are regulated, which will limit our access to capital resources which we may need in the future to grow
and maintain our operations.
Because
our contracts will involve cannabis and related activities, which are not legal under U.S. federal law, we may face difficulties in enforcing
our contracts.
Because
our contracts will involve cannabis and other activities that are not legal under federal law and in some state jurisdictions, we may
face difficulties in enforcing our contracts in federal courts and certain state courts. Therefore, there is uncertainty as to whether
we will be able to legally enforce our agreements, which could have a material adverse effect on our business and results of operations.
We
will be subject to restrictive and varying limitations on marketing our products.
Certain
states have enacted strict regulations regarding marketing and sales activities on cannabis products. There may therefore be restrictions
on sales and marketing activities imposed by government regulatory bodies that can hinder the development of the Company’s business
and operating results. Restrictions can include regulations that specify the product, location and to end user for which our products
can appear and/or be advertised. Marketing, advertising, packaging and labeling regulations also vary from state to state, potentially
limiting the consistency and scale of consumer branding communication and product education efforts. The regulatory environment in the
U.S. limits our ability to compete for market share in a manner similar to other industries, widening the gap between us and our competitors
that have greater resources than we do and longer operating histories. If we are unable to effectively market our products and compete
for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling
prices for our products, our sales and operating results could be adversely affected.
The
results of future clinical research of cannabis may be unfavorable to cannabis which may have a material adverse effect on the demand
for our products.
Research
regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids such as CBD and tetrahydrocannabinol,
or THC remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids.
Future research and clinical trials may prove positive assumptions regarding the use of cannabis to be incorrect, or could raise concerns
regarding the safety or utility of cannabis use or of adverse health effects. Further, the cannabis industry is highly dependent upon
consumer perception regarding the safety, efficacy and quality of the cannabis that is produced. Consumer sentiment can be significantly
influenced by scientific research or findings regarding the consumption of cannabis products. If scientific research or findings contain
negative conclusions or medical opinions regarding the benefits, viability, safety, efficacy, dosing, or other facts related to cannabis,
it could therefore have a material adverse effect on the demand for our products, and in turn on our business, prospects, results of
operation and financial condition.
Inconsistent
public opinion of cannabis and the cannabis industry could hinder market growth and state adoption of permissive legislation and policies.
Public
opinion surrounding cannabis use and the cannabis industry has traditionally been inconsistent and varies among markets and demographics.
While public opinion and support appears to be rising generally for legalizing cannabis use, it remains a controversial issue subject
to differing opinions surrounding the level of legalization (for example, medical cannabis as opposed to recreational use). Inconsistent
public opinion and perception of cannabis may hinder growth and government adoption of permissive legislation and policies, which could
have a material adverse effect on our business, financial condition or results of operations.
As
a cannabis business, we will be subject to unfavorable tax treatment under the Internal Revenue Code.
Under
Section 280E of the Internal Revenue Code of 1986, no deduction or credit is allowed for any amount paid or incurred during the taxable
year in carrying on any trade or business if the trade or business (or the activities which comprise the trade or business) consists
of trafficking in controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act) which is prohibited
by federal law or the law of any state in which that trade or business is conducted. The IRS has applied this provision to cannabis operations,
prohibiting them from deducting many expenses associated with cannabis businesses other than certain costs and expenses related to cannabis
cultivation and manufacturing operations. Accordingly, Section 280E has a material impact on the operations of cannabis companies such
as us. For example, what would otherwise be profitable operations could result in a loss after taking into account its U.S. income tax
expenses.
Our
subsidiaries may not be able to obtain necessary permits and authorizations.
We
intend to operate cannabis dispensaries using subsidiaries to be formed for this purpose. Our subsidiaries may not be able to obtain
or maintain the necessary licenses, permits, certificates, authorizations or accreditations to operate their respective businesses, or
may only be able to do so at great cost. In addition, our subsidiaries may not be able to comply fully with the wide variety of laws
and regulations applicable to the cannabis industry. Failure to comply with or to obtain the necessary licenses, permits, certificates,
authorizations or accreditations could result in restrictions on a subsidiary’s ability to operate in the cannabis industry, which
could have a material adverse effect on our business, financial condition or results of operations.
Disparate
state-by-state regulatory landscapes may require us to structure and utilize complex operational and legal structures that could impose
substantial costs on us or otherwise materially adversely affect our operations and financial condition.
If
we acquire additional cannabis licenses in jurisdictions outside of California, we may need to obtain and operate such licenses pursuant
to a number of different transactional or corporate structures, depending on the regulatory requirements from state-to-state, including
potentially realizing the economic benefit of cannabis licenses through management agreements and other commercial arrangements. Such
agreements are often required to comply with applicable laws and regulations or are in response to perceived risks that we determine
warrant such arrangements.
To
the extent necessary for our expansion into additional markets, the foregoing structures will present various risks to us and our subsidiaries,
including the following:
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A
governmental body or regulatory entity may determine that these structures are in violation of a legal or regulatory requirement
or change such legal or regulatory requirements such that a commercial arrangement or management agreement structure violates such
requirements, and a license application submitted by a third party may not be accepted, especially if the management and operation
of the license is dependent on a commercial arrangement or management agreement structure. |
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There
could be a material adverse impact on the revenue stream we intend to receive from or on account of cannabis licenses, as we will
not be the license holder, and therefore any economic benefit is received pursuant to a contractual arrangement. If a commercial
arrangement or management agreement is terminated, we will no longer receive any economic benefit from the applicable dispensary
and/or cultivation license. |
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These
structures could potentially result in the funds invested by us being used for unintended purposes, such as to fund litigation. |
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The
license holder may renege on its obligation to pay fees and other compensation pursuant to a commercial arrangement or management
agreement or violate other provisions of these agreements, in which case we may be delayed or face difficulty in enforcing our rights
including potentially due to the illegality of cannabis at the federal level. |
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The
license holder’s acts or omissions may violate the requirements applicable to it pursuant to the applicable dispensary and/or
cultivation license, thus jeopardizing the status and economic value of the license holder (and, by extension, of our business). |
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In
the case of a management agreement, the license holder may terminate the agreement if any loan owing to us is paid back in full and
the license holder is able to pay a break fee. |
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In
the case of a commercial arrangement, the license holder is a generally an employee or officer of the Company or one of its subsidiaries
(or an affiliate or associate of such individual or individuals); however, in a typical management agreement structure, the license
is owned by a party or parties unrelated to the Company or any of its subsidiaries. |
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The
license holder may attempt to terminate the commercial arrangement or management agreement in violation of its express terms. |
In
any or all of the above situations, it would be difficult and expensive for us to protect our rights through litigation, arbitration,
or similar proceedings.
The
success of our cannabis business will depend, in part, on our ability to execute on our acquisition strategy, to successfully integrate
acquired businesses and to retain key employees of acquired businesses.
While
we intend to initially operate through the two California licenses following the closing of the anticipated Treehouse acquisition, we
continue to evaluate strategic acquisition opportunities that have the potential to support and strengthen our business, including acquisitions
in the United States, as part of our ongoing growth strategy. We cannot predict the timing or size of any future acquisitions. To successfully
acquire a significant target, we may need to raise additional equity and/or indebtedness, which could increase our debt. There can be
no assurance that we will enter into definitive agreements with respect to any contemplated transaction or that any contemplated transaction
will be completed. The investigation of acquisition candidates and the negotiation, drafting and execution of relevant agreements, disclosure
documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys,
and others. If we fail to complete any acquisition for any reason, including events beyond our control, the costs incurred up to that
point for the proposed acquisition would not be recoverable.
Acquisitions
typically require integration of the acquired company’s assets, personnel, products and infrastructure. We may be unable to successfully
integrate an acquired business into our existing business, and an acquired business may not be as beneficial or profitable as and when
expected or at all. Our inability to successfully integrate new businesses in a timely and orderly manner could increase costs and losses
and diminish our ability to become profitable. Factors affecting the successful integration of an acquired business include, but are
not limited to, the following:
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We
may become liable for certain of the liabilities of an acquired business, whether or not known or disclosed to us, which could include,
among others, tax liabilities, product liabilities, environmental liabilities and liabilities for employment practices, and these
liabilities could be significant and unrecoverable from the seller; |
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We
may not be able to retain local managers and key employees who are important to the operations of an acquired business; |
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Substantial
attention from our senior management and the management of an acquired business may be required, which could decrease the time that
they have to service and attract customers; |
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Friction
could arise between our management team and that of the acquired business, which could lead to loss of such persons and stunt our
operations and growth; |
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We
may not effectively utilize new equipment, infrastructure, inventory or other assets that we acquire through acquisitions; |
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Integration
of an acquired business depends, to a certain extent, on the full implementation of our financial and management information systems,
business practices and policies which may be deficient in the context of integrating a new business with our existing operations;
and |
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We
may actively pursue a number of opportunities simultaneously and may encounter unforeseen expenses, complications and delays, including
difficulties in employing sufficient staff and maintaining operational and management oversight. |
Acquisitions
involve risks that the acquired business will not perform as expected and that business judgments concerning the value, strengths and
weaknesses of the acquired business will prove incorrect. In addition, potential acquisition targets may be located in states in which
we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically
dispersed operations, personnel, and facilities. In addition, if we enter new geographic markets, we may be subject to additional and
unfamiliar legal and regulatory requirements.
There
can be no assurance that we will achieve the perceived benefits such as cost savings in connection with future acquisitions in the timeframe
anticipated or at all. Many prospective businesses for acquisition are small private companies with unsophisticated financial statements
that have not been independently reviewed or audited. Our inability to effectively identify, evaluate, negotiate, close and manage the
integration of acquisitions could prevent us from meeting our business and growth objectives and harm our prospects and financial condition,
in which case your investment in us would be at risk.
We
will face security risks related to our physical facilities and cash transfers.
The
business premises of our operating locations, when opened, could be targets for theft. While we intend to implement security measures
at each location, our cannabis dispensaries could be subject to break-ins, robberies and other security breaches. If we experience a
security breach, the loss of cannabis products or other assets could have a material adverse impact on our business. Further, we may
utilize third parties to assist in our security efforts, such as the transportation of cash we receive from sales from dispensaries to
banks. These third parties may not be effective, and we will lack control over them. For example, an employee of a security company we
engage could steal our assets or assist others in such a theft. Any of the foregoing risks could materially adversely harm our results
of operations and financial condition.
We
face exposure to fraudulent or illegal activity by employees, contractors, consultants and agents which may subject us to investigations
and actions.
We
will be exposed to the risk that any of our employees our independent contractors may engage in fraudulent or other illegal activity.
Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities or
confidential information to us that violates government regulations, applicable business policies, practices or standards, laws that
require the true, complete and accurate reporting of financial information or data, or other laws, regulations, rules or policies that
are or may become applicable to us as a result of our operations. It may not always be possible for us to identify and deter misconduct
by our employees and other third parties, and the precautions taken by us to detect and prevent this activity may not be effective in
controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming
from a failure to be in compliance with such laws or regulations. We cannot provide assurance that our internal controls and compliance
systems will protect us from acts committed by our employees, agents or business partners in violation of federal, state or local laws.
If any such actions are instituted against us, and we are not successful in defending the Company or asserting our rights, those actions
could have a material impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary
fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which
could have a material adverse effect on our business, financial condition or results of operations.
We
face risks related to the novelty of the cannabis industry, and the resulting lack of information regarding comparable businesses, and
the offering of new products in a constantly evolving market.
As
a relatively new and constantly evolving industry, there are a limited number of established businesses and stakeholders in the cannabis
market with a business model we can attempt to replicate and build upon. Similarly, there is limited information about comparable businesses
available for potential investors to review in making a decision on whether to invest in us.
Investors
should evaluate the Company and our prospects in light of the risks and uncertainties encountered by businesses, like us, that are in
their early stages. For example, unanticipated expenses, operational problems or technical difficulties may occur, which may result in
material delays in the operation of our business. We may fail to successfully address these contingencies or successfully implement our
operating strategies effectively or at all. If we fail to do so, it could materially harm our business to the point of having to cease
operations and/or reduce the value of our common stock, and investors may lose some or all of their investment.
We
have committed and expect to continue committing significant resources and capital to develop and begin to implement our business plan
and operations. However, the cannabis products we intend to obtain or license and market for consumption will likely be relatively untested
in the marketplace, and there can be no assurance that we will obtain the rights to commercialize targeted products on favorable terms
or at all, or that if we do the products we attempt to sell will achieve market acceptance. Moreover, these prospective products may
be subject to significant competition with offerings by new and existing competitors in the business with a more established market and
a broader reach. The failure to successfully develop and market these new products could materially harm our business, prospects and
financial condition.
We
will be dependent on the popularity and market acceptance of our brand portfolio.
Our
ability to generate revenue and be successful in the implementation of our business plan will be dependent on consumer acceptance of
and demand for the products we sell. In the short-term, we intend to acquire the rights to use existing brands and products owned by
third parties in order to commercialize our cannabis licenses in California. We may face difficulty obtaining these rights on favorable
terms or at all. Further, if we do obtain the rights for the products as intended, acceptance of and demand for these products will depend
on several factors, including availability, cost, ease of use, familiarity of use, convenience, effectiveness, safety and reliability.
If these customers do not accept our products, or if such products fail to adequately meet customers’ needs and expectations, our
ability to continue generating revenues could be reduced.
We
believe that establishing and maintaining the brand identities of products will be a critical aspect of attracting and expanding a sufficient
customer base to generate material revenue and expand our operations. Promotion and enhancement of brands will depend largely on the
ability to offer high quality products. If customers and end users do not perceive the products we sell to be of high quality, or if
we introduce new products or enter into new business ventures that are not favorably received or perceived by customers, end users or
other stakeholders on which we will depend, we will risk diluting brand identities and decreasing their attractiveness to existing and
potential customers. Moreover, in order to attract and retain customers and to promote and maintain brand equity in response to competitive
pressures, we may have to increase our financial commitment to creating, obtaining, and maintaining a distinct brand loyalty among customers.
If we incur significant expenses in an attempt to promote and maintain brands, this could be a material adverse effect on our business,
financial condition or results of operations, particularly if these efforts are unsuccessful.
We
will have a highly concentrated portfolio of assets and operate in a limited number of markets, and therefore face risks surrounding
a lack of diversification.
With
respect to the Elysian business, we intend to invest in and operate solely within the cannabis industry. Other than Elysian our only
other operations are the production and sale of sporting goods and apparel through Norr. Thus, an investment in our Company will provide
limited diversity as to asset type. Additionally, the assets to be held by us may be geographically concentrated from time to time. For
example, our initial cannabis operations are expected to be limited to California, at least in the short-term. This lack of diversification
could cause us to face difficulties in establishing material revenue, particularly if adverse external forces such as market or regulatory
changes occur, and we may be unable to recover from these developments, in which case your investment would be at risk.
We
will face risks related to our information technology systems, and potential cyber-attacks and security and privacy breaches.
We
believe that the installment and use of technology will be a critical in our planned operations. As such, we will be susceptible to operational,
financial and information security risks resulting from cyber-attacks and/or technological malfunctions. Successful cyber-attacks and/or
technological malfunctions affecting us, or our service providers can result in, among other things, financial losses, the inability
to process transactions, the unauthorized release of customer information or confidential information and reputational risk. There can
be no assurance that we will not incur losses form such events in the future. As cybersecurity threats continue to evolve, we may be
required to use additional resources to continue to modify or enhance protective measures or to investigate security vulnerabilities.
We
may store and collect personal information about customers and would therefore be responsible for protecting that information from privacy
breaches that may occur through procedural noncompliance or failures, information technology malfunction or deliberate unauthorized intrusions.
To date, a growing number of states, including California where our initial cannabis operations will be centered, have implemented data
privacy legislation aimed at ensuring data collectors and users comply with privacy and security standards, and penalizing those who
fail to meet these standards. California has enacted the California Consumer Privacy Act of 2018
(the “CCPA”), which became operative in January 2020. The CCPA requires companies that process personal information on California
residents to make new disclosures to consumers about such companies’ data collection, use, and sharing practices and inform consumers
of their personal information rights such as deletion rights, allows consumers to opt out of certain data sharing with third parties,
and provides a new cause of action for data breaches. In November 2020, California enacted the California Privacy Rights Act of 2020
(the “CPRA”), which amends and expands the scope of the CCPA, while introducing new privacy protections that extend beyond
those included in the CCPA and its implementing regulations. The CCPA, as amended and expanded by the CPRA, is one of the most prescriptive
general privacy law in the United States and may lead to similar laws being enacted in other U.S. states or at the federal level. Other
states, including Colorado, Nevada, and Virginia have also implemented similar legislation.
Any
data security or privacy breach and/or violation of data privacy laws such as the CCPA would have a material adverse effect on our business,
prospects, revenue, results of operation and financial condition. We will be subject to laws, rules and regulations in the United States
and other jurisdictions in which we operate or in which our customers reside relating to the collection, processing, storage, transfer
and use of personal data. Our ability to execute transactions and to possess and use personal information and data in conducting our
business subjects us to legislative and regulatory burdens that may require us to notify regulators and customers, employees and other
individuals of a data security breach. Evolving compliance and operational requirements under the privacy laws, rules and regulations
of jurisdictions in which we operate impose significant costs that are likely to increase over time. In addition, non-compliance could
result in proceedings against us by governmental entities and/or significant fines, could negatively impact our reputation and may otherwise
adversely impact our business, financial condition and operating results.
We
face risks related to our insurance coverage and uninsurable risks.
Our
operations will be subject to a number of risks and hazards generally, including adverse weather conditions, accidents, fires, labor
disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, property
damage, operational delays or challenges, monetary losses and possible civil or criminal liability and resulting costs, damages, fines
and other adverse consequences.
Although
we intend to acquire and maintain insurance to protect against certain risks and comply with certain applicable laws and regulations
if and when we purchase and secure ownership of the two cannabis licenses in California, our insurance may not cover all the potential
risks associated with our operations. We may also be unable to maintain insurance to cover these risks on economically feasible terms.
Further, insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Uninsured or underinsured
losses may cause us to incur significant costs which would have a material adverse effect upon our financial performance and results
of operations.
Our
reputation and ability to operate could be negatively impacted by our suppliers’ ability to produce and transport products.
We
will depend on third-party suppliers to produce, provide for and timely deliver orders for the products we sell. Products manufactured
or purchased from our suppliers will be resold to our customers. These suppliers could fail to produce products to our specifications
or quality standards and may not deliver units on a timely basis. Any changes in our suppliers’ ability to resolve production issues,
which could be caused by a variety of factors such as supply shortages which have recently arisen by COVID-19, could impact our ability
to fulfill orders and could also disrupt our business due to delays in finding new suppliers.
We
may face business disruption and related risks arising from the COVID-19 pandemic, which could have a material adverse effect on our
business.
The
sale of cannabis products by us could be materially adversely affected by the COVID-19 pandemic. We expect to be reliant upon cannabis
sales at retail locations, and may not be successful in developing a material online sales presence. Retail sales declined in many industries
and at various times throughout the pandemic, due in part to decreased demand caused by economic hardship and uncertainty and production
challenges caused by supply shortages and the lockdowns. While vaccinations beginning in 2021 allowed for the partial reopening of the
economy, the recent “Omicron” variant of the virus, potential new variants of the virus, as well as reduced efficacy
of vaccines over time and the possibility that a large number of people decline to get vaccinated or receive booster shots, creates inherent
uncertainty as to the future of our business, our industry and the economy in general in light of the pandemic.
We
are still assessing our business plans and the impact COVID-19 may have on our ability to commercialize cannabis licenses and products,
but there can be no assurance that this analysis will enable us to avoid or mitigate part or all of any impact from the spread of COVID-19
or its consequences, including macroeconomic downturns. The extent to which the COVID-19 pandemic and global efforts to contain its spread
will impact our operations will depend on future developments, which for a variety of reasons including those described above are highly
uncertain and cannot be predicted at this time. If we or third parties on which we rely are unable to navigate the pervasive and evolving
challenges posed by the pandemic, our prospects and results of operations could be materially adversely affected.
Because of the Russian invasion of Ukraine,
the effect on the capital markets and the economy is uncertain, and as a result we may have to deal with a recessionary economy and economic
uncertainty including possible adverse effects upon our ability to raise capital as and when needed.
As a result of the Russian invasion of Ukraine,
certain events are beginning to effect the global and U.S. economy including increased inflation, substantial increases in the prices
of oil and gas, large Western companies ceasing to do business in Russia and uncertain capital markets with declines in leading market
indexes. The duration of this war and its impact are at best uncertain. Ultimately the economy may turn into a recession with uncertain
and potentially severe impacts upon public companies and us, including our ability to raise capital. We cannot predict how this will
affect our operations or the industries in which we operate, however any such impact may be material and adverse.
We
face an inherent risk of product liability claims as a manufacturer, processor and producer of products that are meant to be consumed
by humans.
As
a seller of products designed to be ingested or otherwise consumed by humans, we will face an inherent risk of exposure to product liability
claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the sale
of these products involves the risk of injury to consumers including due to tampering by unauthorized third parties or product contamination.
Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications
or substances could occur. We may be subject to various product liability claims, including, among others, that the products sold by
us, which will be purchased by us from third party licensed producers, caused injury, illness or death, include inadequate instructions
for use or include inadequate warnings concerning possible side effects or interactions with other substances. Because of our business
model, we expect to have limited control over the production process of the products we sell to the public. Despite our lack of manufacturing
operations, we could be held liable under a product liability claim which generally imposes strict liability across all parties in the
production, supply and marketing processes. A product liability claim or regulatory action against us could result in increased costs,
could adversely affect our reputation with our customers and consumers generally and could have a material adverse effect on our business,
results of operations and financial condition. There can be no assurances that we will be able to obtain or maintain product liability
insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available
in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise
protect against potential product liability claims could prevent or inhibit the commercialization of our potential products.
Intellectual
property on which we will rely may be difficult or impossible to protect.
We
intend to rely upon certain proprietary intellectual property, including but not limited to trademarks, trade names, copyrights and trade
secrets, which may be developed internally and/or licensed from third parties. Our success will depend, in part, on our ability to maintain
and enhance protection for such intellectual property and proprietary information. We generally enter into confidentiality or non-disclosure
agreements with our employees, consultants, and collaborators. These agreements may be breached, may not effectively assign rights to
proprietary information and intellectual property to us, and may fail to adequately protect us or our intellectual property rights or
proprietary information in scope or duration. In addition, our proprietary information could be independently discovered by competitors,
in which case we may not be able to prevent the use of such proprietary information by our competitors. The enforcement of a claim alleging
that a party illegally obtained and was using our proprietary information could be difficult, expensive, and time consuming and the outcome
would be unpredictable. In addition, courts outside the United States may be less willing to protect such proprietary information. The
failure to obtain or maintain meaningful intellectual property protection could adversely affect our competitive position.
In
addition, effective future copyright and trade secret protection may be unavailable or limited and may be unenforceable. As long as cannabis
remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the Controlled Substances Act, the benefit of
certain federal laws and protections which may be available to most businesses, such as federal trademark protection regarding the intellectual
property of a business, may not be available to us. While many states do offer the ability to protect trademarks independent of the federal
government, state-registered trademarks provide a lower degree of protection than would federally registered marks. As a result, our
intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third parties.
Further,
if intellectual property that we license from third parties is infringed, the licensor may allege that we caused the infringement and
assert a claim for monetary damages, under contractual indemnification provisions or otherwise. The defense against such a claim, regardless
of merit, could be costly and divert management’s attention away from operations, and an adverse outcome could materially harm
our financial condition.
Our
failure or inability to adequately protect proprietary information and intellectual property on which we rely, including intellectual
property that we may license from third parties or otherwise obtain under contractual arrangements, could have a material adverse effect
on our business, financial condition or results of operations.
We
may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could subject us to
significant liabilities and other costs.
Our
success will depend on our ability to use products and branding without infringing the intellectual property rights of third parties.
We cannot assure that third parties will not assert intellectual property claims against us. We are subject to additional risks if entities
licensing intellectual property to us do not have adequate rights to the licensed materials. If third parties assert copyright or patent
infringement or violation of other intellectual property rights against us or our third party product licensors or suppliers, we may
be required to defend our self in litigation or administrative proceedings, which can be both costly and time consuming and may significantly
divert the efforts and resources of management personnel. Further, we may be forced to discontinue allegedly infringing product lines,
processes or other operational components, which could materially adversely affect our results of operations. An adverse determination
in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require
us to seek licenses from third parties, require us to pay ongoing royalties or subject us to injunctions that may prohibit the development
and operation of our applications.
The
products we market may be subject to product recalls, which may result in expense, legal proceedings, regulatory action, loss of sales
and reputation, and management attention.
Despite
quality control procedures, products designed for human consumption are sometimes subject to the recall or return for a variety of reasons,
including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety
and inadequate or inaccurate labeling disclosure. If any of the products we market, which will likely be purchased by us from a third
party licensed producers in most cases, are recalled due to an alleged product defect or for any other reason, we could be required to
incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant
amount of sales and may not be able to replace those sales at an acceptable margin, if at all. In addition, a product recall may require
significant attention from management. Particularly given our anticipated reliance on third party licensors and manufacturers to provide
us with the products we will sell, there can be no assurance that any quality, potency or contamination problems will be detected in
time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the brands we use becomes subject to
recall, the image of that brand and the Company could be harmed. A recall for any of the foregoing reasons could lead to decreased demand
for our products and could have a material adverse effect on our results of operations and financial condition. Additionally, product
recalls may lead to increased scrutiny of our operations by the FDA, or other regulatory agencies, requiring further management attention
and potential legal fees and other expenses.
Synthetic
products from the pharmaceutical industry may compete with cannabis use and products.
The
pharmaceutical industry may attempt to dominate the cannabis industry, and in particular, legal cannabis, through the development and
distribution of synthetic products which emulate the effects and treatment of organic cannabis. If they are successful, the widespread
popularity of such synthetic products could change the demand, volume and profitability of the cannabis industry. This could adversely
affect our ability to generate material revenue or secure long-term profitability and success through the operation of cannabis licenses
and the sale of cannabis products, which could have a material adverse effect on our anticipated business, financial condition and results
of operations.
Risks
Relating to Our Company and Financial Condition
Our
ability to continue as a going concern is in doubt unless we obtain adequate new debt or equity financing and achieve sufficient sales
levels.
As
discussed in Note 1 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and negative
cash flows that raise substantial doubt about the Company’s ability to continue as a going concern. Our continued existence is
dependent upon generating sufficient working capital and obtaining adequate new debt or equity financing. These factors raise substantial
doubt about our ability to continue as a going concern for a period of 12 months. Management cannot provide assurance that we will ultimately
achieve or maintain profitable operations or become cash flow positive or raise debt and/or equity capital to continue and grow our operations.
Because of our continuing losses, without improvements in our cash flow from operations or new financing, we may have to continue to
restrict our expenditures. Management estimates needing at least $10 million to fund our planned expenditures and operations over the
next 12 months. Working capital limitations may impinge on our day-to-day operations, which may contribute to continued operating losses.
If any of the foregoing should happen, our shareholders could lose some or all of their investment.
If
we cannot manage our growth effectively, we may not become profitable.
Businesses,
including development stage companies such as ours and/or any operating business or businesses we may acquire, often grow rapidly and
tend to have difficulty managing their growth. If we are able to acquire an operating business, we will likely need to expand our management
team and other key personnel by recruiting and employing experienced executives and key employees and/or consultants capable of providing
the necessary support.
We
cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges
could cause us to lose money, and your investment could be lost.
Because
we have limited capital, we may need to raise additional capital in the future by issuing debt or equity securities, the terms of which
may dilute our current investors and/or reduce or limit their liquidation or other rights.
We
have now sold all of the shares of Ecoark
common stock previously held by us, and will require additional capital to implement our business plan,
including opening Elysian Stores as planned as well as growing our Norr operations. We may not be able to obtain additional
capital when required. Future business development activities, as well as administrative expenses such as salaries, insurance,
general overhead, legal and compliance expenses and accounting expenses will require a substantial amount of additional
capital.
The
terms of securities we issue in future capital transactions may be more favorable to new investors, and may include liquidation preferences,
superior voting rights or the issuance of other derivative securities, which could have a further dilutive effect on or subordinate the
rights of our current investors. Any additional capital raised through the sale of equity securities will likely dilute the ownership
percentage of our shareholders. Additionally, any debt securities we issue would likely create a liquidation preference superior that
of our current investors and, if convertible into shares of common stock, would also pose the risk of dilution.
We
may be unable to obtain necessary financing if and when required.
Our
ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both in general and in the
particular industry or industries in which we may choose to operate), our limited operating history and current lack of operations, the
national and global economies and the condition of the market for microcap securities. Further, economic downturns such as the current
global depression caused by the COVID-19 pandemic may increase our requirements for capital, particularly if such economic downturn persists
for an extended period of time or after we have acquired an operating entity, and may limit or hinder our ability to obtain the funding
we require. If the amount of capital we are able to raise from financing activities, together with any revenues we may generate from
future operations, is not sufficient to satisfy our capital needs, we may be required to discontinue our development or implementation
of a business plan, cancel our search for business opportunities, cease our operations, divest our assets at unattractive prices or obtain
financing on unattractive terms. If any of the foregoing should happen, our shareholders could lose some or all of their investment.
Because
we are dependent upon Richard Horgan, our Chief Executive Officer and sole director to manage and oversee our Company, the loss of him
or any difficulty hiring or retaining other key personnel could adversely affect our plan and results of operations.
We
currently have a sole director and officer, Richard Horgan, who manages the Company and is presently evaluating a viable plan for our
future operations. We will rely solely on his judgment in connection with selecting a target company and the terms and structure of any
resulting business combination. In order to be successful, we will need to obtain key personnel to assist Mr. Horgan in his efforts to
develop and implement the Company’s business plan. We may be unable to obtain such personnel prior to acquiring a business or at
all. Competition in the market for the human resources that we expect we will need is intense, and we may have difficulty procuring adequate
employees and/or consultants without investing significant financial resources on their salaries, fees, or other compensation. Further,
given our current search for a business opportunity, we may have to delay hiring additional personnel until such time as we have sufficient
capital to meet both the required amounts to make attractive offers to operating entities and to fund our future operations. The loss
of our Chief Executive Officer, or any difficulty or inability to procure other qualified personnel, could delay or prevent the achievement
of our business objectives, which could have a material adverse effect upon our results of operations and financial position.
Because
we lack a controlling shareholder, if Mr. Horgan were unavailable we may be unable to cause the Company to elect a replacement director.
In that event we would cease operations.
In
addition, the officers and directors of an acquisition candidate may resign upon completion of a combination with their business. The
departure of a target’s key personnel could negatively impact the operations and prospects of our post-combination business. The
role of a target’s key personnel upon the completion of the transaction cannot be ascertained at this time. Although we contemplate
that certain or all members of a target’s management team may remain associated with the target following a change of control thereof,
there can be no assurance that all of such target’s management team will decide to remain in place. The loss of key personnel,
either before or after a business combination and including management of either us or a combined entity could negatively impact the
operations and profitability of our business.
Risks
Related to Our Common Stock
Due
to factors beyond our control, our stock price may be volatile.
There
is currently a limited market for our common stock, and there can be no guarantee that an active market for our common stock will develop,
even if we are successful in consummating a business combination. Further, even if an active market for our common stock develops, it
will likely be subject to by significant price volatility when compared to more seasoned issuers. We expect that the price of our common
stock will continue to be more volatile than more seasoned issuers for the foreseeable future. Fluctuations in the price of our common
stock can be based on various factors in addition to those otherwise described in this Report, including:
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Developments
within our industries such as any failure to close or obtain regulatory approval for the
Treehouse acquisition, the opening of new stores or regulatory developments; |
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The
operating performance of any business we acquire, including any failure to achieve material revenues therefrom; |
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The
performance of our competitors in the marketplace, both pre- and post-combination; |
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Large-scale events such as geopolitical turmoil or inflation; |
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The
public’s reaction to our press releases, SEC filings, website content and other public announcements and information; |
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Changes
in earnings estimates of any business that we acquire or recommendations by any research analysts who may follow us or other companies
in the industry of a business that we acquire; |
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Variations
in general economic conditions, including as may be caused by uncontrollable events such as the COVID-19 pandemic and the resulting
decline in the economy; |
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The
public disclosure of the terms of any financing or other transaction we disclose in the future; |
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The
number of shares of our common stock that are publicly traded in the future; |
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Actions
of our existing shareholders, including sales of common stock by our directors and executive officers or by significant investors;
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The
employment or termination of key personnel. |
Many
of these factors are beyond our control and may decrease the market price of our common stock, regardless of whether we can consummate
a business combination and of our current or subsequent operating performance and financial condition. In the past, following periods
of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities
class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise
be used to benefit our business.
Because
trading in our common stock is so limited, investors who purchase our common stock may depress the market if they sell common stock.
Our
common stock trades on the OTC Pink Market, the successor to the pink sheets. The OTC Pink Market generally is illiquid and most stocks
traded there are of companies that are not required to file reports with the SEC under the Securities Exchange Act of 1934. While we
voluntarily file Forms 10-Q and 10-K with the SEC, we are a voluntary filer and not required to file reports with the SEC. Our common
stock itself infrequently trades. For example, on December 31, 2021, our common stock price closed at $1.00 with 33 shares traded. Yahoo
Finance reported that the average daily volume was 1,841 shares as of February 28, 2022. Accordingly, any sales may depress the trading
price.
The
market price of our common stock may decline if a substantial number of shares of our common stock are sold at once or in large blocks.
Presently
the market for our common stock is limited. If an active market for our shares develops in the future, some or all of our shareholders
may sell their shares of our common stock which may depress the market price. Further, Rule 144 will not be available if we are deemed
to be a “shell” company, unless an exemption from the definition applies. Any sale of a substantial number of these shares
in the public market, or the perception that such a sale could occur, could cause the market price of our common stock to decline, which
could reduce the value of the shares held by our other shareholders.
Future
issuance of our common stock could dilute the interests of our existing shareholders, particularly in connection with an acquisition
and any resulting financing.
We
may issue additional shares of our common stock in the future. The issuance of a substantial amount of our common stock could substantially
dilute the interests of our shareholders. In addition, the sale of a substantial amount of common stock in the public market, either
in the initial issuance or in a subsequent resale by the target company in a business combination which received our common stock as
consideration or by investors who has previously acquired such common stock could have an adverse effect on the market price of our common
stock.
Because
our common stock is subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock,
which adversely affects its liquidity and market price.
The
SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less
than $5.00 per share, subject to specific exemptions. The market price of our common stock on the OTC Pink Market is presently less than
$5.00 per share and therefore we are considered a “penny stock” company according to SEC rules. Further, we do not expect
our stock price to rise above $5.00 in the foreseeable future. The “penny stock” designation requires any broker-dealer selling
our securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine
that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases
of our common stock and therefore reduce the liquidity of the public market for our shares.
Moreover,
as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority (“FINRA”), a growing
number of broker-dealers decline to permit investors to purchase and sell or otherwise make it difficult to sell shares of penny stocks.
The “penny stock” designation may have a depressive effect upon our common stock price.
Because
of FINRA sales practice requirements which affect broker-dealers, the market price for our common stock will be adversely affected.
FINRA
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing
that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status,
investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that
speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers
to recommend that their customers buy shares of our common stock, which may limit our shareholders’ ability to buy and sell our
common stock and have an adverse effect on the market for our shares. Further, due to FINRA regulation, there are a limited number of
broker dealers which will handle penny stocks, which impairs the market and reduces the market price.
Due
to recent changes to Rule 15c2-11 under the Exchange Act, our common stock may become subject to limitations or reductions on stock price,
liquidity or volume.
On
September 16, 2020, the SEC adopted amendments to Rule 15c2-11 under the Exchange Act. This Rule applies to broker-dealers who quote
securities listed on over-the-counter markets such as our common stock. The Rule as amended prohibits broker-dealers from publishing
quotations on OTC markets for an issuer’s securities unless they are based on current publicly available information about the
issuer. When it becomes effective, the amended Rule will also limit the Rule’s “piggyback” exception, which allows
broker-dealers to publish quotations for a security in reliance on the quotations of a broker-dealer that initially performed the information
review required by the Rule, to issuers with current publicly available information or issuers that are up-to-date in their Exchange
Act reports. As of this date, we are uncertain as what actual effect the Rule may have on us.
The
Rule changes could harm the liquidity and/or market price of our common stock by either preventing our shares from being quoted or driving
up our costs of compliance. Because we are a voluntary filer under Section 15(d) of the Exchange Act and not a public reporting company,
the practical impact of these changes is to require us to maintain a level of periodic disclosure we are not presently required to maintain,
which would cause us to incur material additional expenses. Further, if we cannot or do not provide or maintain current public information
about our company, our shareholders may face difficulties in selling their shares of our common stock at desired prices, quantities
or times, or at all, as a result of the amendments to the Rule.
Our
shareholders do not have dissenters’ rights with respect to an acquisition of a controlling interest in the Company.
Section
78.378 of the Nevada Revised Statutes allows a corporation to limit the application of the statutory provisions with respect to dissenters’
rights applicable to the acquisition of a controlling interest in a corporation. On August 19, 2015 we amended our bylaws to provide
that Section 78.3793 of the Nevada Revised Statutes, Nevada’s dissenters’ rights statute, does not apply to the shareholders
of the Company. As a result, any of our shareholders who do not approve a transaction that results in the issuance or transfer of a controlling
interest in the Company will not have the rights generally afforded under that provision with respect to such a transaction, including
the right to receive payment of the fair value of their shares as provided therein. Therefore, if the acquisition of a controlling interest
in the Company were to occur, any of our dissenting shareholders may be left without recourse and may be unable to subsequently sell
their shares at the prices they desire or at all.
Because
we may issue preferred stock without the approval of our shareholders and have other anti-takeover defenses, it may be more difficult
for a third-party to acquire us and could depress our stock price.
Our
Board may issue, without a vote of our shareholders, one or more series of preferred stock that have voting rights, liquidation preferences,
dividend rights and other rights that are superior to those of our common stock. Any issuance of preferred stock could adversely affect
the rights of holders of our common stock in that such preferred stock could have priority over the common stock with respect to voting,
dividend or liquidation rights. Further, because we can issue preferred stock having voting rights per share that are greater than the
equivalent of one share of our common stock, our Board could issue preferred stock to investors who support us and our management and
give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting
in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to
sell their common stock and/or cause the market price of our common stock shares to drop significantly, even if our business is performing
well.