INLB Item 9 Labs Corporation (CE)

Item 1A. Risk Factors.

There are certain inherent risks which will have an effect on the Company’s development in the future and the most significant risks and uncertainties known and identified by its management are described below.

Risks Related to the Company and its Business 

Cannabis (other than hemp) remains illegal under federal law, and any change in the enforcement priorities of the federal government could render the Company’s current and planned future operations unprofitable or even prohibit such operations. 

The Company operates both directly and indirectly in the cannabis industry, which is dependent on state laws and regulations pertaining to such industry; however, under federal law, cannabis (other than hemp) remains illegal. 

The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Because of this, doctors may not prescribe cannabis for medical use under federal law. 

Currently, 36 U.S. states, the District of Columbia and the U.S. territories of Guam, Puerto Rico and the US Virgin Island allow the use of medical cannabis and 18 states and the District of Columbia and Guam have legalized cannabis for “adult-use” or recreational use. These state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. The United States Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.   

The United States Department of Justice has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity (see “Federal regulation of cannabis in the United States,” below). In addition, a federal statute, renewed each year in the Congressional budget since 2014 (the so-called “Blumenauer Amendment”), prohibits the use of federal enforcement dollars against state-legal medical cannabis operators.  In the event the Department of Justice reverses stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and adult-use marijuana in small amounts, or if Congress does not continue to renew the Blumenauer Amendment or an equivalent, there may be a direct and adverse impact to the Company and its revenue and profits. 

The Company has expressed substantial doubt about its ability to continue as a going concern, which may hinder its ability to obtain future financing. 

As of September 30, 2022, the Company had $85,637 of cash and negative working capital of ($37,032,478) (current assets minus current liabilities), compared with $1,454,460 of cash and ($4,893,385) of negative working capital as of September 30, 2021. We have experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of $65,016,698 at September 30, 2022. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company’s management concluded that internal controls over financial reporting were not effective at September 30, 2021. If the Company fails to maintain an effective system of internal controls, they may not be able to accurately report the Company’s financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in their financial reporting, which would harm their business and the trading price of their stock. 

In Item9A. Controls and Procedures of this Annual Report on Form 10-K, the Company disclosed that their management assessed the effectiveness of their internal control over financial reporting as of September 30, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013), and concluded that the Company’s internal control over financial reporting was not effective as of  September 30, 2022, due to material weaknesses, including a lack of segregation of duties, a lack of risk assessment procedures on internal control to detect financial reporting risks in a timely manner; and a lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives.

In expanding on the Company’s cited material weaknesses, the Company disclosed that their limited size has prevented them from being able to employ sufficient resources to enable them to have an adequate level of supervision and segregation of duties within their system of internal control. Further, the Company lacks risk assessment procedures on internal control to detect financial reporting risks in a timely manner; and lacks documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives.

Effective internal controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud. If the Company cannot provide financial reports or prevent fraud, their business reputation and operating results could be harmed. Inferior internal controls could also cause investors to lose confidence in their reported financial information, which could have a negative effect on the trading price of their stock.  

The Company is an early-stage growth company.  

The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company’s planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations. The commercial response to the product offerings is still uncertain, and although the Company believes that its strategy incorporates advantages compared to other cannabis business models, if patients or consumers do not respond favorably to the Company’s products or if it takes longer to develop its products or establish its customer base or it proves to be more costly than currently anticipated to develop its businesses, revenues may be adversely affected. 

The Company will need, but may be unable to, obtain additional funding on satisfactory terms, which could dilute the Company’s stockholders or impose burdensome financial restrictions on their business. 

In the future, the Company hopes to rely on revenues generated from operations to fund all of the cash requirements of their activities. However, there can be no assurance that the Company will be able to generate any significant cash from their operating activities in the future. Future financings may not be available on a timely basis, in sufficient amounts or on terms acceptable to the Company, if at all. Any debt financing or other financing of securities senior to the Common Shares will likely include financial and other covenants that will restrict the Company’s flexibility. Any failure to comply with these covenants would have a material adverse effect on the Company’s business, prospects, financial condition and results of operations because the Company could lose their existing sources of funding and impair their ability to secure new sources of funding. There can be no assurance that the Company will be able to generate any investor interest in its securities. If the Company does not obtain additional financing, the Company’s business may be materially adversely affected and could require them to suspend operations, in which case one would likely lose the entirety of your investment in the Company. 

The Company’s operating plan may change as a result of many factors currently unknown to them, and they may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances or a combination of these approaches. Raising funds in the current economic environment may present additional challenges. It is not certain that the Company has accounted for all costs and expenses of future development and regulatory compliance. Even if the Company believes they have sufficient funds for their current or future operating plans, the Company may seek additional capital if market conditions are favorable or if they have specific strategic considerations. 

Any additional fundraising efforts may divert the Company’s management from their day-to-day activities, which may adversely affect their ability to develop and commercialize their products. In addition, they cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to them, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of their stockholders and the issuance of additional securities, whether equity or debt, by the Company, or the possibility of such issuance, may cause the market price of their shares to decline. The sale of additional equity or convertible securities may dilute their existing stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and the Company may be required to agree to certain restrictive covenants, such as limitations on their ability to incur additional debt, limitations on their ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact the Company’s ability to conduct their business. The Company could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and the Company may be required to relinquish rights to some of their technologies or product candidates or otherwise agree to terms unfavorable to the Company, any of which may have a material adverse effect on the Company’s business, operating results and prospects. 

If the Company is unable to obtain funding on a timely basis, they may be required to significantly curtail, delay or discontinue one or more of their research or development programs or the commercialization of any product, or be unable to expand their operations or otherwise capitalize on the Company’s business opportunities, as desired, which could materially affect their business, financial condition and results of operations. 

If the Company fails to raise additional capital, the Company’s ability to implement its business model and strategy could be compromised. 

The Company has limited capital resources. To date, the Company’s operations have been funded by and through the Company’s operations, private placements of the Company’s securities and financing from the Company’s financing partners. The Company expects to require substantial additional capital in the near future, including through this Offering, in order to execute the Company’s businesses as planned, to develop and expand the Company’s operations, expand the Company’s brand in the marketplace, and to establish the targeted levels of production. The Company may not be able to obtain additional financing on terms acceptable to us, or at all. Even if the Company obtains financing for its near-term operations, the Company expects that they will require additional capital beyond the near term. If the Company is unable to raise capital when needed, its business, financial condition and results of operations would be materially adversely affected, and the Company could be forced to reduce or discontinue the Company’s operations. 

If the Company needs additional capital to fund their growing operations, the Company may not be able to obtain sufficient capital and may be forced to limit the scope of the Company’s operations. 

If adequate additional financing is not available on reasonable terms, the Company may not be able to expand their business operations and they would have to modify their business plans accordingly. There is no assurance that additional financing will be available to the Company. 

In connection with its growth strategies, the Company may experience increased capital needs and accordingly, the Company may not have sufficient capital to fund their future operations without additional capital investments. The Company’s capital needs will depend on numerous factors, including: (i) their profitability; (ii) the release of competitive products by their competition; (iii) the level of their investment in marketing and branding their products and (iv) the amount of their capital expenditures. The Company cannot assure one that they will be able to obtain capital in the future to meet their needs. 

In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies, especially those in the cannabis industry, have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, the Company’s securities can also be expected to be subject to volatility resulting from market forces over which the Company will have no control. If the Company needs additional funding they will, most likely, seek such funding in the United States and the effect of market fluctuations on their stock price could limit their ability to obtain equity financing. 

If the Company cannot obtain additional funding, they may be required to: (i) limit their expansion; (ii) limit their marketing efforts and (iii) decrease or eliminate capital expenditures. Such reductions could adversely affect their business and their ability to compete. 

Even if the Company does find a source of additional capital, they may not be able to negotiate terms and conditions for receiving the additional capital that are favorable to the Company. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of its existing stockholders. In addition, new equity or convertible debt securities issued by the Company to obtain financing could have rights, preferences and privileges senior to their Common Shares. The Company cannot give any assurance that any additional financing will be available to the Company, or if available, will be on terms favorable to the Company.

The Company faces inherent risks prevalent when performing acquisitions and dispositions. 

Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) the Company may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; (v) increasing the scope and complexity of the Company’s operations; (vi) loss or reduction of control over certain of the Company’s assets; and (vii) litigation or other disputes concerning either the Company’s obligations to counterparties under relevant transaction documents or liabilities of an acquisition target or its previous owners (whether disclosed or undisclosed at the time of the relevant transaction).  

The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Company. While the Company attempts to obtain appropriate indemnification provisions in connection with its acquisitions and dispositions, the Company may still be exposed to significant financial or reputational risk as a result of entering into such transactions. 

The required regulatory approvals needed for certain acquisitions may not be obtained or may contain materially burdensome conditions. 

Completion of certain of the Company’s potential acquisitions, specifically the transfer of certain licenses and cannabis inventory, are conditioned upon the receipt of certain approvals of the transfer of the assets and licenses by the respective state and local regulators. There can be no assurance that these approvals will be obtained. In addition, the governmental entities from which these approvals are required may impose conditions on the completion of the transfer or require changes to the terms of the transfer of the licenses. Such conditions or changes could have the effect of jeopardizing or delaying completion of the transfer of the licenses or reducing the anticipated benefits of such acquisitions. If the Company agrees to any material conditions in order to obtain any approvals required to complete any acquisition, the Company’s business and results of operations may be adversely affected.

Failure to effectively manage growth of internal operations and business may strain the Company’s financial resources. 

The Company intends to significantly expand the scope of their business operations in the near term. The Company’s growth rate may place a significant strain on their financial resources for a number of reasons, including, but not limited to, the following: 

Additionally, the Company’s strategy envisions a period of rapid growth that may impose a significant burden on their administrative and operational resources. The Company’s ability to effectively manage growth will require them to substantially expand the capabilities of their administrative and operational resources and to attract, train, manage and retain qualified management and other personnel. The Company’s failure to successfully manage growth could result in their sales not increasing commensurately with capital investments. The Company’s inability to successfully manage growth could materially adversely affect their business. 

The failure to hire additional employees could harm the Company’s business. 

The Company’s future success also depends upon the Company’s continuing ability to attract and retain highly qualified personnel. Expansion of the Company’s business and the management and operation will require additional managers, officers, directors and employees with industry experience, and the Company’s success will be highly dependent on their ability to attract and retain skilled management personnel and other employees. There can be no assurance that the Company will be able to attract or retain highly qualified personnel. Competition for honest, diligent and skilled personnel in the Company’s industry is significant. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees. 

Risks Related to the Cannabis Industry 

The Company may be exposed to inherent risk due to the Federal regulation of cannabis in the United States. 

Investors are cautioned that in the United States, cannabis is largely regulated at the state level.  

As a result of the conflicting views between state legislatures and the federal government regarding cannabis noted below, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the memorandum which then Deputy Attorney General James Cole sent to all United States district attorneys (the “Cole Memorandum”) acknowledging that, notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several states had enacted laws relating to cannabis for medical purposes.

The Cole Memorandum outlined the priorities for the United States Department of Justice (the “DOJ”) relating to the prosecution of cannabis offenses. In particular, 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, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the DOJ never provided specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard. In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. 

In 2017, then newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit. However, in 2018, then General Sessions issued a memorandum (the “Sessions Memorandum”), which rescinded and superseded the Cole Memorandum. The Sessions Memorandum stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to cannabis activities as set out in chapter 9-27.000 of the U.S. Attorneys’ Manual. The inconsistency between federal and state laws and regulations is a major risk to the Company’s business. 

As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. However, the Company believes that the Cole Memorandum’s principles remain well respected, and the federal government under Sessions’ tenure prosecuted no state law compliant entities. Sessions resigned in late 2018. The new Attorney General William Barr testified in his confirmation hearing that he will not upset “settled expectations”, “investments”, or other “reliance interest[s]” arising as a result of the Cole Memorandum, and that he does not intend to use federal resources to enforce federal cannabis laws in states that have legalized cannabis “to the extent people are complying with the state laws.” 

Medical cannabis is currently further protected against enforcement by enacted legislation from United States Congress in the form of the Blumenauer-Farr Amendment, which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to Congress restoring such funding. If such funding were ever restored, actions which were previously protected could be subject to prosecution if they are within the statute of limitations. 

Current Attorney General Merrick Garland, appointed by President Biden, has not readopted the Cole Memorandum or announced a substantive cannabis enforcement policy, although Mr. Garland has indicated he would deprioritize enforcement of low-level cannabis crimes such as possession and other state-legal operations and otherwise expressed views consistent with the Cole Memorandum. Recent statements include, “I do not think it the best use of the Department’s limited resources to pursue prosecutions of those who are complying with the laws in states that have legalized and are effectively regulating marijuana…I do think we need to be sure, for example, that there are no end runs around the state laws by criminal enterprises, and that access is prohibited to minors.” 

Due to the dual sovereign nature of American government, the federal government can assert criminal violations of U.S. federal law despite state law. Since the Cole Memo, there have not been publicized instances of any state-legal cannabis operations being prosecuted absent claims that the operation is also violating state law. Nonetheless, the level of prosecutions of state-legal cannabis operations is entirely unknown. If the DOJ policy were to change course and aggressively pursue financiers or equity owners of cannabis-related business, and United States Attorneys followed such DOJ policies through pursuing prosecutions, then the Company could face (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries, (ii) the arrest of its employees, directors, officers, managers and investors, and charges of ancillary criminal violations of the CSA for directly violating, or aiding and abetting and conspiring to violate the CSA by virtue of providing financial support to cannabis companies that service or provide goods to state-licensed or permitted cultivators, processors, distributors, and/or retailers of cannabis; and/or (iii) barring employees, directors, officers, managers and investors who are not U.S. citizens from entry into the United States temporarily or for life. 

Under these circumstances, it also is possible that a federal prosecutor would seek to seize the assets of the Company, and to recover the “illicit profits” previously distributed to stockholders resulting from any of cannabis activities of the Company. In these circumstances, the Company’s operations would cease, stockholders may lose their entire investment and directors, officers and/or stockholders may be left to defend any criminal charges against them at their own expense and, if convicted, may be sent to federal prison. 

The Blumenauer-Farr Amendment remains current in effect. However, should the Blumenauer-Farr Amendment not be renewed upon expiration in subsequent spending bills there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law.

Such potential proceedings could involve significant restrictions being imposed upon the Company or on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favor of the Company. 

Additionally, there can be no assurance as to the position any new administration may take on cannabis and a new administration could decide to enforce the U.S. federal laws strongly. Any enforcement of current U.S. federal laws could cause significant financial damage to the Company and its stockholders. Further, future presidential administrations may want to treat cannabis differently and potentially enforce the U.S. federal laws more aggressively. 

Violations of any U.S. 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. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis licenses in the United States, the listing of its securities on various stock exchanges or trading platforms, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial. 

The Company understands that almost all major securities clearing firms in the U.S. refuse to facilitate transactions related to securities of companies involved in the marijuana industry, especially those companies, like the Company, whose securities are not trading on national securities exchanges. This is due to the fact that marijuana continues to be listed as a Schedule I controlled substance under U.S. federal law, with the result that marijuana-related practices or activities, including the cultivation, possession or distribution of marijuana, are illegal under U.S. federal law. Accordingly, U.S. residents who acquire Common Shares or other Company securities may find it difficult, or costly – if not impossible – to resell such shares over the facilities of any stock exchange or trading platform on which the Common Shares or other Company securities  may then be listed, including the OTCQX. It remains unclear what impact, if any, this and any future actions among market participants in the U.S. will have on the ability of U.S. residents to resell any Common Shares that they may acquire in open market transactions.

There is regulatory uncertainty related to state cannabis laws. 

The rulemaking process for cannabis operators at the state level in any state will be ongoing and result in frequent changes. As a result, a compliance program is essential to manage regulatory risk. All operating policies and procedures implemented by the Company are compliance-based and derived from the state regulatory structure governing ancillary cannabis businesses and their relationships to state-licensed or permitted cannabis operators, if any. Notwithstanding the Company’s efforts, regulatory compliance and the process of obtaining regulatory approvals can be costly and time-consuming. No assurance can be given that the Company will receive the requisite licenses, permits or cards to operate its businesses. 

In addition, local laws and ordinances could restrict the Company’s business activity. Although legal under the laws of the states in which the Company’s business will operate, local governments have the ability to limit, restrict, and ban cannabis businesses from operating within their jurisdiction. Land use, zoning, local ordinances, and similar laws could be adopted or changed, and have a material adverse effect on the Company’s business. It is possible that laws or regulations may be enacted in the future that will be directly applicable to the Company’s business. The Company cannot predict the nature of any future laws, regulations, interpretations or applications, nor can the Company determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on the Company’s business. 

The Company is aware that multiple states are considering special taxes or fees on businesses in the cannabis industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation, which could result in changes in the state in which the Company operates. This could have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

The Company may be exposed to risks upon the re-classification of cannabis in the United States.  

If cannabis is re-categorized as a Schedule II or lower controlled substance, the ability to conduct research on the medical benefits of cannabis would most likely be improved; however, rescheduling cannabis may materially alter enforcement policies across many federal agencies, primarily the FDA. The FDA is responsible for ensuring public health and safety through regulation of food, drugs, supplements, cosmetics and other similar products, pursuant to its enforcement authority set forth in the United States Federal Food Drug and Cosmetic Act (the “FDCA”). The 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 Drug Enforcement Administration (“DEA”); however, the FDA has enforced the FDCA with regard to hemp-derived products, especially CBD, sold outside of state-regulated cannabis businesses. 

If cannabis were to be rescheduled to a federally controlled, yet legal, substance, the FDA would likely play a more active regulatory role. In the event that cannabis becomes subject to FDA regulation, the pharmaceutical industry may directly compete with state-regulated cannabis businesses for market share, and the pharmaceutical industry may urge the DEA, the FDA, and others to enforce the CSA and FDCA against businesses that comply with state but not federal law. The potential for multi-agency enforcement could threaten or have a materially adverse effect on existing cannabis businesses whose operations are compliant with applicable state laws, including the Company. 

Additionally, the FDA may issue rules and regulations including good manufacturing practices, related to the growth, cultivation, harvesting and processing of medical cannabis. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where medical-use cannabis is grown register with the FDA and comply with certain federally prescribed regulations. In the event that some or all of these regulations are imposed, the impact on the cannabis industry is unknown, including what costs, requirements and possible prohibitions may be enforced. If the Company is unable to comply with the regulations or registration as prescribed by the FDA, it may have an adverse effect on the Company’s business, operating results and financial condition. 

The Company could have exposure to risks related to the failure of cannabis legislation passing in certain states. 

The Company’s business model depends on the legalization of cannabis, for medical and/or adult-use, at the state level. It is possible that legislation in certain states in which the Company may wish to operate could fail to obtain the necessary votes and fail to pass. Such inability for states to pass such legislation could materially impact the Company’s future growth prospects. If a state passes legislation to legalize cannabis for medical and/or adult-use, the state may subsequently pass legislation to implement the law and potentially address any details not addressed in the legalizing statute or constitutional amendment itself. It is possible that such implementing legislation could be drafted in such a way as to make the Company’s operations more challenging and costly. 

Federal cannabis law pre-emption could pose a risk to the Company. 

It is possible that the federal government could pass legislation legalizing cannabis for medical and/or adult-use in the future. Such federal legislation could preempt similar legislation, and/or similar legalization efforts, including existing state laws. The Company’s operations could be subject to new federal laws and regulations, which are currently unknown and could have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects. 

Confidentiality agreements with employees and others may not adequately prevent disclosure of the Company’s trade secrets and other proprietary information. 

The Company’s success depends upon the skills, knowledge and experience of their technical personnel, their consultants and advisors as well as their licensors and contractors. Because the Company operates in a highly competitive field, they will rely significantly on trade secrets to protect their proprietary techniques and processes. However, trade secrets are difficult to protect. The Company enters into confidentiality and intellectual property assignment agreements with their corporate partners, employees, consultants, outside scientific collaborators, developers and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third-party businesses confidential information developed by the Company during the course of the receiving party’s relationship with the Company. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to the Company will be the Company’s exclusive property. However, these agreements may be breached and may not effectively assign intellectual property rights to the Company. The Company’s trade secrets also could be independently discovered by competitors, in which case the Company would not be able to prevent the use of such trade secrets by their Company’s competitors. The enforcement of a claim alleging that a party illegally obtained and was using the Company’s trade secrets 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 trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect the Company’s competitive position.

The Company faces inherent risks associated with extensive regulation and taxation in the cannabis industry. 

The Company’s services and customers are expected to be subject to federal, state, county, local and other regulations that are subject to change without notice. In addition, there may be other legal, tax and/or regulatory changes that the Company may or may not be able to foresee that may materially affect the Company. The process of complying with any regulations that may be imposed could, among other unknown risks, take a significant period of time and require the expenditure of substantial resources. 

The Company faces inherent risks associated with it competing with criminal enterprises. 

The Company’s operations may be a source of competition with current criminal enterprises dealing in cannabis, including drug cartels. As a result, the operations of the Company may be an ongoing target of attacks specifically designed to impede the success of its products, and it may be exposed to various levels of criminal interference and other risks and uncertainties including terrorism, violence, hostage taking and other drug gang activities. The nature of the Company’s operations may also make the Company subject to greater risks of theft and greater risks as to property security. These conditions could lead to lower productivity and higher costs, which would adversely affect results of operations and cash flow of the Company. Such conditions could have a material impact on the investment returns of the Company. 

The Company faces inherent risks associated with the cannabis industry due to limited access to banking and the ability to access public and private capital. 

In February 2014, the US Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Memorandum (the “FinCEN Memorandum”) outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses in compliance with federal enforcement priorities. The FinCEN Memorandum echoed the enforcement priorities of the Cole Memorandum and states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Under these guidelines, financial institutions must submit a suspicious activity report (“SAR”) in connection with all banking activities on behalf of “marijuana related businesses” (as referred to in the FinCEN Memorandum), in accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories – cannabis limited, cannabis priority, and cannabis terminated – based on the financial institution’s belief that the business in question follows state law, is operating outside of compliance with state law, or where the banking relationship has been terminated, respectively. Despite the foregoing, although FinCEN reported 706 banks and credit unions accepting business from marijuana related businesses as of June 2021, most banks do not accept deposit funds from state-sanctioned cannabis businesses. As a result, businesses involved in the cannabis industry in the U.S. often have difficulty accessing the U.S. banking system and traditional financing sources. 

In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company 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 resides in permits cannabis sales. The inability or limitation in the Company’s 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 the Company to operate and conduct its business as planned or to operate efficiently. 

Risks Related to the Company’s Products and Services 

The Company could face various risks due to its products and services offered. 

Because the Company’s industry is relatively new, there is limited information about comparable companies available for potential investors to review in making a decision about whether to invest in the Company. 

Stockholders and investors should further consider, among other factors, the Company’s prospects for success in light of the risks and uncertainties encountered by companies that, like the Company, are in their early stages. For example, unanticipated expenses and problems or technical difficulties may occur and they may result in material delays in the operation of the Company’s business. The Company may not successfully address these risks and uncertainties or successfully implement its operating strategies. If the Company fails to do so, it could materially harm the Company’s business to the point of having to cease operations and could impair the value of the securities of the Company to the point investors may lose their entire investment.

The Company expects to commit significant resources and capital to develop and market existing products and new products and services. These products are relatively untested, and the Company cannot assure stockholders and investors that it will achieve market acceptance for these products, or other new products and services that the Company may offer in the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business. In addition, new products and services may pose a variety of challenges and require the Company to attract additional qualified employees. The failure to successfully develop and market these new products and services could seriously harm the Company’s business, financial condition and results of operations. 

The Company competes with a number of other companies, including other licensed entities in the United States, some of which have longer operating histories and more financial resources and experience than the Company has. 

The Company faces, and they expect to continue to face, intense competition from licensed cannabis operators, both public and private, and other potential competitors, some of which have longer operating histories and more financial resources and experience than the Company has. In addition, the cannabis industry currently is undergoing consolidation, creating larger companies with financial resources, capabilities and product offerings that are superior to the Company’s by virtue of size alone. As a result of this competition, the Company may be unable to maintain their operations or develop them as currently proposed, on terms the Company considers acceptable, or at all. 

There are currently hundreds of applications for cannabis licenses being processed across a number of states. The number of licenses granted and the number ultimately authorized by each state could have an adverse impact on the Company’s ability to compete in the medical cannabis and adult-use cannabis industry. The Company expects to face additional competition from new market entrants that are granted licenses or existing license holders that are not yet active in the industry in the states in which the Company currently operates or plans to operate. If a significant number of new licenses are granted in any given market which the Company participate in, the Company may experience increased competition and may experience downward price pressure on the Company’s medical cannabis products as new entrants increase production. 

If the number of users of cannabis for medical and/or adult-use purposes increases, the demand for products will increase. This could result in the competition in the cannabis industry becoming more intense as current and future competitors begin to offer an increasing number of diversified cannabis products. Conversely, if there is a contraction in the medical market for cannabis, resulting from the legalization of adult-use cannabis or otherwise, competition for market share may increase. 

The Company faces an inherent risk of exposure to product liability claims.  

The Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of the Company’s products would involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of the Company’s products alone or in combination with other medications or substances could occur. The Company may be subject to various product liability claims, including, among others, that the Company’s products caused injury or illness or death, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations and financial condition of the Company. There can be no assurances that the Company 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 the Company’s potential products. 

The Company faces an inherent risk of exposure to product recalls.   

Manufacturers and distributors of products are sometimes subject to the recall or return of their products 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 Company’s products are recalled due to an alleged product defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. The Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although the Company has detailed procedures in place for testing its products, 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 Company’s significant brands were 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 the Company’s products and could have a material adverse effect on the results of operations and financial condition of the Company. Additionally, product recalls may lead to increased scrutiny of the Company’s operations by the FDA, or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.

The Company’s business may be negatively impacted by environmental factors, including unfavorable weather patterns and pesticide contamination. 

Cannabis cultivation is an extensive, complicated and delicate process, and a successful harvest is reliant on myriad factors including, but not limited to, lighting, fertilization, technique, sunlight, temperature and proper application of pesticides. Variance in any one of these factors may result in a tainted or destroyed harvest that will be unfit for distribution. Further, pesticide contamination may prompt recall and public-safety alerts, and any contamination detected may also result in product removal from retail dispensaries. 

The Company’s business may be negatively impacted by current and future environmental regulations.  

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations. 

Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of marijuana or from proceeding with the development of its operations as currently proposed. 

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. 

Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development. 

The Company’s business may be negatively impacted by currently unknown environmental risks. 

There can be no assurance that the Company will not encounter hazardous conditions at the site of the real estate used to operate its businesses, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Company may be suspended. If the Company receives notice of a hazardous condition, it may be required to correct the condition prior to continuing construction. The presence of other hazardous conditions will likely delay construction and may require significant expenditure of the Company’s resources to correct the condition. Such conditions could have a material impact on the investment returns of the Company. 

The Company relies heavily on the management team and could be negatively impacted by a loss of service of key members. 

A risk associated with the production and sale of adult-use cannabis is the loss of important staff members. Success of the Company will be dependent upon the ability, expertise, judgment, discretion and good faith of its senior management and key personnel. While employment agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results or financial condition. 

The Company relies heavily on the key inputs, suppliers and employees and could be negatively impacted by a loss of these relationships.  

The cannabis business is dependent on a number of key inputs and their related costs including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability, quality or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the Company. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the Company.

The ability of the Company to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labor, equipment, parts and components. This could have an adverse effect on the financial results of the Company. 

The Company’s access to affordable skilled labor may be impeded by the existence of unionization or other collective bargaining efforts among the Company’s employees or independent contractors. The Company may also be legally required to participate in or facilitate such unionization or collective bargaining efforts within certain jurisdictions, which could limit the Company’s access to affordable skilled labor and have a materially adverse impact on the business, financial condition, results of operations or prospects of the Company. The Company does not believe its employees currently anticipate seeking unionization and believes its relationship with its employees is satisfactory. 

As the Company is a cultivator, producer and provisioner of cannabis, it will largely depend on third party retailers to resell its cannabis and related products to end-user consumers. These retailers could tamper with the Company’s products or otherwise ignore its quality standards, which could harm the end-user customers, with whom the Company has no contact. Any changes in the Company’s retailer customer’s business or fortunes could disrupt the Company’s ability to sell its products at volume. Any such changes or other unrelated production issues could also disrupt the Company’s business due to delays in finding new retailers. 

Furthermore, the Company cannot provide assurance that its internal controls and compliance systems will always protect it from acts committed by its employees, agents or business partners in violation of federal or state laws. Any improper acts or allegations could damage the Company’s reputation and subject it to civil or criminal investigations and related stockholder lawsuits, could lead to substantial civil and criminal monetary and non-monetary penalties, and could cause the Company to incur significant legal and investigatory fees. 

The Company relies heavily on third parties and could be negatively impacted by a loss of these relationships.  

The cannabis business is dependent on a number of third parties, including various service providers, distributors and retailers. Some of the services and market access provided by such third parties may only be available from a single third party or a limited group of third parties. If the only provider of a service or access to a market were to go out of business or cease doing business with the Company, the Company might be unable to find a replacement for such service or market access in a timely manner or at all. If the only provider of a service or access to a market were to be acquired by a competitor, that competitor may elect not to provide services or market access to the Company in the future. Further, due to the uncertain regulatory landscape for regulating cannabis in U.S., the Company’s third-party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. There is also a risk that a regulatory body could impose certain restrictions on such third party’s ability to operate in the United States. Any significant interruption or negative change in the Company’s business relations with such third parties could materially impact the business, financial condition, results of operations or prospects of the Company. 

The Company maintains what it believes to be adequate insurance coverages across its business, though there is a risk that the Company could be negatively impacted by unknown risks associated with being uninsured or underinsured. 

The Company’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labor disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability. 

Although the Company intends to continue to maintain insurance to protect against risks in such amounts as it considers to be reasonable, its insurance will not cover all the potential risks associated with its operations. Moreover, there are exclusions and additional difficulties and complexities associated with certain insurance coverages due to the Company’s involvement in the cannabis industry. The Company may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. 

Insurance against risks such as environmental pollution or other hazards encountered in the operations of the Company is not generally available on acceptable terms. The Company’s access to adequate and affordable insurance is significantly limited by the nature of the Company’s business, which may prevent it from purchasing adequate and affordable insurance coverage. The Company might also become subject to liability for pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.

The Company utilizes proprietary forecasting models, though the limited operating history of the Company and industry as a whole may make the models unreliable. 

The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the adult-use cannabis industry in the states in which the Company’s business will operate. Federal and state laws prevent widespread participation and hinder market research. As a result, the market data available is limited and unreliable. Market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of the Company’s management team as of the date they are made. A failure in the demand for its products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of the Company. 

The Company faces an inherent risk of exposure to various litigation risks that could have an adverse impact on its planned future operations. 

The Company may become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company such a decision could adversely affect the Company’s ability to continue operating and the market price for the Company’s securities and could use significant resources. Even if the Company is involved in litigation and wins, litigation can redirect significant resources of the Company and/or the Company’s management. 

As the legalization of cannabis for the medical and/or adult-use is a highly controversial issue, the Company may be subject to litigation prior to, or after, passage of legislation and/or a constitutional amendment legalizing cannabis for certain uses. In addition, although the Company itself may not be directly named in a civil action, any litigation involving any of the Company’s subsidiaries or affiliated entities could negatively affect the Company’s profits and impact its ability to conduct business operations as planned. Such litigation could have a material adverse effect on the financial position of the Company. 

Risks Related to the Company’s Franchise Model 

The franchise business model presents a number of risks.  

The Company’s success will rely to a large degree on the financial success and cooperation of their franchisees, including their pre-franchise clients and affiliates. The Company’s revenues arise from two sources: fees from franchised dispensaries and pre-franchise clients and sales from company-owned dispensaries that the Company owns and may own in the future. The Company’s franchisees manage their businesses independently, and therefore are responsible for the day-to-day operation of their dispensaries. The revenues the Company realizes from franchised dispensaries are largely dependent on the ability of the Company’s franchisees to grow their sales. Business risks affecting the Company’s operations also affect their franchisees. If the Company’s franchisees do not experience sales growth, the Company’s revenues and margins could be negatively affected as a result. Also, if sales trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, closures, or delayed or reduced payments to  the Company. 

The Company believes they are one of the first in the U.S. cannabis industry to offer dispensary franchises as they build their brand. There is, therefore, to the Company’s knowledge, no record of any national company achieving success or profitability by offering franchised cannabis dispensaries under consistent branding in the United States.   

The Company’s franchisees could take actions that could harm the Company’s business.  

The Company’s franchisees are contractually obligated to operate their dispensaries in accordance with state cannabis laws and the operations, safety, and health standards set forth in the Company’s agreements with them. However, franchisees are independent third parties which the Company does not control. The franchisees own, operate, and oversee the daily operations of their dispensaries and have sole control over all employee and other workforce decisions. As a result, the ultimate success and quality of any franchised dispensary rests with the franchisee. If franchisees do not successfully operate dispensaries in a manner consistent with required standards, franchise fees paid to the Company will be adversely affected and brand image and reputation could be harmed, which in turn could materially and adversely affect the Company’s business and operating results. 

The Company’s operating performance could also be negatively affected if the Company’s franchisees experience operational problems or project an image inconsistent with the Company’s brand and values, particularly if the Company’s contractual and other rights and remedies are limited, costly to exercise or subjected to litigation and potential delays.

The Company may face regulatory hurdles seeking to sell franchises in certain states.  

The sale of franchises is regulated by various state laws, as well as by the FTC. The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration or disclosure by franchisors in connection with franchise offers and sales. Several states also have "franchise relationship laws" or "business opportunity laws" that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. The states with relationship or other statutes governing the termination of franchises include Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Virginia, Washington and Wisconsin. Some franchise relationship statutes require a mandated notice period for termination; some require a notice and cure period; and some require that the franchisor demonstrate good cause for termination. Although the Company believes that their franchise agreements comply with these statutory requirements, failure to comply with these laws could result in the Company incurring civil liability. In addition, the Company cannot predict the effect of any future federal or state legislation or regulation. 

States may not be willing to allow the Company to offer franchises because of the federally illegal status of cannabis. States, such as California, also could require that the Company become a party to their franchisees’ cannabis dispensary license. If this occurs, the Company may be limited in the number of franchises they sell in a particular state, municipality or local jurisdiction, the Company’s costs of compliance would likely be increased, and the Company’s ability to remediate a default by a franchisee may be limited, which may have material adverse effect on the Company’s business, financial condition, and results of operations. 

Their marketing activities for franchises may not be successful. 

The Company invests resources in advertising and other marketing activities to maintain, extend and expand the Company’s brand image. There can be no assurance that the Company’s marketing strategies will be effective or that the amount the Company invests in advertising activities will result in a corresponding increase in sales of the Company’s franchises.  If the Company’s marketing initiatives are not successful, the Company will have incurred significant expenses without the benefit of higher revenues. 

Risks Associated with the Company’s Capital Stock  

Sales of substantial amounts of a particular class of securities may have an adverse effect on the market price of such securities.  

Sales of substantial amounts of a particular class of securities of the Company, or the availability of such securities for sale, could adversely affect the prevailing market prices for such class of securities. A decline in the market prices of a particular class of the Company’s securities could impair the Company’s ability to raise additional capital through the sale of securities should it desire to do so. 

The Company’s stock has historically experienced volatile market pricing. 

The market price for the Company’s securities may be volatile and subject to wide fluctuations in response to numerous factors, many of which will be beyond the Company’s control. Financial markets have at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Company’s securities may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted, and the trading price of the Company’s securities may be materially adversely affected. 

The Company’s ability to manage debt service is dependent on its cash flows. 

An economic downturn may negatively impact the Company’s cash flows. Credit and capital markets can be volatile, which could make it more difficult for the Company to obtain additional debt or equity financings in the future. Such constraints could increase the Company’s costs of borrowing and could restrict its access to other potential sources of future liquidity. The Company’s failure to have sufficient liquidity to make interest and other payments required by its debt could result in a default of such debt and acceleration of the Company’s borrowings, which would have a material adverse effect on the Company’s business and financial condition. To the extent the Company incurs indebtedness, principal and interest payments on such indebtedness will have to be made when due, regardless of whether sufficient cash flow or income is available. If payments on any debts and obligations are not made when due, it may result in substantial adverse consequences to the Company, including adverse income tax consequences.

The Company’s common stock may become subject to the SEC's penny stock rules, which may make it difficult for broker-dealers to complete customer transactions and could adversely affect trading activity in their securities.  

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 the Company’s common stock may be less than $5.00 per share for some period of time and therefore would be a "penny stock" according to SEC rules, unless the Company is listed on a national securities exchange. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: 

If required to comply with these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in the Company’s securities may be adversely affected. 

FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell the Company’s stock. 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“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 the Company’s Common Stock, which may limit one’s ability to buy and sell the Company’s stock and have an adverse effect on the market for the Company’s shares. 

The Company does not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of the Company’s stock. 

The Company has never paid any cash dividends on any shares of their capital stock, and they do not anticipate that they will pay any dividends in the foreseeable future. The Company’s current business plan is to retain any future earnings to finance the expansion of their business. Any future determination to pay cash dividends will be at the discretion of the Company’s Board of Directors, and will be dependent upon the Company’s financial condition, results of operations, capital requirements and other factors as the Company’s Board of Directors may deem relevant at that time. If the Company does not pay cash dividends, their stock may be less valuable because a return on one’s investment will only occur if the Company’s stock price appreciates. 

The market for the Company’s Common Stock may be thinly traded, so one may be unable to sell at or near ask prices or at all if one needs to sell one’s shares to raise money or otherwise desire to liquidate one’s shares. 

The Company’s Common Stock has been historically thinly traded on the OTC Markets, meaning that the number of persons interested in purchasing the Company’s shares at or near ask prices at any given time has been relatively small or non-existent. This situation is attributable to several factors, including that the Company is a small company that is relatively unknown to stock analysts, stockbrokers, institutional investors, and others in the investment community. Even if the Company came to such persons’ attention, those persons tend to be risk-averse and would be reluctant to follow an unproven company such as the Company or purchase or recommend the purchase of the Company’s shares until they became more seasoned and viable. Consequently, there may be periods of several days or more when trading activity in the Company’s shares is minimal or non-existent compared to a seasoned issuer, which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on the Company’s share price. The Company cannot assure one that a broader or more active public trading market for the Company’s Common Shares will develop or be sustained or that current trading levels will be maintained. 

The indemnification provisions in the Company’s certificate of incorporation and bylaws under Delaware law may result in substantial expenditures by the Company and may discourage lawsuits against the Company’s directors, officers, and employees. 

The Company’s certificate of incorporation contains provisions that eliminate the Company’s directors’ liability for monetary damage to the Company and stockholders. The Company’s bylaws also require them to indemnify their officers and directors. The Company may also have contractual indemnification obligations under their agreements with their directors, officers, and employees. These indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers, and employees that they may not recoup.

Pursuant to the laws of the State of Delaware, the Company’s certificate of incorporation excludes personal liability for its directors for monetary damage based upon any violation of their fiduciary duties as directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, acts in violation of the Delaware General Corporation Law, or any transaction from which a director receives an improper personal benefit.

This exclusion of liability does not limit any right, which a director may have to be indemnified, and does not affect any director’s liability under federal or applicable state securities laws. 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to provisions of the State of Delaware, the Company has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable. 

The Company is classified as a “smaller reporting company” and they cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make their Common Stock less attractive to investors. 

The Company is currently a “smaller reporting company.” Specifically, smaller reporting companies are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings. Decreased disclosures in the Company’s SEC filings due to their status as a smaller reporting company may make it harder for investors to analyze their results of operations and financial prospects. 

Holders of the Company’s Common Stock may face significant restrictions on the resale of the Common Stock due to states’ “blue sky” laws or rules. 

The Company intends to offer and sell their securities to private subscribers and retail customers, from time to time, in every state in the United States plus the District of Columbia and Puerto Rico. The National Securities Markets Improvement Act of 1996 (“NSMIA”), which is a U.S. federal statute, preempts the states from regulating transactions in certain securities, which are referred to as “covered securities,” and which include the Units and components thereof offered hereby pursuant to Regulation A. NSMIA nevertheless allows the states to investigate if there is a suspicion of fraud or deceit, or unlawful conduct by a broker or dealer, in connection with the sale of securities. If there is a finding of fraudulent activity, the states can bar the sale of covered securities in a particular case. The various states and other jurisdictions can impose fines on the Company or take other regulatory actions against the Company if they fail to comply with their securities laws. Although the Company is taking steps to help ensure that they will conduct all offers and sales of its securities in compliance with all blue sky laws, there can be no assurance that they will be able to achieve such compliance in all instances, or avoid fines or other regulatory actions if they do not achieve compliance. 

Because the Company became a reporting company under the Exchange Act by means other than a traditional underwritten initial public offering, the Company may not be able to attract the attention of research analysts at major brokerage firms. 

Because the Company did not become a reporting company by conducting an underwritten initial public offering, or IPO, of the Company’s Common Stock, and because the Company is not listed on a national securities exchange, security analysts of brokerage firms may not provide coverage of the Company. In addition, investment banks may be less likely to agree to underwrite secondary offerings on the Company’s behalf because they may be less familiar with the Company as a result of more limited coverage by analysts and the media, and because the Company became public at an early stage in its development.  

Provisions under Delaware law could make an acquisition of the Company more difficult, limit attempts by their stockholders to replace or remove their current management. 

In addition to the Company’s corporate charter and their bylaws, because they are incorporated in Delaware, they are subject to the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of their capital stock for a period of three years following the date on which the stockholder became a 15% stockholder. 

The Company currently has outstanding, and they may, in the future, issue instruments which are convertible into shares of Common Stock, which may result in stockholder dilution.  

The Company currently has outstanding instruments which are convertible into shares of Common Stock, and they may need to issue similar instruments in the future. In the event that these convertible instruments are converted into shares of Common Stock, or that the Company makes additional issuances of other convertible or exchangeable securities, stockholders could experience additional dilution. Furthermore, the Company cannot guarantee that they will be able to issue shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors or the then current market price.