BLUM HOLDINGS, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K beginning on page F-1. The following discussion contains forward-looking statements that involve risks and uncertainties. Investors should not place undue reliance on these forward-looking statements. These forward-looking statements are based on current expectations and actual results could differ materially from those discussed herein. Factors that could cause or contribute to the differences are discussed in Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those predicted in these forward-looking statements, and the events anticipated in the forward-looking statements may not actually occur. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results or to reflect the occurrence of unanticipated events, unless required by applicable laws or regulations. COMPANY OVERVIEW Our Business The Company is a cannabis company with retail, production, distribution, and cultivation operations inCalifornia , with an emphasis on providing the highest quality of medical and adult use cannabis products. The Company is home to Korova, a brand of high potency products across multiple product categories, currently available inCalifornia ,Oregon ,Arizona , andOklahoma . With the acquisition of People's First Choice, the Company operates a premier cannabis dispensary inOrange County, California , regularly servicing upwards of 1,000 customers each day. The Company also owns dispensaries inCalifornia which operate as The Spot inSanta Ana , Blüm inOakland , and Blüm inSan Leandro . As ofDecember 31, 2022 , the Company had approximately 170 employees.
We are organized into two reportable segments:
• Cannabis Retail - Includes cannabis-focused retail, both physical stores and non-store front delivery • Cannabis Cultivation and Distribution - Includes cannabis cultivation, production, and distribution operations
Either independently or in conjunction with third parties, we operate medical
marijuana retail and adult use dispensaries, cultivation and production
facilities in
Our corporate headquarters are located at3242 S. Halladay St ,Santa Ana, California 92705 and our telephone number is (888) 909-5564. Our website address is as follows: www.unrivaledbrands.com. No information available on or through our websites shall be deemed to be incorporated into this Form 10-Q. Our common stock, par value$0.001 (the "Common Stock"), is quoted on the OTC Markets Group, Inc's OTCQB tier under the symbol "UNRV."
Fiscal Year 2022 Highlights
In fiscal year 2022, the Company launched a 100-day turnaround plan and strategic restructuring to reduce costs, drive efficiency, and identify a path to profitable growth. Management has made concentrated efforts to optimize cashflow by eliminating non-core assets, streamlining on-going operations, and improving the Company's balance sheet with an emphasis on improving key vendor relationships and reducing short and long-term debt.
Retail Operations
On
InJune 2022 , the Company temporarily closed BlümSan Leandro and began actively marketing the retail location for sale through the fiscal third quarter of 2022. InDecember 2022 , a change to the plan of sale occurred and the Company reopened BlümSan Leandro . Accordingly, the assets were reclassified as held and used as ofDecember 31, 2022 . Refer to Note 5 of the Consolidated Financial Statements for additional details. 26
--------------------------------------------------------------------------------
T a ble of Contents
OnDecember 28, 2022 , the Company closed on a Management Services Agreement (the "MSA") withBrick City Productions, Inc. (the "Operator") to re-open and fully operate the Blum dispensary inSan Leandro , including operations management, inventory management, labor administration, vendor relations, and customer service for a term of 12 months. The Operator is also providing the working capital of$0.40 million required to re-open the store. As consideration for such services, the Company will pay a management fee equal to 25% of the gross revenue less discounts, refunds and credits payable in shares of the Company's common stock at the completion of the MSA. The Company will receive a monthly fee equal to 4% of the gross revenue of theSan Leandro dispensary. In addition, the Operator will dedicate and use up to 50% of theSan Leandro dispensary to sell the Company's licensed products. During the fiscal third quarter of 2022, the Company surrendered its retail and delivery licenses related to SilverStreak inSacramento due to underperformance. InNovember 2022 , the Company dissolved the legal entity related to SilverStreak and all liabilities and existing obligations were extinguished. OnDecember 30, 2022 , the Company entered into binding letters of intent with each ofGreen Door Redding, LLC ("Cookies Redding") and 510Retail & Events, Inc. ("Cookies Oakland") pursuant to which Unrivaled is purchasing an Option to Purchase each of the dispensaries and will also negotiate and enter into a Management Services Agreements to operate the respective dispensaries. The letters of intent provide the Company, for a period of 12 months, with an option to purchase each of Cookies Redding and Cookies Oakland on mutually agreeable terms. The Company paid an equivalent of$1.00 million and$0.50 million , respectively, for the Cookies Redding and Cookies Oakland option to purchase deposit in shares of the Company's common stock ("Common Stock") at the closing share price onDecember 30, 2022 , which will be applied to the purchase price of each dispensary at the time of purchase if such purchase occurs.
Cultivation & Distribution Operations
During the fiscal third quarter of 2022, management concluded that it would no longer continue its cultivation operations at one of its cultivation facilities located inCalifornia and terminated its operations as ofDecember 31, 2022 . InJune 2022 , Unrivaled partnered with a leading North American distributor of cannabis and cannabis accessories, with a strong fulfillment infrastructure, to manage distribution of its Korova branded products. InSeptember 2022 , Unrivaled reduced the number of in-house manufactured products to high-grossing Korova products and halting productions of Sticks and Cabana products. InJuly 2022 , the Company exited its third-party distribution operations inCalifornia . InNovember 2022 , the Company dissolved the related distribution entities inCalifornia and all liabilities and existing obligations were extinguished.
NuLeaf Discontinued Operations
InApril 2022 , the Company completed the sale of its remaining fifty percent (50%) of the membership interests ofNuLeaf Reno Production, LLC ("NuLeaf Reno") andNuLeaf Sparks Cultivation, LLC ("NuLeaf Sparks") withNuLeaf, Inc. (collectively, the "NuLeaf Operations") for aggregate consideration of$6.50 million in cash. Gross proceeds from the sale of the NuLeaf Operations were used to support ongoing operations and general corporate expenses.
Oregon Discontinued Operations
As part of its restructuring plan, management reevaluated its operations in the state ofOregon and determined it would divest the underperforming assets. OnDecember 28, 2022 , the Company entered into a Stock Purchase and Sale Agreement pursuant to which the Company sold all of its equity interests inLTRMN, Inc. , which conducts cannabis distribution and wholesale activities inOregon , toBuchanan Group, LLC and an unaffiliated third-party buyer, for an aggregate purchase price of$0.25 million . The purchase price was paid in the form of a secured promissory note at a rate of 8.0% per annum due and payable on the third anniversary of the date of issuance. However, upon a final and binding settlement of certain ongoing litigation that is approved by UMBRLA, the purchase price shall be automatically revised to be$0 and the promissory note shall be deemed paid and satisfied in-full. OnDecember 28, 2022 , the Company entered into a Membership Interest Purchase and Sale Agreement pursuant to which the Company sold its 50% equity interests inPsychonaut Oregon, LLC ("Psychonaut"), toJoseph Gerlach for an aggregate purchase price of$1 .Mr. Gerlach owns the other 50% of the equity interests in Psychonaut and is also the Company's Chief Cultivation Officer. 27
--------------------------------------------------------------------------------
T a ble of Contents
Divestiture of Non-Core Assets
OnFebruary 10, 2022 , the Company announced the successful closing of the sale of the Company's non-operating real property and building located onDyer Road inSanta Ana, CA (the "Dyer Property") for$13.40 million . The sale results in the Company retiring$9.00 million of outstanding debt on the property. Part of the$9.00 million of outstanding debt, that the Company retired in theDyer property sale, was the$2.50 million promissory note held byDominion Capital .
Private Financing Through Equity
On
InDecember 2022 , the Company filed a Certificate of Designation of Rights, Privileges, Preferences, and Restrictions to establish a new class of preferred shares, the Series V Preferred Stock. The number of authorized shares of Series V Preferred Stock is 25,000,000 shares. Each share of Series V Preferred Stock is convertible into ten shares of Common Stock at any time from and after the first anniversary of the issuance date. Each share of Series V Preferred Stock will automatically be converted into ten fully paid and non-assessable shares of Common Stock on the second anniversary of the date on which the holder's shares of Series V Preferred Stock were issued. The Series V Class of Preferred Stock have a one-year lock-up and have a two times voting right which automatically expires in two years. Purchasers agreed to enter into a voting agreement assigning their voting rights to Sabas Carrillo, the Company's Chief Executive Officer. InJanuary 2023 , the Company completed a private placement transaction led by its new executive management team for total gross proceeds of$1.97 million . The Company issued (i) 14,071,431 shares of Series V Preferred Stock at$0.14 per share and (ii) 70,357,155 warrants to purchase up to 70,357,155 shares of Common Stock with an exercise price of$0.028 .
Management Changes
OnFebruary 23, 2022 Eric Baum became Chairman of the board of directors for the Company, succeedingNicholas Kovacevich .Mr. Kovacevich remains on the board of directors.
On
On
On
OnAugust 12, 2022 , the Company entered into an engagement letter withAdnant, LLC ("Adnant") pursuant to which Adnant will provide executive level consulting and related business support and services related to the Company's present and future challenges and opportunities. Specifically, Adnant will provide a team of restructuring focused executives that may include, but not be limited to, CEO support, chief restructuring officer, executive vice president of finance, financial planning and analysis professional, and/or legal consulting. Adnant is expected to work closely with the Company and its internal teams, existing management, existing consultants and advisors, lenders, attorneys, and other relevant parties in connection with the implementation of the strategies most appropriate to achieve the Company's objectives and as directed and authorized by the board of directors. Adnant's fees for the services will be a flat fee of$0.15 million monthly. The payment of the monthly fee shall be subject to the Company having available a cash balance greater than or equal to$1.2 million (the "Cash Threshold") following the payment of the monthly fee. Should cash not be sufficient when the fee becomes due and payable, the Company shall accrue such fee(s) until such time as the Cash Threshold is achieved or, at the election of Adnant, and as mutually agreed by the Company, such fees may be paid in an equivalent value of shares of the Company's common stock. In addition to the monthly fee described above, a Performance Bonus Award in the aggregate amount of$2.00 million shall be payable to Adnant in shares of the Company's common stock ("Performance Bonus Award Shares") based upon the achievement of the Performance Bonus Award Objectives set forth in the Engagement Letter and the continued performance of Adnant towards obtaining such Performance Bonus Award Objectives. 28 -------------------------------------------------------------------------------- T a ble of Contents OnAugust 12, 2022 , the board of directors appointed Sabas Carrillo as Interim Chief Executive Officer.Mr. Carrillo is the Founder and CEO of Adnant. OnAugust 22, 2022 andSeptember 12, 2022 , the Company appointedRobert Baca as Interim Chief Legal Officer andPatty Chan as Interim Chief Financial Officer, respectively. Annual Impairment Test Under US GAAP, impairment exists when the net book value of an asset exceeds its fair value. Net book value is recorded at cost less accumulated amortization. Fair value is determined based on quoted market prices, prices of comparable businesses, a present value or other valuation technique, or a combination thereof. Forecasted cash flows expected from the assets may be considered depending on the valuation technique. To determine if an asset is impaired, the total profit, cash flow or other benefit expected to be generated by the asset is compared with its current book value. If it is determined that the book value of the asset is greater than the future cash flow or benefit of the asset, an impairment is recorded. In accordance with ASC 350, "Intangibles-Goodwill and Other," goodwill and indefinite-lived intangible assets are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. US GAAP requires that if an asset group was impaired, the impairment of long-lived assets should be completed and reflected in the carrying amount of the reporting unit prior to the goodwill impairment test. The Company conducts its annual impairment assessment onSeptember 30 . In fiscal year 2022, the Company recorded total impairment loss of$163.70 million detailed as follows: During the nine months endedSeptember 30, 2022 , the Company recorded total impairment of$83.09 million related to the intangible assets and goodwill acquired fromUMBRLA, Inc. in 2021. Management assessed the projected revenues based on current market conditions and revised the earnings forecast based on a decrease in anticipated operating profits and cash flows. During the nine months endedSeptember 30, 2022 , the Company recorded total impairment of$63.64 million related to the intangible assets and goodwill acquired fromPeople's First Choice LLC in 2021. Management noted forecasted revenues used at the time of acquisition were not achievable due to regulatory and licensing issues and revised the earnings forecast accordingly. During the nine months endedSeptember 30, 2022 , the Company recognized an impairment of$11.08 million and$5.89 million related to the intangible assets and goodwill acquired from SilverStreak Solutions in 2021 andBlack Oak Gallery in 2016, respectively, as a result of current market conditions inCalifornia as market participants continue to compete with the illegal market.
Outlook
The Company engagedAdnant, LLC to provide management consulting,SEC financial reporting, and related business support and services. Key to the engagement, Unrivaled hired Sabas Carrillo as Interim CEO to implement an aggressive restructuring and turnaround strategy. The Company will focus on its performing assets, particularlyCalifornia retail assets. In particular, the Company intends to emphasize retail business fundamentals including a robust and diverse product offering, improving inventory and vendor management, effective marketing, and reinvigorating its Korova brand. The Company will continue to focus on reducing and streamlining its corporate overhead and "rightsizing" the Company. This outlook is based on several management assumptions that are largely outside the control of the Company. With a disciplined approach to retail performance, a management team with extensive cannabis industry, capital markets experience and deep relationships in the industry, and a commitment to investing in its team and specifically its company culture, the Company is encouraged that Unrivaled will emerge from its current restructuring efforts as an effective cannabis company. Management has assessed its productive and non-productive assets, specifically the assets related to the UMBRLA and Silverstreak transactions. These transactions resulted in the acquisition of several assets that have been underperforming and consequently, management spun-off, discontinued, and dissolve certain of those UMBRLA and Silverstreak assets, allowing the Company to focus on its core profitable assets without the significant overhead of operating those assets. Under new management, we will seek further opportunities to expand profitability maximize returns for its shareholders. 29
--------------------------------------------------------------------------------
T a ble of Contents
RESULTS OF OPERATIONS
The below table outlines the impact of reclassifying the operations of the NuLeaf operations, Nevada Dispensaries, Oregon Operations, OneQor, and Edible Garden to discontinued operations:
(unaudited)
Three Months Ended December 31, Twelve Months Ended December 31,
($ in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue $ 8,726 $ 20,480 $ (11,754) (57.0) % $ 52,015 $ 42,120 $ 9,895 23.0 %
Cost of Goods Sold 4,905 12,923 (8,018) (62.0) % 35,118 31,101 4,017 13.0 %
Gross Profit 3,821 7,557 (3,736) (49.0) % 16,897 11,019 5,878 53.0 %
Gross Profit % 43.8 % 36.9 % 6.9 % 32.5 % 26.2 % 6.3 %
Operating Expenses:
Selling, General and Administrative
Expenses 4,113 17,841 (13,728) (76.9) % 54,156 46,314 7,842 16.9 %
Impairment Expense - 6,171 (6,171) (100.0) % 163,698 6,171 157,527 2552.7 %
Gain on Disposal of Assets (9,066) (3,133) (5,933) 189.4 % (7,194) (3,133) (4,061) 129.6 %
Total Operating Income (Expenses) (4,953) 20,879 (25,832) (123.7) % 210,660 49,352 161,308 326.9 %
Income (Loss) from Operations 8,774 (13,322) 22,096 (165.9) % (193,763) (38,333) (155,430) 405.5 %
Other Expense (2,026) (1,948) (78) 4.0 % (1,871) (2,847) 976 (34.3) %
Income (Loss) from Continuing
Operations Before Provisions for
Income Taxes 6,748 (15,270) 22,018 (144.2) % (195,634) (41,180) (154,454) 375 %
Provision for Income Tax Benefit
(Expense) for Continuing Operations (2,802) (885) (1,917) 216.6 % 2,784 (885) 3,669 (415) %
Net Income (Loss) from Continuing
Operations 3,946 (16,155) 20,101 (124.4) % (192,850) (42,065) (150,785) 359 %
Net (Loss) Income from Discontinued
Operations (380) 6,415 (6,795) (105.9) % 4,194 10,190 (5,996) (59) %
Net Income (Loss) 3,566 (9,740) 13,306 (136.6) % (188,656) (31,875) (156,781) 492 %
Net Loss from Continuing Operations
Attributable to Non-Controlling
Interest - - - - % - (604) 604 (100) %
Net Income from Discontinued
Operations Attributable to
Non-Controlling Interest - - - - % 275 - 275 100 %
Net Loss Attributable to Unrivaled
Brands, Inc. $ 3,566 $ (9,740) $ 13,306 (136.6) % $ (188,931) $ (31,271) $ (157,660) 504 %
30--------------------------------------------------------------------------------
T a ble of Contents
Year Ended
Revenue
During the year endedDecember 31, 2022 , the Company generated revenue from continuing operations of$52.02 million composed of retail revenue of$39.94 million and cultivation/distribution revenue of$12.08 million . This compared to revenue from continuing operation of$42.12 million for the year endedDecember 31, 2021 , which included retail revenue of$24.54 million and cultivation/distribution revenue of$17.58 million . This was an increase of$9.90 million , or 23.0%, in revenue from continuing operations from the prior year. Retail revenue for the year endedDecember 31, 2022 outpaced the prior year by$15.40 million , or 62.7%, due to the retail assets acquired in the Company's 2021 acquisitions of UMBRLA and People's First Choice. We operated five retail stores and a non-storefront delivery service for the majority of fiscal 2022 compared to 2 retail stores which operated for the full year of fiscal 2021 and 3 retail and a store front delivery service was added during the latter half of fiscal 2021. Cultivation and distribution revenue for the year endedDecember 31, 2022 decreased by$5.50 million , or 31.3%, as a result of management's focused efforts to restructure the Company's cannabis brands through reduction of active products as well decrease in internal sales force during the year the year endedDecember 31, 2022 . The Company also shutdown third-party distribution operations in the state ofCalifornia during the fiscal third quarter of 2022 as well as completed the sale of Oregon Operations during the fiscal fourth quarter of 2022. Refer to "Note 19 - Discontinued Operations" of the notes to the Consolidated Financial Statements in Item 8 for further information, which contributed in the decrease in cultivation and distribution revenue as compared to the prior year. Gross Profit Cost of goods sold for the year endedDecember 31, 2022 was$35.12 million , an increase of$4.02 million , or 13.0%, compared to$31.10 million for the year endedDecember 31, 2021 . The increase in cost of goods sold was directly impacted by the increase in revenues for the current reporting period as compared to the prior year. The Company's gross profit for the year endedDecember 31, 2022 , was$16.90 million , compared to$11.02 million for the year endedDecember 31, 2021 , an increase of$5.88 million or 53.0%. The Company's gross margin was 32.5% for the year endedDecember 31, 2022 compared with 26.2% for the year endedDecember 31, 2021 , an increase of 6.3%. The increased gross margin is primarily due to the improvement in retail operations for the year endedDecember 31, 2022 as compared to the prior year as the Company's retail operations has higher margins than its other operations.
Selling, General & Administrative Expenses
The merger with UMBRLA and the acquisitions of People's First Choice and SilverStreak Solutions in 2021 led to expanded operations with additional facilities, employees, and costs to support them. Selling, general and administrative expenses for the year endedDecember 31, 2022 , were$54.16 million , compared to$46.31 million for the year endedDecember 31, 2021 , an increase of$7.84 million or 16.9% primarily driven by larger operations through the majority of the current year. As a result, the Company saw an increase in depreciation and amortization of$5.07 million , rent and facility fees of$2.08 million , security expenses of$2.07 million , stock based compensation of$0.90 million , license, fees and other taxes of$1.44 million . These increases were offset by a decrease in salaries and related benefits of$4.96 million as the Company began to reduce its workforce during the second quarter of fiscal 2022. The Company expects for fiscal 2023, selling, general and administrative expenses to be significantly lower due to the execution of its restructuring plan enacted during the latter half of fiscal 2022.
Operating Loss
The Company realized an operating loss from continuing operations of$193.76 million for the year endedDecember 31, 2022 compared to$38.33 million for the year endedDecember 31, 2021 , an increase of$155.43 million or 405.5%. This increase was primarily attributable to a$163.70 million impairment of intangible assets and goodwill related to the UMBRLA, People's, and SilverStreak acquisitions which was partially offset by a gain on disposal of assets of$7.19 million recognized during the year endedDecember 31, 2022 . As part of the Company's strategic restructuring in fiscal year 2022, the Company terminated its third-party distribution operations inCalifornia , its retail and delivery operations at SilverStreak inSacramento, California and other non-performing assets. As a result, management expects to have significantly lower expenditures during fiscal year 2023. 31
--------------------------------------------------------------------------------
T a ble of Contents
Other Expense
Other expense for the year endedDecember 31, 2022 was$1.87 million compared to other expense of$2.85 million for the year endedDecember 31, 2021 , a decrease of$0.98 million , or (34.3)%. The decrease in other expense was attributed to a loss on extinguishment of debt of$5.98 million as a result of the amendment of the 7.5% Senior Convertible Promissory Notes in fiscal 2021, while no such extinguishment was recognized during fiscal 2022. The loss was offset by a gain on investments of$5.34 million during fiscal 2021 from the sale of Hydrofarm Holdings Group, Inc. ("Hydrofarm") while no such transaction occured during fiscal 2022. Interest expense increased by$2.40 million compared to the prior year as a result of increased debt for the funding of the acquisitions incurred during fiscal 2021, which primarily contributed to the change in other expenses as compared to fiscal 2022. Discontinued Operations Net income from discontinued operations was$4.19 million for the year endedDecember 31, 2022 compared to$10.19 million for the comparative prior year. The decrease of$6.00 million over the year endedDecember 31, 2021 was primarily due to less disposition of its discontinued operating assets in fiscal 2022 as compared to fiscal 2021. The Company disposed of five non-core assets in fiscal 2021 compared to 3 non-core assets in fiscal 2022.
Net Loss Attributable to
Net loss attributable toUnrivaled Brands, Inc. was$188.93 million , or$(0.32) per share, for the year endedDecember 31, 2022 , compared to$31.27 million , or$(0.08) per share, for the year endedDecember 31, 2021 . The increase in net loss was primarily attributable to the impairment of$163.70 million during the year endedDecember 31, 2022 compared to an impairment expense of$6.17 million during the year endedDecember 31, 2021 .
Three Months Ended
Revenue During the three months endedDecember 31, 2022 , the Company generated revenue from continuing operations of$8.73 million composed of retail revenue of$8.11 million and cultivation/distribution revenue of$0.61 million . This compared to revenue from continuing operations of$20.48 million for the quarter endedDecember 31, 2021 , which included retail revenue of$13.28 million and cultivation/distribution revenue of$7.20 million . This was a decrease of$11.75 million or 57.0% in revenue from continuing operations. Retail revenue for the three months endedDecember 31, 2022 decreased by$5.17 million , or 38.9%, as compared to the same period in the prior year which is primarily due to the Company's strategic restructuring in fiscal year 2022 and closing under-performing retail locations. During the fourth quarter of fiscal 2022, the Company was not operating the People's dispensary inLos Angeles , the Blum dispensary inSan Leandro was re-opened inDecember 2022 , in addition to the retail and delivery licenses related to SilverStreak inSacramento was shut down due to underperformance. These same locations were operational during the fourth quarter of fiscal 2021, contributing to the decline in retail revenue compared to the prior year. Cultivation and distribution revenue for the three months endedDecember 31, 2022 decreased by$6.59 million , or 91.5%, compared to the same period in the prior year period due to the Company's turnaround plan to promote fewer active products as well as a reduction in internal sales force. The Company shut down third-party distribution operations in the state ofCalifornia during the fiscal third quarter of 2022 as well as completed the sale of Oregon Operations during the fiscal fourth quarter of 2022. Refer to "Note 19 - Discontinued Operations" of the notes to the Consolidated Financial Statements in Item 8 for further information, which contributed to the decline in cultivation and distribution revenue as compared to the prior year.
Gross Profit
Cost of goods sold for the three months endedDecember 31, 2022 was$4.91 million , a decrease of$8.02 million , or 62.0%, compared to$12.92 million for the three months endedDecember 31, 2021 . The decrease in cost of goods sold was impacted by the restructuring of the Company's cannabis cultivation and distribution operations which had diminished activity during the three months endedDecember 31, 2022 as compared to the prior year. 32
--------------------------------------------------------------------------------
T a ble of Contents
The Company's gross profit for the three months endedDecember 31, 2022 , was$3.82 million , compared to$7.56 million for the three months endedDecember 31, 2021 , a decrease of$3.74 million million, or 49.0% as a result of the above reduction in retail locations and restructuring of its cultivation and distribution operations in the fourth quarter of 2022 compared to the same period in the prior year. The Company's gross margin was 43.8% for the three months endedDecember 31, 2022 compared with 36.9% for the three months endedDecember 31, 2021 , an increase of 6.9%. The increased gross margin is primarily due to the strategic restructuring and discontinuation of unprofitable subsidiaries and focusing on its higher margin retail operations.
Selling, General & Administrative Expenses
Selling, general and administrative expenses for the three months endedDecember 31, 2022 , were$4.11 million , compared to$17.84 million for the three months endedDecember 31, 2021 , a decrease of$13.73 million , or 76.9%, as a result of the Company's restructuring plan to focus on efficiencies, its core assets and reducing its non-core assets implemented during the third fiscal quarter of 2022. As a result of the restructuring plan, the Company saw a decrease in depreciation and amortization of$2.15 million , rent and facility fees of$1.34 million , professional fees of$1.06 million , salaries and related benefits of$3.06 million and a reduction in allowance for bad debt of$4.29 million . The Company expects for fiscal 2023, selling, general and administrative expenses to be significantly lower due to the execution of its restructuring plan enacted during the later half of fiscal 2022.
Operating Income
The Company recognized operating income from continuing operations of$8.77 million for the three months endedDecember 31, 2022 compared to an operating loss from continuing operations of$13.32 million for the three months endedDecember 31, 2021 , a net income increase of$22.10 million or 165.9% as a result of the Company's restructuring plan to focus on efficiencies, its core assets and reducing its non-core assets implemented during the third fiscal quarter of 2022. The Company has meaningfully reset the cost structure of its continuing operations. The reduction in the Company's prior operating loss was further contributed by an increase in gain on disposal of$5.93 million related to the shut down of its non-core assets during the fourth quarter of fiscal 2022 compared to the prior year.
Other Expense
Other expense for the three months endedDecember 31, 2022 was$2.03 million compared to other expense of$1.95 million for the three months endedDecember 31, 2021 , an increase of$0.08 million , or 4.0%. The increase in other expense was attributed to an increase in interest expense of$0.43 million coupled with an increase in unrealized loss on investments of$0.26 million , offset by a decrease in other expense of$0.62 million during the three months endedDecember 31, 2022 as compared to the same period in the prior year.
Discontinued Operations
Net loss from discontinued operations was$0.38 million for the three months endedDecember 31, 2022 compared to net income from discontinued operations of$6.42 million for the comparative prior year. The decrease of$6.80 million , or 105.9%, over the year endedDecember 31, 2021 was primarily due to twoNevada dispositions occurring in the fourth quarter of fiscal 2020 compared to one disposition occurring in the fourth quarter of fiscal 2022.
Net Income (Loss) Attributable to
Net income attributable toUnrivaled Brands, Inc. was$3.57 million , or$0.01 per share, for the three months endedDecember 31, 2022 , compared to net loss of$9.74 million , or$(0.02) per share, for the three months endedDecember 31, 2021 primarily from the reduction of selling, general and administrative expenses during the three months endedDecember 31, 2022 as compared to the same period in the prior year. The decline in selling, general and administrative are a result of the Company's restructuring plan to focus on efficiencies, its core assets and reducing its non-core assets implemented during the third fiscal quarter of 2022. 33
-------------------------------------------------------------------------------- T a ble of Contents Non-GAAP Reconciliations Non-GAAP earnings is a supplemental measure of our performance that is neither required by, nor presented in accordance with,U.S. generally accepted accounting principles ("US GAAP"). Non-GAAP earnings is not a measurement of the Company's financial performance under US GAAP and should not be considered as alternative to net income, operating income, or any other performance measures derived in accordance with US GAAP, or as alternative to cash flows from operating activities as a measure of the Company's liquidity. In addition, in evaluating non-GAAP earnings, you should be aware that in the future the Company will incur expenses or charges such as those added back to calculate non-GAAP earnings. The Company's presentation of non-GAAP earnings should not be construed as an inference that its future results will be unaffected by unusual or nonrecurring items. Non-GAAP earnings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company's results as reported under US GAAP. Some of these limitations are (i) it does not reflect the Company's cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) it does not reflect changes in, or cash requirements for, the Company's working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and non-GAAP earnings does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in the Company's statements of cash flows, and (vi) other companies in our industry may calculate this measure differently than we do, limiting its usefulness as comparative measures. The Company compensates for these limitations by providing specific information regarding the US GAAP amounts excluded from such non-GAAP financial measures. The Company further compensates for the limitations in our use of non-GAAP financial measures by presenting comparable US GAAP measures more prominently. The Company believes that non-GAAP earnings facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). The Company also presents non-GAAP earnings because (i) it believes that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in the Company's industry, (ii) the Company believes that investors will find these measures useful in assessing the Company's ability to service or incur indebtedness, and (iii) the Company uses non-GAAP earnings internally as benchmark to compare its performance to that of its competitors.
In the presentation of the financial results below, the Company reconciles Non-GAAP Adjusted EBITDA Loss with net loss attributable to continuing operations, the most directly comparable GAAP measure. Management believes that this presentation may be more meaningful in analyzing our income generation.
On a non-GAAP basis, the Company recorded Non-GAAP Adjusted EBITDA Income of$1.40 million for the three months endedDecember 31, 2022 compared to a Non-GAAP Adjusted EBITDA loss of$6.18 million for the three months endedDecember 31, 2021 . The Company recorded Non-GAAP Adjusted EBITDA Loss of$18.68 million for the year endedDecember 31, 2022 compared to a Non-GAAP Adjusted EBITDA of$16.34 million for the year endedDecember 31, 2021 . The details of those expenses and non-GAAP reconciliation of these non-cash items are set forth below: 34
--------------------------------------------------------------------------------
T a ble of Contents
(unaudited)
Three Months Ended December 31, Twelve Months Ended December 31,
($ in thousands) 2022 2021 2022 2021
Net Income (Loss) $ 3,566 $ (9,740) $ (188,656) $ (31,875)
Less: Net (Income) Loss from
Discontinued Operations, Net 380 (6,415) (4,194) (10,190)
Add (Deduct) Impact of:
Interest Expense 1,587 1,148 4,173 1,775
Provision for Income Tax Expense
(Benefit) 2,802 1,802 (2,784) 1,802
Depreciation Expense 869 892 3,585 2,008
Amortization of Intangible Assets 490 1,878 7,616 3,390
EBITDA Income (Loss) from
Continuing Operations (Non-GAAP) $ 9,694 $ (10,435) Non-GAAP Adjustments: Stock-based Compensation Expense 507 1,173 4,919 4,057 Impairment of Assets - 6,171 163,698 6,171 Severance Expense for Series A Share Repurchases - 47 910 9,100 Gain on Sale of Investments - - - (5,337) Unrealized Loss (Gain) on Investments 260 - (210) - Gain on Disposition and Sale of Assets (9,066) (3,133) (7,194) (3,133) Gain for Debt Forgiveness - - - (86) (Gain) Loss on Extinguishment of Debt - - (542) 5,976 Adjusted EBITDA Income (Loss) from Continuing Operations (Non-GAAP)$ 1,395 $ (6,177)
LIQUIDITY AND CAPITAL RESOURCES
We incurred net losses for the year endedDecember 31, 2022 and have an accumulated deficit of$440.05 million and$250.02 million atDecember 31, 2022 andDecember 31, 2021 , respectively. As ofDecember 31, 2022 , we had a working capital deficit of$54.57 million , including$1.20 million of cash compared to a working capital deficit of$62.44 million , including$6.70 million of cash, as ofDecember 31, 2021 . Current assets were approximately 0.08 times current liabilities as ofDecember 31, 2022 , compared to approximately 0.29 times current liabilities as ofDecember 31, 2021 . We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital through private sales of common stock and debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations. We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We continue to evaluate various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling common stock. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations, or if we are able to raise capital, that such capital will be available to us on acceptable terms, on an acceptable schedule, or at all. The risks and uncertainties surrounding the Company's ability to continue to raise capital and its limited capital resources raise substantial doubt as to the Company's ability to continue as a going concern for twelve months from the issuance of these financial statements. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , which contemplate our continuation as a going concern. For additional information on, see Item 1A - "Risk Factors" in Part I of this Form 10-K. 35
--------------------------------------------------------------------------------
T a ble of Contents
Operating Activities
Cash used in operating activities for the year endedDecember 31, 2022 was approximately$7.83 million , compared to approximately$17.96 million for the year endedDecember 31, 2021 , a decrease of$10.13 million , or 56.4%. The decrease in cash used in operating activities was primarily due to a slowdown in cash payments of payables and accrued expenses due to the lack of capital during the current year. For fiscal year 2022, management is focused on its turnaround plan to stabilize operations to put the Company on a path to profitability. With new management, the Company took decisive actions to preserve operating cash flow by reducing cash burn, prioritizing payments, renegotiating vendor agreements and closing underperforming business units. Management expects to see improvement in cash flow from operating activities in the following quarters of 2023 as the Company continues to execute its strategic restructuring.
Investing Activities
Cash provided in investing activities for the year endedDecember 31, 2022 was approximately$19.61 million , compared to$21.67 million provided in investing activities for the year endedDecember 31, 2021 , a decrease of$2.06 million , or 9.5%. The decrease in cash provided by investing activities was primarily due to$39.38 million in proceeds from the sale of the Company's Hydrofarm investment in the prior period versus no comparable transaction in the current year. This was partially offset by a$24.40 million paid for the People's and Silverstreak acquisitions in the prior period. During the current year, the company only recognized$20.71 million in cash received from the sale of theDyer property, the Reno dispensary and the NuLeaf joint venture.
Financing Activities
Cash used in financing activities for the year endedDecember 31, 2022 was$17.28 million , compared to$4.50 million provided by financing activities for the year endedDecember 31, 2021 , a decrease of$21.78 million , or 483.6%. The decrease in cash provided by financing activities for the year endedDecember 31, 2022 was primarily due to$21.65 million of principal repayments of debt made during the current year endedDecember 31, 2022 compared to$6.77 million during the year endedDecember 31, 2021 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A detailed description of our critical accounting policies and recent accounting pronouncements are described in "Note 2 - Summary of Significant Accounting Policies" of the notes to the Consolidated Financial Statements in Item 8 of this Form 10-K. Our "Management's Discussion and Analysis of Financial Condition and Results of Operations" section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company's future results of operations will be affected. Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the annual Consolidated Financial Statements are described below. Inventory Valuation The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. The reserve estimate for excess and obsolete inventory is dependent on expected future use. 36 -------------------------------------------------------------------------------- T a ble of Contents Share-Based Compensation The Company uses the Black-Scholes option-pricing model to determine the fair value of equity-based grants. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company's future share price, risk-free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.
Goodwill Impairment, Other Intangible Assets and Long-Lived Assets
Goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill has been impaired. In the impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit's carrying amount to the estimated fair value of the reporting unit. The carrying amount of each reporting unit is determined based upon the assignment of the Company's assets and liabilities, including existing goodwill, to the identified reporting units. The Company relies on a number of factors, including historical results, business plans, forecasts and market data. Changes in the conditions for these judgments and estimates can significantly affect the recoverable amount.
DISCLOSURE ABOUT OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS A description of recently adopted accounting pronouncements and recently issued accounting pronouncements that may potentially impact our financial position and results of operations are described in "Note 2 - Summary of Significant Accounting Policies" of the notes to the Consolidated Financial Statements in Item 8 of this Form 10-K.
© Edgar Online, source
