BLUM HOLDINGS, INC. FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which provides a "safe harbor" for forward-looking statements made by us. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends, and other information, may be forward-looking statements. Words such as "might," "will," "may," "should," "estimates," "expects," "continues," "contemplates," "anticipates," "projects," "plans," "potential," "predicts," "intends," "believes," "forecasts," "future," and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, estimates, and projections will occur or can be can achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements. There are a number of risks, uncertainties, and other important factors, many of which are beyond our control, that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties, and other important factors that could cause actual results to differ include, among others, the risk, uncertainties and factors set forth under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 and in other filings we make from time to time with theU.S. Securities and Exchange Commission ("SEC"). We caution you that the risks, uncertainties, and other factors set forth in our periodic filings with theSEC may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that: (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors' likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of the report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or
otherwise. Company Overview Our corporate headquarters is located at3242 S. Halladay St ,Santa Ana, California 92705 and our telephone number is (888) 909-5564. Our website addresses are as follows: www.unrivaledbrands.com. No information available on or through our websites shall be deemed to be incorporated into this Quarterly Report on Form 10-Q. Our common stock, par value$0.001 (the "Common Stock"), is quoted on the OTC Markets Group, Inc.'s OTCQX tier under the symbol "UNRV."
Our Business The Company is a multi-state operator (MSO) with retail, production, distribution, and cultivation operations, with an emphasis on providing the highest quality of medical and adult use cannabis products. From the acquisition of UMBRLA, the Company has multiple cannabis lifestyle brands. The Company is home to Korova, a brand of high potency products across multiple product categories, currently available inCalifornia ,Oregon ,Arizona , andOklahoma . Other Company brands include Cabana, a boutique cannabis flower brand, and Sticks, a mainstream value-driven cannabis brand, active inCalifornia andOregon . With the Management Services Agreement and pending acquisition of People's First Choice, the Company operates the premier cannabis dispensary inOrange County California . The Company also owns dispensaries inCalifornia which operate as The Spot inSanta Ana and Blum inOakland andSan Leandro . The Company also has licensed distribution facilities inPortland ,Los Angeles ,
andSonoma County .
We are organized into one reportable segment: Cannabis Dispensary, Cultivation and Production, which includes cannabis-focused retail, cultivation and production operations.
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Employees
As ofSeptember 30, 2021 , the Company had 286 employees versus 53 from the prior quarter. The additions in headcount were a direct result of the merger betweenTerra Tech Corp. and UMBRLA which rebranded asUnrivaled Brands, Inc. (Unrivaled, The Company) and the Management Agreement between Peoples First Choice and the Company which brought an additional 84 employees. At time of writing, Unrivaled employees accounted for 202. RESULTS OF OPERATIONS
The below table outlines the impact of reclassifying the operations of the Nevada Dispensaries, OneQor, and Edible Garden to discontinued operations:
Revenue & Gross Profit Breakdown Continuing & Discontinued Operations (in thousands) Three Months EndedSeptember 30
Nine Months Ended
2021 2020 Change % 2021 2020 Change %
Revenue
Continuing
Operations $ 23,434 $ 3,053 $ 20,381 667.6 % $ 34,809 $ 9,806 $ 25,003 255.0 % Discontinued Operations - 203 (203 ) -100.0 % - 3,478 (3,478 ) -100.0 % Total
Revenue 23,434 3,256 20,178 619.7 % 34,809
13,284 21,525 162.0 %
Cost of
Goods Sold
Continuing n.a.Operations 21,146 1,615 (19,531 ) 27,750
4,796 (22,954 ) -478.6 %
Discontinued
Operations - 94 94 100.0 % - 2,755 2,755 100.0 %
Total Cost
of Goods n.a.Sold 21,146 1,709 (19,531 ) 27,750
7,551 (22,954 ) -478.6 %
Gross Profit $ Continuing Operations$ 2,288 $ 1,438 $ 850 59.1 %$ 7,059
$ 5,010 $ 2,049 40.9 % Discontinued Operations - 109 (109 ) -100.0 % - 723 (723 ) -100.0 % Total Gross
Profit $ 2,288 1,547 741 47.9 % 7,059
5,733 1,326 23.1 %
Gross Profit % Continuing % % Operations 9.8 % 47.1 % -37.3 20.3 % 51.1 % -30.8 Discontinued Operations -- 53.7 % -- -- 20.8 % -- Total Gross % % Profit % 9.81 % 47.5 % -37.7 20.3
% 43.2 % -22.9 OutlookUnrivaled Brands, Inc. has made substantial progress on its integration efforts since successfully closing the merger with UMBRLA onJuly 1st, 2021 . Management believes that this strategic acquisition and corporate rebranding will provide a sustainable platform to capture synergies across organization verticals by leveraging Unrivaled's existing brand portfolio and scaling its multi-state distribution operations. Furthermore, onSeptember 1st, 2021 the Company entered into a Management Agreement with People's First Choice; grantingUnrivaled Brands, Inc. operational management and control of theSanta Ana, CA dispensary which provided an immediate lift to revenues as well as the opportunity to expand the retail footprint of our in-house product lines including but not limited to; Korova, Sticks & Cabana. 33 Table of Contents Besides integrating and expanding the Company's platform - management is focused on fostering strategic partnerships with keystone brands in the west coast that complement our brand portfolio and corporate mission. As such, onAugust 18th 2021 , Unrivaled entered into an exclusive distribution agreement with G-Eazy's FlowerShop, a lifestyle and wellness brand that can be found in over 400 retail stores acrossCalifornia at time of writing. To this end, the Company's efforts to create a robust and scalable platform in tandem to brand-conscious partnerships both position the Company to create sustainable shareholder value as "The West Coast MSO".
Comparison of the Three Months Ended
Revenues During the three months endedSeptember 30, 2021 , the Company generated total revenue of$23.43 million composed of retail revenue of$7.24 million , distribution revenue of$14.56 million and cultivation revenue of$1.63 million . This compared to total revenue of$3.05 million for the quarter endedSeptember 30, 2020 which included retail revenue of$0.54 million , distribution revenue of$0.55 million and cultivation revenue of$1.96 million . This was an increase of 621 percent. Retail revenue for the quarter outpaced the prior comparable quarter in part due to the Management Agreement between the Company and People'sSanta Ana , one of the leading retail locations inOrange County which was signed inSeptember 2021 has provided an immediate lift to revenues of$2.63 for the month endedSeptember 30, 2021 . Management expects to support revenue growth by offering additional consumer options like direct-to-consumer, in-store pickup as well as expanding geographic footprint in the coming months. This comes after adding UMBRLA's retail location, The Spot, which generated over$2.32 million during the three months endedSeptember 30, 2021 . Revenues were dramatically increased as a result of the Company's successful merger with UMBRLA, now with a distribution network throughoutCalifornia andOregon . The additive distribution assets provided a net benefit of$13.62 million for the three months endedSeptember 30, 2021 as a direct result of integrating UMBRLA's platform - an increase of 1,433 percent compared to the three months endedSeptember 30, 2020 . Gross Profit The Company's gross profit for the three months endedSeptember 30, 2021 was$2.29 million , compared to a gross profit of$1.44 million for the three months endedSeptember 30, 2020 , an increase of$0.85 million or 59 percent.
Selling, General and Administrative Expenses and Other Operating Expenses
The merger with UMBRLA and the Management Services Agreement with People's First Choice led to more operations with additional facilities, employees and costs to support them. Selling, general and administrative expenses for the three months endedSeptember 30, 2021 were$13.52 million , compared to$5.59 million for the three months endedSeptember 30, 2020 , an increase of$7.93 million or 142 percent. For the three months endedSeptember 30, 2021 and 2020 Employee Related Expenses increased by$1.64 million or 69.4 percent, facilities related expenses, such as Rent, Utilities, Repairs & Maintenance, Security and Insurance, increased by$1.22 million over Q3 of 2020. Advertising, accounting fees, technology and other professional services increased by$0.98 million . Option expense and director's compensation increased by$0.82 million with the addition of two more board members or 196 percent. Taxes, licensing and permitting increased by$0.74 million . Operating Income (Loss) The Company realized an operating loss of$11.23 million for the three months endedSeptember 30, 2021 compared to an operating loss of$13.94 million for the three-month endedSeptember 30, 2020 , an improvement of$2.71 million or 20
percent.
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Other Income (Expense)
Other expense for the three months ended September 30, 2021 were $0.55 million ,
compared to the $0.16 million loss recognized in the three months ended
September 30, 2020 , an increase of $0.39 million . This increase was attributed
to additional interest expense and lower other income compared with Q3 of last
year.
Discontinued Operations
We realized a net gain of $6.31 million for the three months ended September 30,
2021 compared with a net loss of $4.20 million for the same timeframe last year.
This was an increase of $10.51 million over the three months ended September 30,
2020 resulting from the disposal of our Blum Decatur assets in Nevada .
Net Loss Attributable to
We incurred a net loss of$5.35 million , or$0.01 per share, for the three months endedSeptember 30, 2021 , an improvement of$0.08 per share compared to a net loss of$18.16 million , or ($0.09 ) per share, for the three months endedSeptember 30, 2020 . The improvement in net loss was attributable to management's continued focus on efficiency as well as integrating the legacy Terra Tech operations, the legacy Umbrla operations and the People's operation together. The newly combined company had sales general and administrative expenses increase by 145 percent to$13.52 million in the third quarter of 2021 compared to the third quarter of 2020; however, the business also saw revenue expand by$20.38 million or 668 percent.
Comparison of the Nine Months Ended
Revenues For the nine months endedSeptember 30, 2021 , the Company generated revenues of$34.81 million , compared to$9.81 million for the nine months endedSeptember 30, 2020 , an increase of$25.00 million or 255 percent. As stated above, the increase in revenues were a direct result of the merger betweenTerra Tech Corp. and UMBRLA and the Management Agreement betweenUnrivaled Brands Inc. and People's First Choice. Excluding these two events, the legacy operations ofTerra Tech Corp. have trended upwards compared to the nine months endedSeptember 30, 2021 , where revenue has increased by 63 percent or$6.83 million . Gross Profit Our gross profit for the nine months endedSeptember 30, 2021 was$7.06 million , compared to a gross profit of$5.01 million for the nine months endedSeptember 30, 2020 , an increase of$2.05 million or 41 percent.
Selling, General and Administrative Expenses and Other Operating Expenses
Selling, general and administrative expenses for the nine months endedSeptember 30, 2021 were$33.84 million , compared to$20.41 million for the nine months endedSeptember 30, 2020 , an increase of$13.58 million or 67 percent. The increase was due to a larger operational footprint in third quarter of 2021 and nearly$9.00 million of severance expenses paid out in the first quarter of 2021. In addition to those two factors, in the first half of the year management's ongoing expense reduction initiative contributed to a decrease of$3.49 million predominately from salaries and wages, professional services including but not limited to legal, accounting and technology. Operating Income (Loss) We realized an operating loss of$26.79 million for the nine months endedSeptember 30, 2021 , compared to an operating loss of$35.27 million for the nine months endedSeptember 30, 2020 , an improvement in loss of approximately$8.49 million or 24 percent. Year to date 2020 included a$19.91 million impairment of assets charge. Other Income (Expense)
Other expense for the nine months ended
Discontinued Operations
We recognized a gain from discontinued operations of$6.27 million for the nine months endedSeptember 30, 2021 . This was an improvement of$23.61 million over the nine months endedSeptember 30, 2020 where the Company recorded a loss
of$17.34 million . 35 Table of Contents
Net Loss Attributable to
We incurred a net loss of$21.53 million , or$0.07 per share, for the nine months endedSeptember 30, 2021 , an improvement of 60 percent compared to a net loss of$53.67 million , or$0.29 per share, for the nine months endedSeptember 30, 2020 . The improvement in net loss was mainly attributable to management's continued focus on cost efficiency within the corporate function; including but not limited to strategic reductions in headcount and the elimination of non-core assets. Furthermore, as our cultivation facilities progress - the Company expects further improvements through a comprehensive marketing campaign and by expanding the market share of our in-house brands. Management plans to continue its efforts to lower operating expenses and increase revenue through strategic investments, improvements to our technology stack and furthering the education of potential clients. Due to the quasi-fixed nature of the company's operating structure, management expects that, as revenue increases, those expenses will significantly decrease as a percentage of revenue. Because the Company is subject to various macro-economic trends and legislative outcomes which can materially impact the condition, financial performance and future performance in succeeding quarters, there can be no assurance that we will be able to increase our revenues to the degree management expects. Deviations to expectations around these trends could cause actual results to differ materially from any forward-looking information expressed in this MD&A and the Company's financial statements.
DISCLOSURE ABOUT OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our "Management's Discussion and Analysis of Financial Condition and Results of Operations" section discusses our unaudited 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. These accounting policies are described in Note 2, "Summary of Significant Accounting Policies" of the notes to unaudited condensed consolidated financial statements included in this report. 36 Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
We incurred net losses for the three months and nine months endedSeptember 30, 2021 and 2020 and have an accumulated deficit of approximately$240.42 million and$219.80 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. As ofSeptember 30, 2021 , we had working capital of$1.70 million , including$15.24 million of cash compared to working capital of$11.18 million , including$0.95 million of cash, as ofDecember 31, 2020 . Current assets were approximately 1.04 times current liabilities as ofSeptember 30, 2021 , compared to approximately 1.42 times current liabilities as ofDecember 31, 2020 . 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 preferred stock, 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 believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the end of 2021. However, 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 it will be available to us on acceptable terms, on an acceptable schedule, or at all. Operating Activities Cash used in operating activities for the nine months endedSeptember 30, 2021 was$16.32 million , compared to$12.89 million for the nine months endedSeptember 30, 2020 , an increase of$3.43 million , or approximately 26.6 percent. The increase in cash used in operating activities was due to primarily to a$3.62 million increase in cash used for inventory. Investing Activities Cash provided by investing activities for the nine months endedSeptember 30, 2021 was$28.62 million , compared to cash provided by investing activities of$11.23 million for the nine months endedSeptember 30, 2020 , an increase of$17.39 million , or 155 percent. The increase in cash provided by investing activities was primarily due to proceeds from the sale of our Hydrofarm investment partially offset by cash paid for acquisitions. Financing Activities Cash provided by financing activities for the nine months endedSeptember 30, 2021 was$2.04 million , compared to$2.77 million for the nine months endedSeptember 30, 2020 , a decrease of$0.73 million , or 26 percent. The decrease in cash provided by financing activities for the nine months endedSeptember 30, 2021 was primarily due to$3.05 million of additional proceeds from the issuance of debt, offset by$3.53 million cash outflows for debt principal and financing fees, and$0.25 million of lower proceeds from the issuance of common stock. 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 our 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 our liquidity. In addition, in evaluating Non-GAAP earnings, you should be aware that in the future we will incur expenses or charges such as those added back to calculate Non-GAAP earnings. Our presentation of Non-GAAP earnings should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. 37 Table of Contents
Non-GAAP earnings has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are (i) it does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) it does not reflect changes in, or cash requirements for, our working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our 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 our 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. We compensate for these limitations by providing specific information regarding the US GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable US GAAP measures more prominently. We believe 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). We also present Non-GAAP earnings because (i) we believe that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use Non-GAAP earnings internally as benchmark to compare our performance to that of our competitors. In the presentation of the financial results below, the Company reconciles Non-GAAP earnings (loss) with net loss attributable to continuing operations, the most directly comparable GAAP measure, and reports Non-GAAP earnings (loss) per share, which is calculated by dividing Non-GAAP net income (loss) divided by weighted average common shares. Management believes that this presentation may be more meaningful in analyzing our income generation. On a non-GAAP basis, the Company recorded a non-GAAP loss of$0.88 million for the three months endedSeptember 30, 2021 , compared to a non-GAAP loss in the amount of$12.71 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the Company recorded a$3.27 million loss compared to a$38.32 million loss for the nine months endedSeptember 30, 2020 . The details of those expenses and non-GAAP reconciliation of these non-cash
items are set forth below:
Non-GAAP Reconciliation
(in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
2021 2020 2021 2020
Net loss attributable to Unrivaled )
Brands Inc. $ (5,347 $ (18,161 ) $ (21,530 ) $ (53,672 )
Non-GAAP adjustments
Amortization of intangible assets 1,136 - 1,512 761 Depreciation expense 1,091 - 2,968 1,913 Stock based compensation 1,685 - 2,883 1,244 Impairment of assets - 4,998 - 10,118 Interest expense 740 454 1,344 1,356 Severance expense for Series A share repurchases - - 8,990 - Loss (Gain) on sale of investments - - (5,337 ) - Gain on sale of assets - - 6 (35 ) Gain for debt forgiveness - - (86 ) -
Loss on extinguishment of debt (185 ) -
5,976 - Non-GAAP gain / (loss)$ (880 ) $ (12,709 ) $ (3,273 ) $ (38,315 ) 38 Table of Contents
The following table sets forth the computation of basic and diluted loss per share on a non-GAAP basis:
Non-GAAP Reconciliation
(in thousands, except for share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
2021 2020 2021 2020
Non-GAAP net income
(loss) $ (880 ) $ (12,709 ) $
(3,273 )
Denominator
Weighted average common shares - Basic 457,745,655 206,828,614 317,491,979 186,295,127 Weighted average common shares - Diluted 457,745,655 206,828,614 317,491,979 186,295,127 Non-GAAP earnings (loss) per common share: Non-GAAP earnings (loss) - Basic$ (0.00 ) $ (0.06 ) $ (0.01 ) $ (0.21 ) Non-GAAP earnings (loss) - Diluted$ (0.00 ) $ (0.06 ) $ (0.01 ) $ (0.21 )
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