Blum Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2024

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of Blum Holdings, Inc. (“Blüm” or the “Company”) is for the three months ended March 31, 2024. The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q (this "Form 10-Q") and those discussed in Item 8 of the Company’s Annual Report on Form 10-K (the “Form 10-K”) filed with the SEC on April 15, 2024. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below for many reasons, including the risks described in “Cautionary Language Concerning Forward-Looking Statements,” “Item 1A—Risk Factors” and elsewhere in this Form 10-Q.

COMPANY OVERVIEW

Our Business

Blum Holdings, Inc. is a cannabis company with retail and distribution operations throughout California, 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. The Company operates Blüm OC, a premier cannabis dispensary in Orange County, California, regularly servicing upwards of 800 customers each day. The Company also owns dispensaries in California which operate as The Spot in Santa Ana, Blüm in Oakland, and Blüm in San Leandro. As of March 31, 2024, the Company had 116 employees.

We are organized into two reportable segments:

• Cannabis Retail – Includes cannabis-focused retail, both physical stores and non-store front delivery
• Cannabis Distribution – Includes cannabis distribution operations

Either independently or in conjunction with third parties, we operate medical marijuana retail and adult use dispensaries in California.

Our corporate headquarters are located at 3242 S. Halladay St, Santa Ana, California 92705 and our telephone number is (888) 909-5564. Our website address is www.blumholdings.com (http://www.blumholdings.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 “BLMH.”

Fiscal First Quarter 2024 Highlights

Corporate Reorganization

On January 12, 2024, Unrivaled Brands, Inc. ("UNRV") completed a corporate reorganization pursuant to the Reorganization Agreement, by and among Unrivaled Brands, Inc., Blum Holdings, Inc., and Blum Merger Sub, Inc ("Merger Sub"). The Reorganization Agreement provided for the merger of UNRV and Merger Sub, with UNRV surviving the merger as a wholly-owned subsidiary of Blüm. The Reorganization Agreement was approved and adopted by the stockholders of UNRV at its annual meeting of stockholders held on December 5, 2023. At the effective time of the Reogranization, all of the issued and outstanding shares of UNRV’s common stock, par value $0.001 per share were converted automatically on a one-for-one basis into shares of Blüm’s common stock, par value $0.001 per share, and all of the issued and outstanding shares of UNRV’s classes of preferred stock, par value $0.001 per share, were converted automatically on a one-for-one basis into shares of Blüm’s respective classes of preferred stock, par value $0.001 per share. On February 12, 2024, the Company began trading as "BLMH" on the OTCQB.

Effective January 12, 2024, the Company completed a reverse stock split of its common stock at a 1-for-100 ratio. Accordingly, all share and per share amounts for all periods presented in this Quarterly Report on Form 10-Q have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

Cultivation Operations

On December 15, 2023, the Company entered into a management services agreement with a third-party to manage and operate the Company's second cultivation operations in Oakland, California (the "MSA"). The agreement includes an option to purchase the licensed entity at its fair value or a negotiated price. In conjunction with the MSA, the parties entered into a binding letter of intent to sell 100% of the stock and assets of the licensed entity which was completed on January 28, 2024 for a purchase price of $1.40 million. All assets and liabilities allocable to the Company's cultivation operations are classified as discontinued operations in the Consolidated Balance Sheets for all periods presented. Discontinued operations are presented separately from continuing operations in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for all periods presented.

Outlook

The Company will continue to focus on its performing assets, particularly California retail assets. In particular, the Company continues to emphasize on retail business fundamentals including a robust, curated and diverse product offering, improving inventory turn and vendor management to continue to optimize gross margins, effective marketing strategies focused on driving loyalty, reactivation of lapsed customers and new customer acquisitions while continuing to deliver positive ROIs. The Company remains excited as it embarks on reinvigorating the 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, including the continued overall down trending market conditions and highly promotional competitive landscape in our key markets. With a disciplined approach to analyzing retail performance and customer relationship management, a management team with extensive retail and cannabis industry and capital markets experience, 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. We will continue to seek further opportunities to expand profitability and maximize returns for its shareholders.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 (Unaudited)

The below table outlines our consolidated statements of operations for the three months ended March 31, 2024 and 2023:

(in thousands)

Revenue

Overall revenue for the three months ended March 31, 2024 was $6.78 million compared to $8.62 million for the three months ended March 31, 2023, a decrease of $1.84 million or 21.3%. Revenue from continuing operations for the three months ended March 31, 2024 was composed of retail revenue of $6.76 million and distribution revenue of $0.02 million. This compared to prior year revenue from continuing operations composed of retail revenue of $8.18 million and distribution revenue of $0.43 million.

Retail revenue for the three months ended March 31, 2024 decreased by $1.42 million or 17.4% compared to the same period in prior year primarily due to the decrease in revenue at The Spot, which no longer offered in-store shopping effective February 18, 2024. The Spot continues to offer cannabis delivery.

Distribution revenue for the three months ended March 31, 2024 decreased by $0.41 million or 95.4% compared to the same period in the prior year. During fiscal year 2023, the Company began scaling down its wholesale distributions in California and focused primarily on distribution to its own retail dispensaries.

Gross Profit

Cost of goods sold for the three months ended March 31, 2024 was $3.17 million, a decrease of $0.75 million or 19.1% compared to $3.92 million for the three months ended March 31, 2023. The decrease in cost of goods sold was directly impacted by the decrease in revenues for the current reporting period as compared to prior year.

Gross profit from continuing operations for the three months ended March 31, 2024 was $3.61 million compared to $4.69 million for the three months ended March 31, 2023, a decrease of $1.09 million or 23.1%. The decrease in gross profit was primarily impacted by the decrease in revenue as described above. The Company's overall gross margin decreased for the three months ended March 31, 2024 to 53.2% as compared to 54.5% for the same period in the prior year as the Company offered promotional discounts during the fiscal first quarter of 2024 in response to the general decline in the legal California cannabis market. Gross profit for on-going retail operations remained steady at 53.5% for the three months ended March 31, 2024 and 2023.

Selling, General & Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2024 were $6.1 million compared to $5.55 million for the three months ended March 31, 2023, an increase of $0.55 million or 9.9%. This was primarily attributable to a gain on settlement of liabilities of $1.51 million in the prior year, versus none during the three months ended March 31, 2024. This was offset by reductions in expenses during the three months ended March 31, 2024 as compared to the same period in the prior year. Specifically, the Company saw a decrease of $0.59 million in depreciation and amortization expense and a decrease of $0.34 million in stock-based compensation expense. Management expects to continue focusing on efficiencies within its core assets and reducing non-core assets and expenditures.

Operating Loss

The Company realized an operating loss from continuing operations of $2.49 million for the three months ended March 31, 2024 compared to $0.86 million for the three months ended March 31, 2023, an increase of $1.64 million or 191.3%. The increase in operating loss was primarily due to the $1.51 million gain on settlement of liabilities in the prior year, versus no such gains during the three months ended March 31, 2024.

Other Income (Expense)

The Company recognized other expense of $0.51 million for the three months ended March 31, 2024 compared to other income of $1.94 million for the three months ended March 31, 2023. This was primarily due to a gain on extinguishment of debt of $3.03 million recognized during the three months ended March 31, 2023, versus no such transactions in the current year, offset by an unrealized gain on investments of $0.42 million recognized during the three months ended March 31, 2024 and a decrease in interest expense of $0.42 million.

Discontinued Operations

Net income from discontinued operations was $0.0 million for the three months ended March 31, 2024 compared to net loss from discontinued operations of $0.02 million for the comparative prior period. Discontinued operations for all periods presented consist of the Company's cultivation operations.

Three Months Ended March 31, 2024 Compared to Three Months Ended December 31, 2023 (Unaudited)

The below table outlines our consolidated statements of operations for the fiscal first quarter of 2024 compared to the fiscal fourth quarter of 2023:

(in thousands)

(1) Management noted that the results of operations of Unrivaled Brands, Inc. for the three months ended December 31, 2023 as reported in "Item 7–Management's Discussion and Analysis" of the Annual Report on Form 10-K was misstated in which the loss on disposal of assets should be nil. Loss on disposal of assets of $1.81 million for the three months ended December 31, 2023 as previously reported in the Form 10-K relates to the affected periods ended June 30, 2023 and September 30, 2023, which were restated therein. The misstatement does not have an impact on the audited consolidated financial statements for the year ended December 31, 2023 or the Company's cash position.

Revenue

Overall revenue for the three months ended March 31, 2024 was $6.78 million compared to $8.1 million for the three months ended December 31, 2023, a decrease of $1.31 million or 16.2%. Revenue from continuing operations for the three months ended March 31, 2024 was composed of retail revenue of $6.76 million and distribution revenue of $0.02 million. This compared to the prior quarter ended December 31, 2023 in which revenue from continuing operations consisted of retail revenue of $8.06 million and distribution revenue of $0.04 million.

Retail revenue for the three months ended March 31, 2024 decreased by $1.3 million or 16.1% compared to the consecutive prior quarter ended December 31, 2023 primarily due to the decrease in revenue at The Spot, which no longer offered in-store shopping effective February 18, 2024. The Spot continues to offer cannabis delivery.

Distribution revenue for the fiscal first quarter ended March 31, 2024 was generally consistent with the fiscal fourth quarter ended December 31, 2023.

Gross Profit

Cost of goods sold for the three months ended March 31, 2024 was $3.17 million, a decrease of $0.55 million or 14.7%, compared to $3.72 million for the three months ended December 31, 2023. The decrease in cost of goods sold was directly impacted by the decrease in revenues for the current reporting period as compared to prior quarter.

Gross profit from continuing operations for the three months ended March 31, 2024 was $3.61 million compared to $4.38 million for the three months ended December 31, 2023, a decrease of $0.77 million or 17.5%. The decrease in gross profit was directly impacted by the decrease in revenue as described above. The Company's overall gross margin declined from the prior consecutive quarter at 53.2% compared to 54.0% for the three months ended December 31, 2023. The decline was primarily due to an increase in discounts and promotions in response to the general decline in the legal California cannabis market. Gross profit for on-going retail operations also decreased to 53.5% for the three months ended March 31, 2024 compared to 54.5% for the preceding quarter.

Selling, General & Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2024 were $6.1 million compared to $9.25 million for the three months ended December 31, 2023. The quarter-over-quarter decrease of $3.16 million or 34.1% was primarily related to a decrease of $2.18 million in business and property taxes, a decrease of $0.82 million in professional fees, and a decrease of $0.47 million in bad debt expense. Such decreases were offset by an increase of $0.20 million in salaries and benefits.

Operating Loss

The Company realized an operating loss from continuing operations of $2.49 million for the three months ended March 31, 2024 compared to $4.88 million for the three months ended December 31, 2023, a decrease of $2.39 million or 48.9%. The improvement in operating loss from the preceding quarter was primarily due to the decrease in selling, general and administrative expenses, offset by the decrease in gross profit as described above.

Other Income (Expense)

The Company recognized other expense of $0.51 million for the three months ended March 31, 2024 compared to other income of $0.35 million for the three months ended December 31, 2023. This was primarily due to a gain on extinguishment of debt of $2.42 million during the fiscal fourth quarter of 2023, versus no such transactions in the current quarter, and a decrease in interest expense of $1.02 million. In addition, the Company recognized an unrealized gain on investment of $0.42 million in the current period compared to an unrealized loss on investment of $0.67 million in the consecutive prior quarter.

Discontinued Operations

Net income from discontinued operations was $0.0 million for the three months ended March 31, 2024 compared to net loss from discontinued operations of $0.12 million for the comparative prior period. During the fiscal fourth quarter of 2023, the Company classified its cultivation operations as discontinued operations and had begun winding down operations at its facilities.

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 Income (Loss) with net income (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 Loss of $2.12 million for the three months ended March 31, 2024 compared to $1.23 million for the three months ended March 31, 2023. The details of those expenses and non-GAAP reconciliation of these non-cash items are set forth below:

(in thousands)

30

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

We incurred pre-tax net loss from continuing operations of $3.0 million for the three months ended March 31, 2024 and have an accumulated deficit of $457.23 million and $454.18 million at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, we had a working capital deficit of $60.86 million, including $1.18 million of cash compared to a working capital deficit of $57.86 million, including $0.86 million of cash, as of December 31, 2023. Current assets were approximately 0.07 times current liabilities as of March 31, 2024, compared to approximately 0.08 times current liabilities as of December 31, 2023.

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, preferred 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 US GAAP, which contemplate our continuation as a going concern.

Operating Activities

Cash used in operating activities for the three months ended March 31, 2024 was $0.95 million compared to $2.21 million for the three months ended March 31, 2023, a decrease of $1.26 million, or 57.1%. The decrease in cash used in operating activities was primarily due to a slowdown in cash payments of payables and accrued expenses, partly due to the lack of capital during the current period and our increased efforts to scale back on non-accretive expenditures. Since August 2022, management has implemented a turnaround plan to stabilize operations and put the Company on a path to profitability. Management took decisive action to preserve operating cash flow by reducing cash burn, prioritizing payments, renegotiating vendor agreements and closing underperforming business units. Management expects to see improvements in cash flow from operating activities as the Company continues to execute its strategic restructuring.

Investing Activities

Cash provided by investing activities for the three months ended March 31, 2024 was $1.29 million compared to $0.63 million for the three months ended March 31, 2023, an increase of $0.66 million, or 104.9%. The increase in cash provided by investing activities was primarily due to the cash received upon the sale of equity interests in a cultivation business in the amount of $1.30 million in January 2024, compared to proceeds from notes receivable of $0.63 million in the prior year.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2024 was $0.03 million compared to cash provided by financing activities of $1.75 million for the three months ended March 31, 2023, a decrease of $1.78 million, or 101.7%. The decrease in cash provided by financing activities as compared to the prior year was primarily due to the January 2023 Private Placement of Series V Preferred Stock which provided cash proceeds of $1.97 million, versus no such transactions in the current year.

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 in the 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 consolidated financial statements included in this Form 10-Q.

DISCLOSURE ABOUT OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2024, the Company does not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

Under the supervision and with the participation of our management, our principal executive officer and our principal financial officer are responsible for conducting an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2024. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective to a reasonable level as of March 31, 2024.

Based on the results of its assessment, our management concluded that our internal control over financial reporting was not effective as of March 31, 2024 based on such criteria due to material weaknesses in internal control over financial reporting described below:

Material Weaknesses in Internal Control over Financial Reporting

• The Company’s primary user access controls (i.e., provisioning, de-provisioning, and quarterly user access review) to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate company personnel were not operating effectively. Automated process-level controls and manual controls that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result of such deficiency.
• Failure to timely record transactions and to timely review account reconciliations resulting in post-closing adjustments and restatement of the financial statements.

Remediation Plan

We plan to enhance our internal control over financial reporting in an effort to remediate the material weaknesses described above. We are committed to ensuring that our internal control over financial reporting is designed and operating effectively. Our remediation process will include:

• Enhancing the organizational structure to support financial reporting processes and internal controls.
• Investing in IT systems to enhance our operational and financial reporting and internal controls.
• Establishing effective general controls over IT systems to ensure that information produced can be relied upon by process level controls is relevant and reliable.
• Providing guidance, education and training to employees relating to our accounting policies and procedures.
• Further developing and documenting detailed policies and procedures regarding business processes for significant accounts, critical accounting policies and critical accounting estimates.

We expect to remediate these material weaknesses during fiscal year 2024. However, we may discover additional material weaknesses that may require additional time and resources to remediate.

Changes in Internal Control Over Financial Reporting

We regularly assess the adequacy of our internal controls over financial reporting and enhance our controls in response to internal control assessments and external audit and regulatory recommendations. No changes in internal control over financial reporting have been identified in connection with the evaluation of disclosure controls and procedures during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Certain factors that may affect the Company’s business or operations are described under “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K (the “Annual Report”). There have been no material changes to our risk factors from the risk factors previously disclosed in the 2023 Annual Report.