NOTE 12: DISCONTINUED OPERATIONS

Background and Triggering Event

On July 1, 2023, the Company, through its wholly owned subsidiary Ranco LLC (“Ranco”), acquired assets from RAN CoPacking Solutions LLC to operate a co-packing and white-label manufacturing business for the hemp and wellness industries. Ranco’s services included third-party logistics, storage and order fulfillment, custom packaging and hardware solutions, and media and design services. On the same date, Ranco entered into a five-year exclusive Packwoods Private Label Services and Intellectual Property Licensing Agreement providing rights to manufacture, package, distribute, and sell hemp-based inhalable and edible products, nicotine-based vaporizer products, and related branded packaging materials.

Following the passage of H.R. 5371 – the Continuing Appropriations, Agriculture, Legislative Branch, Military Construction and Veterans Affairs, and Extensions Act, 2026 – which bans intoxicating hemp-derived consumable products nationally effective November 12, 2026, management evaluated the long-term viability of Ranco’s operations. On November 19, 2025, the Company’s Board of Directors formally approved a plan to discontinue the operations of Ranco LLC, with an expected wind-down and exit from the business by December 31, 2025.

Discontinued Operations Classification

Ranco LLC operated as a separate legal entity and wholly owned subsidiary with clearly distinguishable operations, assets, revenues, expenses and cash flows, and represented a distinct line of business significantly impacted by adverse regulatory changes. The Board-approved decision to discontinue Ranco represents a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly, Ranco qualifies for discontinued operations accounting under ASC 205-20 beginning as of November 19, 2025.

Held-for-Sale Analysis – Abandonment Classification

The Company considered whether the long-lived assets of Ranco should be classified as “held for sale” under ASC 360-10-45-9. Management concluded that the criteria for held-for-sale classification were not met as of December 31, 2025 because: (i) although management committed to a plan to explore strategic alternatives, no binding sale agreement had been reached; (ii) the assets were not available for immediate sale in their present condition due to the wind-down status and regulatory uncertainty under H.R. 5371; (iii) no active marketing program to locate a buyer had been initiated; (iv) a sale within twelve months was not probable given the national ban on intoxicating hemp-derived products; and (v) no asking price had been established and no formal marketing had commenced.

Accordingly, the disposition of Ranco is classified as an abandonment under ASC 205-20-45-1(b) rather than a held-for-sale transaction. Under the abandonment model, the remaining assets of the discontinued operation (consisting solely of cash of $84,799 at December 31, 2025) are carried at their historical carrying values, and the assets are not presented as “held for sale” on the balance sheet.

Retrospective Reclassification of Prior Periods

In accordance with ASC 205-20, the Company has retrospectively reclassified the prior-period comparative financial statements to present Ranco’s results as discontinued operations, as follows:

Consolidated Statements of Operations: Results of Ranco for all prior periods presented have been reclassified from continuing operations to discontinued operations. Revenues and expenses previously included in continuing operations line items have been removed. Total net income (loss) for each period remains unchanged.

Consolidated Statements of Cash Flows: Prior-period cash flows attributable to Ranco have been reclassified and presented separately as cash flows from discontinued operations within operating, investing and financing activities.

Consolidated Balance Sheets: No retrospective reclassification is required for prior-period balance sheets. Assets and liabilities of Ranco are presented separately only in the period in which the discontinued operations criteria are met (December 31, 2025). All Ranco liabilities – including amounts previously classified as long-term (notes payable and right-of-use liabilities) – have been reclassified as current liabilities of discontinued operations as of December 31, 2025, as there is no ongoing business basis supporting long-term classification under the abandonment model.

Earnings Per Share: Prior-period EPS amounts have been recast to separately present income (loss) per share from continuing operations and discontinued operations.

Impairment of Long-Lived Assets

In connection with the discontinued operations classification, the Company evaluated Ranco’s long-lived assets for impairment under ASC 360-10. During the year ended December 31, 2025, the Company recognized impairment charges of $1,998,538 related to Ranco’s property and equipment, right-of-use assets, trade show booth, and security deposits, which are included in the loss from discontinued operations in the consolidated statement of operations.

Results of Discontinued Operations

The following table presents the results of Ranco’s discontinued operations for the years ended December 31, 2025 and 2024:

The increase in the loss from discontinued operations from $2,431,132 in 2024 to $4,716,689 in 2025 was primarily attributable to: (i) impairment charges of $1,998,538 recognized on Ranco’s long-lived assets in connection with the wind-down; (ii) increased bad debt expense of $2,116,932 (compared to $1,396,210 in 2024) as the Company increased its allowance for doubtful accounts during the wind-down; (iii) partially offset by a significant reduction in interest expense to $1,204 in 2025 from $1,940,832 in 2024 as amortization of original issue discounts on the Ranco notes was completed in the prior year.

Assets and Liabilities of Discontinued Operations

The following table presents the major classes of assets and liabilities of Ranco included in the consolidated balance sheet as of December 31, 2025. As discussed above, all Ranco liabilities have been reclassified to current under the abandonment model. Prior-period balance sheets have not been reclassified.

The notes payable of $4,044,083 and right-of-use liability of $1,765,842 were previously classified as non-current liabilities. These have been reclassified to current liabilities of discontinued operations as of December 31, 2025, as Ranco no longer has a going-concern basis for long-term classification. The notes payable consist primarily of the notes originally issued in connection with the Ranco acquisition.

Cash Flows from Discontinued Operations

Cash flows from discontinued operations for the years ended December 31, 2025 and 2024 were as follows:

In 2025, net loss from discontinued operations was $4,716,690, offset by $5,307,235 in non-cash charges and changes in discontinued operating assets and liabilities of $1,458,580.  In 2024, net loss from discontinued operations was $2,431,132, offset by $1,115,203 in non-cash charges and changes in discontinued operating assets and liabilities of $3,646,565.

Ranco Lease Obligations

In connection with the Ranco acquisition in July 2023, the Company assumed a lease for approximately 46,000 square feet of warehouse and manufacturing space in Los Angeles, California. The lease expires on July 31, 2027, and requires monthly base rent payments of $96,634 for the full premises (effective May 1, 2024). The lease is personally guaranteed by Allen Park, the Company’s former Chief Operating Officer, and Rami Abi, the Company’s Chief Strategy Officer. The right-of-use asset has been fully impaired as of December 31, 2025 as part of the discontinued operations wind-down. The remaining right-of-use liability of $1,765,842 is included in current liabilities of discontinued operations. The Company is evaluating options for the lease, including assignment, sublease or early termination.

Related Party Transactions within Discontinued Operations

During the year ended December 31, 2025, Ranco purchased products aggregating approximately $17.3 million from AGP Holdings LLC, an entity wholly owned by Allen Park, the Company’s former Chief Operating Officer and Controller, on arm’s length terms. The products consisted of mitragynine-related bulk raw material. On October 1, 2025, the arrangement was terminated by the Company. These transactions and the related revenue and cost of revenue are included in the results of discontinued operations for all periods presented.