Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Description of the Business
Upexi is a multi-faceted brand owner with established brands in health, wellness, pet, beauty and other growing markets. We operate in emerging industries with high growth trends and look to drive organic growth of our current brands. We focus on direct to consumer and Amazon brands that are scalable and have anticipated, high industry growth trends. Our goal is to continue to accumulate consumer data and build out a significant customer database across all industries we sell into. The growth of our current customer database has been key to the year-over-year gains in sales and profits. To drive additional growth, we have and will continue to acquire profitable Amazon and eCommerce businesses that can scale quickly and reduce costs through corporate synergies. We utilize our in-house SaaS programmatic ad technology to help achieve a lower cost per acquisition and accumulate consumer data for increased cross-selling between our growing portfolio of brands.
The Company primarily conducts its business operations through the following subsidiaries:
| ☐ | HAVZ, LLC, d/b/a/ Steam Wholesale, a California limited liability company |
| | o | SWCH, LLC, a Delaware limited liability company |
| | o | Cresco Management, LLC, a California limited liability company |
| ☐ | Trunano Labs, Inc., a Nevada corporation |
| ☐ | MW Products, Inc., a Nevada corporation |
| ☐ | Upexi Holding, LLC, a Delaware limited liability company |
| | o | Upexi Pet Products, LLC, a Delaware limited liability company |
| ☐ | VitaMedica, Inc, a Nevada corporation |
| ☐ | Upexi Enterprise, LLC, a Delaware limited liability company |
| | o | Upexi Property & Assets, LLC, a Delaware limited liability company |
| | | ■ | Upexi 17129 Florida, LLC, a Delaware limited liability company |
| | o E-Core Technology, Inc. |
| ☐ | Interactive Offers, LLC (“Interactive”), a Delaware limited liability company |
| ☐ | Cygnet Online, LLC (“Cygnet”), a Delaware limited liability company, 55% owned |
We operate throughout our locations in the USA with operations in Florida, California, Nevada, and Colorado through our various Brands and entities.
Upexi operates from our corporate location in Clearwater, Florida where direct to consumer and Amazon sales are driven by on-site and remote teams for all brands. The location also supports all the other locations with accounting, corporate oversight, day to day finances and all business growth and management operating from this location.
VitaMedica operates mainly from our California location with product development, fulfillment, and day-to-day operations from that location, primarily focused on our health and beauty products.
Interactive Offers operates from its Florida office with day-to-day operations supported by various off site remote positions, with the majority of the development team operating out of Portugal.
Cygnet Online operates from our South Florida location with a full on-site GMP warehouse and distribution center, day to day operations of our Amazon liquidation business team from this location with support of remote team members.
LuckyTail operates from our Clearwater, Florida location with sales and marketing driven by on-site and remote teams that operate Amazon and direct to consumer sales strategy and daily business operations for our pet products.
E-Core Technology, Inc. operates from offices in Massachusetts, New York, New Jersey, and Florida and uses third-party logistic providers to receive, store and distribute its products. E-Core Technology, Inc. focuses on name brand consumer electronics and offers several innovative distribution models based on retailer requirements and programs. In addition, E-Core operates Tytan Tiles a children’s toy brand for popular magnetic tiles and building blocks.
HAVZ, LLC, d/b/a/ Steam Wholesale operates manufacturing and/or distribution centers in Henderson, Nevada supporting our health and wellness products, including those products manufactured with hemp ingredients and our overall distribution operations. We have continued to manage these operations with corporate focus on larger opportunities that have warranted management focus and investments for the future.
Business Acquisitions
On August 1, 2021, the Company completed an asset purchase agreement with Grove Acquisition Subsidiary, Inc., a Nevada corporation and wholly owned subsidiary of the Company and the members of VitaMedica Corporation, a California corporation to purchase all the assets and assume certain liabilities of VitaMedica. VitaMedica is a leading online seller of supplements for surgery, recovery, skin, beauty, health, and wellness.
On October 1, 2021, the Company completed an equity interest purchase agreement with Gyprock Holdings LLC, a Delaware limited liability company, MFA Holdings Corp., a Florida corporation and Sherwood Ventures, LLC, a Texas limited liability company to acquire all of the outstanding membership interest of Interactive Offers, LLC, a Delaware limited liability corporation.
On April 1, 2022, the Company completed a securities purchase agreement with a single investor to acquire 55% of the equity interest in Cygnet Online, LLC, a Delaware limited liability corporation. The agreement also enables the Company to purchase the remaining 45% over the following two years.
On August 12, 2022, the Company completed an asset purchase agreement with GA Solutions, LLC, a Delaware limited liability company (“LuckyTail”), pursuant to which the Company acquired substantially all assets of LuckyTail. LuckyTail sells pet nail grinders and other pet products through various sales channels including some international sales channels.
On October 31, 2022, the Company and its wholly owned subsidiary Upexi Enterprise, LLC, completed a securities purchase agreement to purchase the outstanding stock of E-Core Technology, Inc. d/b/a New England Technology, Inc. (“E-Core”), a Florida corporation. E-Core distributes non-owned branded products to national retail distributors and has branded products in the toy industry that E-Core sells direct to consumers through online sales channels and to national retail distributors.
Business Divested
On October 26, 2022, the Company executed a membership interest purchase agreement to sell 100% of the membership interests of Infusionz LLC, a Colorado limited liability company (“Infusionz”), included in the sale was all rights to Infusionz brands and the manufacturing of certain private label business. Infusionz was originally purchased by the Company in July of 2020. The divestiture of Infusionz and related private label manufacturing represents a strategic shift in our operations and will allow us to become a predominantly product distribution focused company for both our Company owned brands and non-owned brands. Accordingly, the results of the business were classified as discontinued operations in our condensed statements of operations and excluded from both continuing operations and segment results for all periods presented.
Basis of Presentation and Principles of Consolidation
The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of December 31, 2022, and June 30, 2022.
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated in consolidation. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.
Discontinued Operations
A discontinued operation is a component of an entity that has either been disposed of or that is classified as held for sale, which represents a separate major line of business or geographic area of options and is part of a single coordinated plan to dispose of a separate line of business or geographical area of operations. In accordance with the rules regarding the presentation of discontinued operations, the assets, liabilities, and activity of Infusionz and certain manufacturing business have been reclassified as discontinued operations for all periods presented.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguished between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumption about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identified fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 established a three-tier fair value hierarchy that distinguishes between the following:
Level 1—Quoted market prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves.
Level 3—Unobservable inputs developed using estimates or assumptions developed by the Company, which reflect those that a market participant would use.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The carrying amounts reflected in the balance sheets for cash and cash equivalents, prepaid expenses, other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature. For the three and six months ended December 31, 2022, management believed it necessary to record a reserve against the debt and equity instruments obtained in the sale of Infusionz of $8,500,000.
Reclassification
Certain reclassifications have been made to the condensed consolidated financial statements as of and for the year ended June 30, 2022, and for the three and six months ended December 31, 2021 to conform to the presentation as of and for the three and six months ended December 31, 2022.
Note 2. Acquisitions
VitaMedica Corporation
Effective August 1, 2021, the Company entered into and closed an asset purchase agreement (the “VitaMedica Agreement”) with Grove Acquisition Subsidiary, Inc., a Nevada corporation and wholly owned subsidiary of the Company and VitaMedica Corporation, a California corporation, David Rahm and Yvette La-Garde (“Seller”). VitaMedica Corporation is a leading online seller of supplements for surgery, recovery, skin, beauty, health and wellness.
The Company agreed to purchase substantially all of the assets of the Seller as of August 1, 2021. The transaction was valued at an estimated fair value of $3,556,589. The purchase price consisted of 100,000 shares of the Company’s common stock valued at $482,000, $4.82 per common share, the closing price on August 4, 2021 (close date of the transaction), a non-negotiable promissory note from the Company in favor of the Seller in the original principal amount of $500,000, a non-negotiable convertible promissory note from the Company in favor of the Seller in the original principal amount of $500,000, convertible at $5.00 per share for a total of 100,000 shares of the Company’s Common Stock and a cash payment of $2,000,000 which was paid on August 5, 2021. In addition, a $74,589 cash payment was made on October 29, 2021, for excess working capital acquired.
A finder’s fee of $103,740 was paid by the Company, $70,000 in cash and 7,000 shares of common stock, valued at $33,740, $4.82 per common share, the closing market price on August 4, 2021 (close date of the transaction). These fees were expensed during the three and six months ended December 31, 2021.
The assets and liabilities of VitaMedica are recorded at their respective fair values and the following table summarizes these values based on the balance sheet on August 1, 2021, the effective closing date.
Tangible Assets | | $ | 860,738 | |
Intangible Assets | | | 1,935,000 | |
Goodwill | | | 960,780 | |
Liabilities Acquired | | | (199,929 | ) |
Total Purchase Price | | $ | 3,556,589 | |
The Company’s condensed consolidated financial statements for the three and six months ended December 31, 2022 include the actual results for VitaMedica. For the three and six months ended December 31, 2021, the Company’s condensed consolidated financial statements include the actual results of VitaMedica for the period August 1, 2021 to December 31, 2021.
The acquisition of VitaMedica provided the Company with entrance into the online seller’s market for supplements for surgery, recovery, skin, beauty, health and wellness and provided improved gross margins through synergies recognized with the consolidation of manufacturing and distribution operations. These are the factors of goodwill recognized in the acquisition.
Interactive Offers, LLC
Effective October 1, 2021, the Company entered into an equity interest purchase agreement (the “I/O Agreement”) with Gyprock Holdings LLC, a Delaware limited liability company, MFA Holdings Corp., a Florida corporation and Sherwood Ventures, LLC, a Texas limited liability company (each an “I/O Seller” and collectively the “I/O Sellers”). The I/O Sellers owned all the membership interests in Interactive Offers, LLC, a Delaware limited liability company (“Interactive”). The Company’s CEO and Chairman, Allan Marshall, was the controlling stockholder and the president of MFA Holdings Corp, which owned 20% of the outstanding membership interests in Interactive. Interactive provides programmatic advertising with its SaaS platform which allows for programmatic advertisement placement automatically on any partners’ sites from a simple dashboard.
The Company purchased all the outstanding membership interests of Interactive as of October 1, 2021. The purchase price for the sale was $4,833,630, as amended, which consisted of 560,170 shares of common stock of the Company valued at $2,733,630, $4.88 per share, the stock price on October 1, 2022, and a cash payment of $2,100,000.
The assets and liabilities of Interactive are recorded at their respective fair values and the following table summarizes these values based on the balance sheet on October 1, 2021, the effective closing date.
Tangible Assets | | $ | 413,465 | |
Intangible Assets | | | 2,631,000 | |
Goodwill | | | 2,889,158 | |
Liabilities Acquired | | | (1,099,993 | ) |
Total Purchase Price | | $ | 4,833,630 | |
The Company’s condensed consolidated financial statements for the three and six months ended December 31, 2022 include the actual results of Interactive.
The acquisition of Interactive provided the Company with a solid entry into the programmatic ad space and added a unique in-house advertising platform to leverage and scale its current and future brands. Access by sellers to Interactive’s ad platform provides further product sales growth and advertising efficiencies. These are the factors of goodwill recognized in the acquisition.
Cygnet Online, LLC
The Company entered into a securities purchase agreement to purchase Cygnet Online, LLC, a Delaware limited liability company effective as of April 1, 2022. The Company purchased 55% of the equity in the business with a purchase price of $5,100,000, as amended. The consideration consisted of $1,500,000 in cash, $2,550,000 or 555,489 shares of restricted common stock and a non-negotiable convertible promissory note in the original principal amount of $1,050,000, which can be converted into common stock of the Company at a price of $6.00 per share and is payable in full, to the extent not previously converted, on April 15, 2023. The purchase price is subject to a two-way adjustment based on the amount of Closing Working Capital, as defined in the agreement.
Additionally, Seller will be paid up to $700,000 in the form of an earn-out payment based on 7% of Cygnet’s net revenue during the earn-out period, in accordance with and subject to the terms and conditions of the agreement. The earn-out payment, if any, will be paid 50% in immediately available funds and 50% in Company restricted common stock.
The Agreement contains customary confidentiality, non-competition, and non-solicitation provisions for the Seller and Seller’s affiliates.
In addition, the Company has the right to purchase Seller’s remaining membership interests in Cygnet. Commencing on October 10, 2022 and continuing for 180 days thereafter, the Company has the right, but not the obligation, to cause the Seller to sell 15% of the membership interests in Cygnet for $1,650,000 in immediately available funds. Commencing on the date that the Company completes its financial statements for the year ended December 31, 2023, and continuing for 120 days thereafter, the Company has the right, but not the obligation, to cause the Seller to sell the remaining 30% of the membership interests in Cygnet for 30% of the amount equal to four times Cygnet’s Adjusted EBITDA (as defined in the Call Agreement) for calendar year 2023, payable by wire transfer of immediately available funds equal to at least 50% of said purchase price with the balance payable through the issuance to Seller of shares of restricted common stock of the Company.
The Seller has the right, but not the obligation, at any time commencing on the date that is 120 days after the date the Company completes Cygnet’s financial statements for the year ended December 31, 2023, and continuing for 90 days thereafter, to cause the Company to purchase all of the Seller’s remaining membership interests in Cygnet for a purchase price equal to the product of (i) four times Cygnet’s Adjusted EBITDA (as defined in the Put Agreement) for calendar year 2023, and (ii) the percentage of Cygnet membership interests being sold, payable in shares of restricted common stock of the Company.
The assets and liabilities of Cygnet are recorded at their preliminary respective fair values as of the closing date of the Cygnet Agreement, and the following table summarizes these values based on the balance sheet on April 1, 2022, the effective closing date.
Tangible Assets | | $ | 3,683,829 | |
Intangible Assets | | | 7,800,000 | |
Goodwill | | | 2,037,455 | |
Liabilities Acquired | | | (8,421,284 | ) |
Total Purchase Price | | $ | 5,100,000 | |
The Company’s condensed consolidated financial statements for the three and six months ended December 31, 2022, include the actual results of Cygnet.
The acquisition of Cygnet provided the Company with the opportunity to expand its operations as an Amazon and eCommerce seller. The resulting combination increased Cygnet’s product offerings through the Company’s distributors and partnerships as it continues to focus on over-the -counter supplements and beauty products. Cygnet will be the anchor company for Upexi’s Amazon strategy. These are the factors of goodwill recognized in the acquisition.
LuckyTail
The Company entered into an asset purchase agreement with GA Solutions, LLC to acquire substantially all assets of the business. The base consideration totals $3,000,000 plus the amount of working capital transferred to the Company. The consideration for the purchase consisted of $2,000,000, paid into escrow and released when certain assets were transferred to the Company, (ii) $500,000 payable on the latter of the release from escrow and 90 days post-closing, and (iii) $500,000 payable on the latter of the release from escrow and 180 days post-closing. In addition, the Company has agreed to purchase certain inventory from the Seller upon its valuation having been determined, at close the inventory and other current assets were estimated at $490,822. The asset purchase agreement also provides for a two-way post-closing adjustment based on a target adjusted revenue for the business acquired of $1,492,329 for the period of August 1, 2022 through December 31, 2022.
The Agreement contains customary confidentiality, non-competition, and non-solicitation provisions for the Seller and Seller’s affiliates.
The assets and liabilities of LuckyTail are recorded at their preliminary respective fair values as of the closing date of the asset purchase agreement, and the following table summarizes these values based on the balance sheet on August 12, 2022, the effective closing date.
Tangible Assets | | $ | 490,822 | |
Intangible Assets | | | 2,664,000 | |
Goodwill | | | 336,000 | |
Liabilities Acquired | | | - | |
Total Purchase Price | | $ | 3,490,822 | |
The Company’s condensed consolidated financial statements for the three and six months ended December 31, 2022, include the actual results of LuckyTail from August 13, 2022, through December 31, 2022.
The acquisition of LuckyTail provided the Company a foothold in the pet care industry and a strong presence on Amazon and its eCommerce store, offering nutritional and grooming products domestically and internationally. The acquisition provided both top line growth and improved EBITDA for the Company. These are the factors of goodwill recognized in the acquisition.
E-Core, Inc. and its subsidiaries
On October 31, 2022, Upexi, Inc. (the “Company”), and its wholly owned subsidiary Upexi Enterprises, LLC entered into a securities purchase agreement, effective October 21, 2022, to purchase 100% of E-Core Technology, Inc. (“E-Core”) d/b/a New England Technology, Inc., a Florida corporation (“New England Technology”), for $24,100,000, subject to adjustments. The consideration consisted of $3,100,000 in cash, 1,247,402 shares of the Company’s restricted common stock with a value equal to $6,000,000, two promissory notes in the original principal amount of $5,750,000 each, payable upon maturity and a convertible promissory note in the original principal amount of $3,500,000, convertible in full on the two-year anniversary of the issuance of the note at a conversion price of $4.81 per share. If the conversion right is not exercised, the principal balance will be paid in twelve monthly installments beginning on the two-year anniversary of the executed promissory note. The principal amount of the convertible promissory note is subject to a two-way adjustment based on the Company’s Adjusted EBITDA for the three-year period commencing on the closing date.
In addition, on October 31, 2022, the Company issued options to purchase up to 360,000 shares of the Company’s common stock at an exercise price of $5.30 per share.
The agreement contains customary confidentiality, non-competition, and non-solicitation provisions for E-Core and its affiliates.
Within 90 days after the closing date, Buyer shall prepare and deliver to E-Core a statement, setting forth Buyer’s calculation of closing working capital and the purchase price resulting therefrom. The two-way post-closing adjustment based on target working capital shall be an amount equal to the closing working capital minus the target closing working capital.
The assets and liabilities of E-Core are recorded at their preliminary respective fair values as of the closing date of the asset purchase agreement, and the following table summarizes these values based on the balance sheet on October 21, 2022, the effective closing date.
Tangible Assets | | $ | 15,540,288 | |
Intangible Assets | | | 7,250,000 | |
Goodwill | | | 8,988,076 | |
Liabilities Acquired | | | (7,712,168 | ) |
Total Purchase Price | | $ | 24,066,196 | |
The Company’s condensed consolidated financial statements for the three and six months ended December 31, 2022, include the actual results of E-Core from October 21, 2022, through December 31, 2022.
The acquisition of E-Core provided the Company with an entrance into the children’s toy sector as well as national retail distribution for owned and non-owned branded products. The acquisition expands the Company’s ability to leverage direct-to-consumer distribution and further develop the broad distribution capabilities of E-Core. These are the factors of goodwill recognized in the acquisition.
Revenue from acquisitions included in the financial statements.
Net revenue included in the six months ended:
| | December 31, | |
| | 2022 | | | 2021 | |
VitaMedica | | $ | 3,561,264 | | | $ | 2,406,266 | |
Interactive | | | 683,322 | | | | 853,017 | |
Cygnet | | | 14,607,180 | | | | - | |
LuckyTail | | | 2,219,234 | | | | - | |
E-core | | | 13,647,412 | | | | - | |
| | | | | | | | |
| | $ | 34,718,412 | | | $ | 3,259,283 | |
Net revenue included in the three months ended:
| | December 31, | |
| | 2022 | | | 2021 | |
VitaMedica | | $ | 1,943,955 | | | $ | 1,417,483 | |
Interactive | | | 345,110 | | | | - | |
Cygnet | | | 7,359,661 | | | | - | |
LuckyTail | | | 1,394,459 | | | | - | |
E-core | | | 13,647,412 | | | | - | |
| | | | | | | | |
| | $ | 24,690,597 | | | $ | 1,417,483 | |
Consolidated pro-forma unaudited financial statements.
The following unaudited pro forma combined financial information is based on the historical financial statements of the Company, VitaMedica, Interactive, Cygnet, LuckyTail and E-Core after giving effect to the Company’s acquisitions as if the acquisitions occurred on July 1, 2021.
The following unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisitions occurred on July 1, 2021, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the three and six months ended December 31, 2022 and the three and six months ended December 31, 2021, as if the acquisitions occurred on July 1, 2021. The results of operations for VitaMedica, Interactive and Cygnet are included in the three and six months ended December 31, 2022 and the results of operations for LuckyTail are included from August 13, 2022 to December 31, 2022.
Operating expenses have been increased for the amortization expense associated with the fair value adjustment of definite lived intangible assets of VitaMedica, Interactive, Cygnet, LuckyTail and E-Core by approximately $41,363, $50,329, $175,000, $54,000, and $145,833 per month, respectively.
Pro Forma, Unaudited | | | | | | | | Proforma | | | | |
Three months ended December 31, 2022 | | Grove, Inc. | | | E-Core | | | Adjustments | | | Proforma | |
| | | | | | | | | | | | |
Net sales | | $ | 27,086,672 | | | $ | 3,483,909 | | | $ | | | $ | 30,570,581 | |
Cost of sales | | $ | 16,773,493 | | | $ | 2,968,750 | | | $ | | | $ | 19,742,243 | |
Operating expenses | | $ | 12,451,600 | | | $ | 414,994 | | | $ | 97,222 | | | $ | 12,963,816 | |
Net income (loss) from continuing operations | | $ | 2,877,005 | | | $ | 82,823 | | | $ | (97,222 | ) | | $ | 2,862,606 | |
Basic income (loss) per common share | | $ | 0.16 | | | $ | 0.27 | | | $ | | | $ | 0.16 | |
Weighted average shares outstanding | | | 17,540,427 | | | | 311,851 | | | | | | | | 17,852,278 | |
Pro Forma, Unaudited | | | | | | | | | | | | | | | |
Six months ended December 31, 2022 | | Grove, Inc. | | | LuckyTail | | | E-Core | | | Adjustments | | | Proforma | |
| | | | | | | | | | | | | | | |
Net sales | | $ | 38,643,683 | | | $ | 892,270 | | | $ | 12,905,836 | | | $ | | | $ | 52,441,789 | |
Cost of sales | | $ | 22,289,773 | | | $ | 137,088 | | | $ | 11,177,032 | | | $ | | | $ | 33,603,893 | |
Operating expenses | | $ | 21,466,482 | | | $ | 383,476 | | | $ | 1,050,602 | | | $ | 561,721 | | | $ | 23,462,281 | |
Net income (loss) from continuing operations | | $ | 176,996 | | | $ | 371,706 | | | $ | 660,860 | | | $ | (561,721 | ) | | $ | 647,841 | |
Basic income (loss) per common share | | $ | 0.01 | | | $ | - | | | $ | - | | | $ | | | $ | 0.04 | |
Weighted average shares outstanding | | | 17,126,886 | | | | - | | | | 779,626 | | | | | | | | 17,126,886 | |
Pro Forma, Unaudited | | | | | | | | | | | | | | Proforma | | | | |
Three months ended December 31, 2021 | | Grove, Inc. | | | Cygnet | | | LuckyTail | | | E-core | | | Adjustments | | | Proforma | |
| | | | | | | | | | | | | | | | | | |
Net sales | | $ | 4,983,557 | | | | 7,527,927 | | | $ | 936,289 | | | $ | 13,062,408 | | | $ | | | $ | 18,045,965 | |
Cost of sales | | $ | 711,246 | | | | 6,372,432 | | | $ | 265,506 | | | $ | 11,637,510 | | | $ | | | $ | 12,348,756 | |
Operating expenses | | $ | 6,808,272 | | | | 695,574 | | | $ | 475,502 | | | $ | 1,424,898 | | | $ | 1,124,499 | | | $ | 9,357,669 | |
Net income (loss) from continuing operations | | $ | (3,078,437 | ) | | | 382,657 | | | $ | 195,281 | | | $ | (4,021 | ) | | $ | (1,124,499 | ) | | $ | (4,206,957 | ) |
Basic income (loss) per common share | | $ | (0.32 | ) | | | 0.69 | | | $ | - | | | $ | - | | | $ | | | $ | (0.38 | ) |
Weighted average shares outstanding | | | 9,755,663 | | | | 555,489 | | | | - | | | | 1,247,402 | | | | | | | | 11,003,065 | |
Pro Forma, Unaudited | | | | | | | | | | | | | | | | | | | | Proforma | | | | |
Six months ended December 31, 2021 | | Grove, Inc. | | | VitaMedica | | | Interactive | | | Cygnet | | | LuckyTail | | | E-core | | | Adjustments | | | Proforma | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 8,853,667 | | | $ | 384,391 | | | $ | 1,329,522 | | | $ | 15,055,854 | | | $ | 1,927,313 | | | $ | 22,484,335 | | | $ | | | $ | 50,035,082 | |
Cost of sales | | $ | 1,982,975 | | | $ | 93,509 | | | $ | - | | | $ | 12,744,864 | | | $ | 562,355 | | | $ | 19,845,792 | | | $ | | | $ | 35,229,495 | |
Operating expenses | | $ | 10,285,779 | | | $ | 255,286 | | | $ | 1,816,464 | | | $ | 1,391,148 | | | $ | 971,139 | | | $ | 2,079,906 | | | $ | 2,441,348 | | | $ | 19,241,070 | |
Net income (loss) from continuing operations | | $ | (3,391,118 | ) | | $ | 35,596 | | | $ | (376,987 | ) | | $ | 765,314 | | | $ | 393,818 | | | $ | 574,016 | | | $ | (2,441,348 | ) | | $ | (4,440,709 | ) |
Basic income (loss) per common share | | $ | (0.22 | ) | | $ | 0.36 | | | $ | (0.57 | ) | | $ | 1.38 | | | $ | - | | | $ | 0.46 | | | $ | | | $ | (0.26 | ) |
Weighted average shares outstanding | | | 15,452,453 | | | | 100,000 | | | | 666,667 | | | | 555,489 | | | | - | | | | 1,247,402 | | | | | | | | 17,255,344 | |
VitaMedica amortization expense of $496,356 annually and $41,363 monthly is based on the purchase price allocation report. For the six months ended December 31, 2021, the proforma adjustment included $41,363, one month of amortization expense.
Interactive amortization expense at $603,948 annually and $50,329 monthly is based on the purchase price allocation report. For the six months ended December 31, 2021, the proforma adjustment included $150,987, three months of amortization expense.
The Company estimated the annual Cygnet amortization expense at $2,100,000 annually and $175,000 monthly, based on management’s preliminary allocation of the purchase price. For the three months ended December 31, 2021, the proforma adjustment included $525,000, three months of amortization expense.
The Company estimated the annual LuckyTail amortization expense at $648,000 annually and $54,000 monthly, based on management’s preliminary allocation of the purchase price. For the six months ended December 31, 2022, the proforma adjustment included $27,000 of amortization expense for half a month. For the three months ended December 31, 2021, the proforma adjustment included $162,000 of amortization of three months and for the six months ended December 31, 2021, the proforma adjustment included $324,000, six months of amortization expense.
The Company estimated the annual E-Core amortization expense at $1,750,000 annually and $145,833 monthly, based on management’s preliminary allocation of the purchase price. For the six months ended December 31, 2022, the proforma adjustment included $437,499 of amortization expense of three months. For the three months ended December 31, 2021, the proforma adjustment included $437,499 of amortization of three months and for the six months ended December 31, 2021, the proforma adjustment included $874,998 of amortization expense for six months.
Note 3. Inventory
Inventory consisted of the following:
| | December 31, 2022 | | | June 30, 2022 | |
Raw materials | | $ | - | | | $ | - | |
Finished goods | | | 6,779,997 | | | | 4,725,685 | |
| | $ | 6,779,997 | | | $ | 4,725,685 | |
The Company writes off the value of inventory deemed excessive or obsolete.
During the three and six months ended December 31, 2021, the Company wrote off inventory valued at $34,328 and $140,000, respectively.
Note 4. Property and Equipment
Property and equipment consist of the following:
| | December 31, 2022 | | | June 30, 2022 | |
Furniture and fixtures | | $ | 170,661 | | | $ | 51,273 | |
Computer equipment | | | 130,507 | | | | 103,615 | |
Manufacturing equipment | | | 3,136,286 | | | | 1,002,796 | |
Leasehold improvements | | | 90,245 | | | | 2,144,341 | |
Building | | | 4,876,133 | | | | 4,656,435 | |
Vehicles | | | 261,362 | | | | 253,229 | |
Property and equipment, gross | | | 8,665,194 | | | | 8,211,689 | |
Less accumulated depreciation | | | (1,433,790 | ) | | | (867,906 | ) |
| | $ | 7,231,404 | | | $ | 7,343,783 | |
Depreciation expense for the three months ended December 31, 2022, and 2021 was $242,551 and $159,073, respectively.
Depreciation expense for the six months ended December 31, 2022, and 2021 was $437,048 and $246,579, respectively.
Note 5. Intangible Assets
Intangible assets as of December 31, 2022:
| | Estimated Life | | Cost | | | Accumulated Amortization | | | Net Book Value | |
Customer relationships, amortized over four years | | 4 years | | $ | 10,396,000 | | | $ | 1,091,242 | | | $ | 9,304,758 | |
Trade name, amortized over five years | | 5 years | | | 2,219,000 | | | | 278,349 | | | | 1,940,651 | |
Non-compete agreements | | Term of agreement | | | 275,000 | | | | 225,500 | | | | 49,500 | |
Online sales channels | | 2 years | | | 1,800,000 | | | | 675,000 | | | | 1,125,000 | |
Vender relationships | | 5 years | | | 6,000,000 | | | | 900,000 | | | | 5,100,000 | |
Software | | 5 years | | | 1,590,000 | | | | 397,500 | | | | 1,192,500 | |
| | | | $ | 22,280,000 | | | $ | 3,567,591 | | | $ | 18,712,409 | |
For the three months ended December 31, 2022 and 2021, the Company amortized approximately $962,077 and $417,549, respectively.
For the six months ended December 31, 2022 and 2021, the Company amortized approximately $1,842,973 and $667,932, respectively.
The following intangible assets were added during the six months ended December 31, 2022 from the acquisition of LuckyTail:
Customer relationships | | $ | 2,304,000 | |
Trade name | | | 360,000 | |
Intangible Assets from Purchase | | $ | 2,664,000 | |
E-Core:
Customer relationships | | $ | 6,000,000 | |
Trade name | | | 1,250,000 | |
Intangible Assets from Purchase | | $ | 7,250,000 | |
Intangible assets as of June 30, 2022:
| | Cost | | | Accumulated Amortization | | | Net Book Value | |
Customer relationships, amortized over four years | | $ | 2,092,000 | | | $ | 689,293 | | | $ | 1,402,707 | |
Trade name, amortized over five years | | | 609,000 | | | | 156,783 | | | | 452,217 | |
Non-compete agreements, amortized over the term of the agreement | | | 275,000 | | | | 115,042 | | | | 159,958 | |
Online sales channels, amortized over two years | | | 1,800,000 | | | | 225,000 | | | | 1,575,000 | |
Vender relationships, amortized over five years | | | 6,000,000 | | | | 300,000 | | | | 5,700,000 | |
Software, amortized over five years | | | 1,590,000 | | | | 238,500 | | | | 1,351,500 | |
| | $ | 12,366,000 | | | $ | 1,724,618 | | | $ | 10,641,382 | |
The following intangible assets were added during the year ended June 30, 2022, from the acquisition of VitaMedica, Interactive and Cygnet.
Customer relationships | | $ | 2,092,000 | |
Trade name | | | 609,000 | |
Non-compete agreements | | | 275,000 | |
Online sales channels | | | 1,800,000 | |
Vender relationships | | | 6,000,000 | |
Software | | | 1,590,000 | |
Intangible Assets from Purchase | | $ | 12,366,000 | |
Future amortization of intangible assets at December 31, 2022 are as follows:
June 30, 2023 | | $ | 2,762,694 | |
June 30, 2024 | | | 5,410,338 | |
June 30, 2025 | | | 5,387,879 | |
June 30, 2026 | | | 3,823,146 | |
June 30, 2027 | | | 1,194,352 | |
Thereafter | | | 134,000 | |
| | $ | 18,712,409 | |
Note 6. Prepaid Expense and Other Current Assets
Prepaid and other receivables consist of the following:
| | December 31, 2022 | | | June 30, 2022 | |
Insurance | | $ | 348,006 | | | $ | 32,045 | |
Prepayment to vendors | | | 821,690 | | | | 175,378 | |
Deposits on services | | | 33,187 | | | | 13,762 | |
Prepaid monthly rent | | | 73,266 | | | | 6,900 | |
Subscriptions and services being amortized over the service period | | | 94,820 | | | | 274,959 | |
Receivables for transition services from sale of Infusionz and select manufacturing | | | 449,484 | | | | - | |
Other deposits | | | 84,269 | | | | 337,149 | |
Accrued interest receivable from Bloomios on note receivable | | | 35,385 | | | | - | |
Other receivables | | | 26,981 | | | | - | |
| | | | | | | | |
Total | | $ | 1,967,088 | | | $ | 840,193 | |
Note 7. Operating Leases
The Company has operating leases for corporate offices, warehouses and office equipment that have remaining lease terms of 1 year to 5 years.
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized in the condensed consolidated balance sheet as of December 31, 2022:
2023 | | $ | 187,777 | |
2024 | | | 147,623 | |
2025 | | | 135,632 | |
2026 | | | 113,633 | |
2027 | | | 28,684 | |
Total undiscounted future minimum lease payments | | | 613,349 | |
Less: Imputed interest | | | (50,020 | ) |
Present value of operating lease obligation | | $ | 563,329 | |
The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of December 31, 2022 are:
Weighted average remaining lease term | | 33 Months | |
Weighted average incremental borrowing rate | | | 5.0 | % |
For the three and six months ended December 31, 2022, the components of lease expense, included in general and administrative expenses and interest expense in the condensed consolidated statement of operations, are as follows:
| | Three Months Ended December 31, 2022 | | | Six Months Ended December 31, 2022 | |
Operating lease cost: | | | | | | |
Operating lease cost | | $ | 93,377 | | | $ | 186,754 | |
Amortization of ROU assets | | | 83,644 | | | | 166,321 | |
Interest expense | | | 9,735 | | | | 20,435 | |
Total lease cost | | $ | 186,756 | | | $ | 373,510 | |
Note 8. Accrued Liabilities and Acquisition Payable
Accrued liabilities consist of the following:
| | December 31, 2022 | | | June 30, 2022 | |
Accrued expenses for loyalty program | | $ | 8,618 | | | $ | 6,418 | |
Accrued interest | | | 209,698 | | | | 147,887 | |
Accrued vendor liabilities | | | 438,291 | | | | 29,960 | |
Accrued expenses on credit cards | | | 585,285 | | | | 108,735 | |
Accrued sales tax | | | 35,056 | | | | 108,425 | |
Derivative liability | | | - | | | | 81,909 | |
Accrued expenses from sale of manufacturing operations | | | 1,786,655 | | | | - | |
Other accrued liabilities | | | 834,715 | | | | 471,993 | |
| | $ | 3,898,318 | | | $ | 955,327 | |
Acquisition Payable consist of the following:
| | December 31, 2022 | | | June 30, 2022 | |
Payments related to the acquisition of E-core | | $ | 2,966,196 | | | $ | - | |
Payments related to the acquisition of LuckyTail | | | 1,012,327 | | | | - | |
| | $ | 3,978,523 | | | $ | - | |
These payables are amounts estimated by management that are due to the sellers of and acquisition and include the original purchase price installment payments not represented with a debt, equity or other instrument, estimates of excess or deficiencies in working capital and estimates of future earnout payments.
Note 9. Convertible Promissory Notes and Notes Payable
Convertible promissory notes and notes payable outstanding as of December 31, 2022 are summarized below:
| | Maturity Date | | December 31, 2022 | |
Convertible Notes, 36-month term notes, 0% cash interest, collateralized with all the assets of the Company | | October 31, 2025 | | $ | 3,500,000 | |
Subordinated Promissory Notes, 24-month term notes, 4% cash interest, collateralized with all the assets of the Company | | October 31, 2024 | | | 5,750,000 | |
Subordinated Promissory Notes, 12-month term notes, 4% cash interest, collateralized with all the assets of the Company | | October 31, 2023 | | | 5,750,000 | |
Marshall Loan, 2-year term note, 8.5% cash interest, 3.5% PIK interest and subordinate to the Convertible Notes | | June 28, 2024 | | | 1,394,234 | |
Mortgage Loan, 10-year term note, 4.8% interest, collateralized by land and warehouse building | | September 26, 2032 | | | 2,961,061 | |
Capital lease, warehouse equipment under a five-year lease, interest rate of 5% | | November 7, 2026 | | | 25,961 | |
Cygnet Loan, 1-year term note, 6% interest and is convertible at $6.00 per share | | April 15, 2023 | | | 1,050,000 | |
SBA note payable, 30-year term note, 6% interest rate and collateralized with all assets of the Company | | October 6, 2031 | | | 4,045,405 | |
Inventory consignment note, 60 monthly payments, with first payment due June 30, 2022, 3.5% interest rate and no security interest in the assets of the business | | June 30, 2027 | | | 1,211,174 | |
GF Note, 6 annual payments, with first payment due December 31, 2022, 3.5% interest rate and no security interest in the assets of the business | | November 7, 2026 | | | 850,000 | |
Total notes payable | | | | | 26,537,835 | |
Less current portion of notes payable | | | | | 2,117,683 | |
Notes payable, net of current portion | | | | $ | 24,420,152 | |
Future payments on notes payable are as follows:
For the year ended June 30: | | | |
| | | |
2023 | | $ | 2,117,683 | |
2024 | | | 7,718,839 | |
2025 | | | 9,197,443 | |
2026 | | | 2,328,946 | |
2027 | | | 1,069,333 | |
Thereafter | | | 4,211,357 | |
| | $ | 26,643,601 | |
| | | | |
Convertible notes, original discount and related fees and costs | | | (105,766 | ) |
| | $ | 26,537,835 | |
On June 3, 2020, the Company entered into a loan for $150,000 with the Small Business Administration. The promissory note has a fixed payment schedule commencing on June 3, 2021, consisting of principal and interest payments of $731 monthly. The balance of the principal and interest will be payable thirty years from the date of the promissory note. The note bears interest at a rate of 3.75% per annum. The Company repaid this note in August of 2022 and the UCC has been terminated.
On August 1, 2021, the Company entered into a non-negotiable convertible promissory note related to the purchase of VitaMedica in the original principal amount of $500,000 (“VitaMedica Note”), convertible at $5.00 per share for a total of 100,000 shares of Company Common Stock. The Company repaid the note in full during August of 2022.
On April 15, 2022, the Company entered into a non-negotiable convertible promissory note in the original principal amount of $1,050,000, as adjusted, (“Cygnet Note”) which can be converted into common stock of the Company at a price of $6.00 per share and is payable in full, to the extent not previously converted, on April 15, 2023.
In June 2022, the Company entered into a securities purchase agreement with two accredited investors pursuant to which the Company could receive up to $15,000,000 during the following twelve months of the agreement. The Company received $6,678,506 for Convertible Notes in the original principal amount of $7,500,000 (the “Convertible Notes”), representing the original purchase amount, less fees, costs and a $500,000 holdback by the investors. In addition to the Convertible Notes, the investors received Common Stock Purchase Warrants (the “Warrants”) to acquire an aggregate of 56,250 shares of common stock. The Warrants are exercisable for five years at an exercise price of $4.44 per share, provide for customary anti-dilution protection, and an investor put right to require the Company to redeem the Warrants for a total of $250,000. There was a loss of $3,540 for the change in the derivative liability for the period ended December 31, 2022. On October 31, 2022, the Company entered into a letter agreement with the accredited investors in which all amounts owed were paid in full and the related convertible notes and all security interests were cancelled. Additionally, the Company terminated the related Form S-3 registration statement.
In June 2022, the Company executed a promissory note with Allan Marshall, the Company’s Chief Executive Officer, in the original principal amount of $1,500,000 (“Marshall Loan”). The promissory note has a 2-year term and bears cash interest at the rate of 8.5% per annum with an additional PIK of 3.5% per annum. The promissory note provides for monthly payments of principal, on an even line 36-month basis, plus cash interest, with a balloon payment of all outstanding principal, cash interest, and PIK interest at maturity. The Company received and deposited the principal amount on July 31, 2022.
On October 19, 2022, Upexi, Inc. (the “Company”) and its indirect wholly owned subsidiary, Upexi 17129 Florida, LLC entered into a loan agreement, promissory note and related agreements with Professional Bank, a Florida state-chartered bank, providing for a mortgage on the Company’s principal office in N. Clearwater, Florida. The Company received $3,000,000 in connection with the transaction. The principal is to be repaid to Professional Bank over a term of ten years. The proceeds of the loan were utilized by the Company to pay down its loan facility with Acorn Capital, LLC in the amount of $2,780,200.
On October 31, 2022, the Company and its wholly owned subsidiary, Upexi Enterprises, LLC entered into a securities purchase agreement with E-Core Technology, Inc. d/b/a New England Technology, Inc., a Florida corporation, and its three principals. The Company entered into a series of promissory notes with the principal parties: (a) promissory notes in the total original principal amount of $5,750,000 payable upon maturity with a term of 12 months at an interest rate of 4%, $600,000 of which shall be satisfied through the cancellation of an equal amount owed by one of the principals to the Company; (b) promissory notes in the total original principal amount of $5,750,000 payable upon maturity with a term of 24 months at an interest rate of 4%; and (c) promissory notes in the original principal amounts of $3,500,000 with a term of 36 months at an interest rate of 0.0%. The principals may convert the notes into shares of the Company’s restricted common stock at a conversion price equal to $4.81. If the principals do not exercise their conversion rights, the principal balance of the notes will be paid in 12 equal monthly payments commencing on the two year anniversary of the issuance of the notes, subject to adjustments based on the Company’s EBITDA over the term of the notes.
Note 10. Related Party Transactions
During the year ended June 30, 2022, the Company entered into a promissory note with a member of management. The loan was for $1,500,000 and has a two-year term with interest rate of 8.5% per annum with an additional PIK of 3.5% per annum.
Note 11. Equity Transactions
Convertible Preferred Stock
The Company has 500,000 shares of Preferred Stock issued and outstanding to Allan Marshall, CEO. The preferred stock is convertible into the Company’s common stock at a ratio of 1.8 shares of preferred stock for a single share of the Company’s common stock at the holder’s option, has preferential liquidation rights and the preferred stock shall vote together with the common stock as a single class on all matters to which shareholders of the Company are entitled to vote at the rate of ten votes per share of preferred stock.
Common Stock
During the six months ended December 31, 2021, the Company issued 306,945 shares of common stock for the acquisition of Infusionz, the shares were valued at $1,764,876.
During the six months ended December 31, 2021, the Company issued 100,000 shares of common stock for the acquisition of VitaMedica, the shares were valued at $482,000.
During the six months ended December 31, 2021, the Company issued 7,000 shares of common stock as a finder’s fee, the shares were valued at $33,740.
During the six months ended December 31, 2021, the Company issued 35,000 shares of common stock for consulting services to be provided over 6 months. The shares were valued at $175,000.
During the six months ended December 31, 2021, the Company issued 666,667 shares of common stock for the acquisition of Interactive Offers, LLC, the shares were valued at $4,000,000.
During the six months ended December 31, 2022, the Company issued 1,247,403 shares of common stock for the acquisition of E-Core Technologies Inc. a Florida corporation, valued at $6,000,000.
Note 12. Stock Based Compensation
The Board of Directors of the Company may from time to time, in its discretion grant to directors, officers, consultants and employees of the Company, non-transferable options to purchase common shares. The options are exercisable for a period of up to 10 years from the date of the grant.
The following table reflects the continuity of stock options for the six months ended December 31, 2022:
A summary of stock option activity is as follows:
| | | | | Weighted | | | Average | | | | |
| | | | | Average | | | Remaining | | | Aggregated | |
| | Options | | | Exercise | | | Contractual | | | Intrinsic | |
| | Outstanding | | | Price | | | Life (Years) | | | Value | |
Outstanding at June 30, 2022 | | | 4,279,888 | | | $ | 3.05 | | | | 7.42 | | | $ | 4,919,182 | |
Canceled | | | (55,556 | ) | | | 1.53 | | | | - | | | | - | |
Granted | | | 873,000 | | | | 4.78 | | | | 10 | | | | - | |
Options outstanding at December 31, 2022 | | | 5,097,332 | | | $ | 3.36 | | | | 6.62 | | | $ | 2,825,830 | |
Options exercisable at December 31, 2022 (vested) | | | 3,578,937 | | | $ | 2.85 | | | | 6.96 | | | | 2,723,849 | |
Stock-based compensation expense attributable to stock options was $1,052,848 and $677,455 for the three months ended December 31, 2022, and 2021, respectively. Stock-based compensation expense attributable to stock options was $1,980,174 and $1,270,553 for the six months ended December 31, 2022, and 2021, respectively. As of December 31, 2022, there was $3,688,533 of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was approximately 1.75 years.
The value of each grant is estimated at the grant date using the Black-Scholes option model with the following assumptions for options granted during the six months ended December 31, 2022:
| | December 31, 2022 | |
Dividend rate | | | - | |
Risk free interest rate | | | 2.07- 4.06 | % |
Expected term | | | 5 | |
Expected volatility | | | 70-77 | % |
Grant date stock price | | $ | 3.87 - $5.30 | |
The basis for the above assumptions are as follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was calculated based on the Company’s historical pattern of options granted and the period of time they are expected to be outstanding; and expected volatility was calculated based upon historical trends in the Company’s stock prices.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience of forfeitures, the Company estimated forfeitures at 0% for each of the six months ended December 31, 2022, and 2021.
Note 13. Income Taxes
The Company computed the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax income and adjusted for discrete tax items in the period. The Company’s income tax expense was $755,253 and $47,052 for the three and six months ended December 31, 2022, respectively and $26,162 and $235,033 for the three and six months ended December 31, 2021, respectively.
The income tax expense for the three and six months ended December 31, 2022, was primarily attributable to federal and state income taxes and nondeductible expenses for an effective tax rate of approximately 29%. For the three and six months ended December 31, 2022, the difference between the U.S. statutory rate and the Company’s effective tax rate is due to the full valuation allowance on the Company’s deferred tax assets.
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. The Company also considered whether there was any currently available information about future years. The Company determined that it is more likely than not that the Company will have future taxable income to fully realize the Company’s deferred tax asset.
As of December 31, 2022, there was approximately $1,400,000 of losses available to reduce federal taxable income in future years and can be carried forward indefinitely.
Note 14. Risks and Uncertainties
There is substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the scope of operation of Farm Bill-compliant hemp programs relative to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the U.S. Drug Enforcement Administration, or DEA, and/or the FDA and the extent to which manufacturers of products containing Farm Bill-compliant cultivators and processors may engage in interstate commerce. The uncertainties cannot be resolved without further federal, and perhaps even state-level, legislation, regulation or a definitive judicial interpretation of existing legislation and rules. If these uncertainties continue, they may have an adverse effect upon the introduction of our products in different markets.
In December 2019, a novel strain of coronavirus (COVID-19) surfaced. The spread of COVID-19 around the world has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, the Company has transition to a combination of work from home and social distancing operations and there has been minimal impact to our internal operations from the transition. The Company is unable to determine if there will be a material future impact to its customers’ operations and ultimately an impact to the Company’s overall revenues.
Note 15. Discontinued Operations – Sale of Infusionz to Bloomios
On October 28, 2022, the Company determined that the best course of action related to Infusionz, LLC and certain manufacturing business was to accept an offer to sell those operations. The business will continue to operate during the transition period and management intends to continue to employ some of the workforce in the consolidation of other acquisition and the overall operations of the business. The Company is reimbursed by Bloomios for purchases of raw materials and other expenses outlined in the agreement, which are offset against any customer invoices collected on behalf of Bloomios.
The Company received from Bloomios, Inc.(OTCQB:BLMS), the purchaser (i) $5,500,000 paid at closing; (ii) a convertible secured subordinated promissory note in the original principal amount of $5,000,000; (iii) 85,000 shares of Series D convertible preferred stock, with a total stated value of $8,500,000; (iv) a senior secured convertible debenture with a subscription amount of $4,500,000, after original issue discount of $779,117; and (v) a common stock purchase warrant to purchase up to 2,853,910 shares of Bloomios’s common stock. The Company recorded the consideration received at the estimated value at the time of the transaction and as part of that estimate valued the additional warrants to purchase Bloomios shares of common stock at $0 and a valuation allowance of $8,500,000 was recorded a $8,5000.
The assets transferred were recorded at their respective book values, the accrued and incurred expenses estimated by management were recorded and the consideration received was recorded at managements estimated fair value based on the balance sheet on October 26, 2022, the effective closing date.
Tangible assets, inventory / working capital* | | $ | (1,344,000 | ) |
Tangible assets, warehouse and manufacturing equipment, net of accumulated depreciation* | | | (679,327 | ) |
Goodwill | | | (2,413,814 | ) |
Intangible assets, net of accumulated amortization | | | (946,996 | ) |
Accrued and incurred expenses related to the transaction and additional working capital* | | | (2,051,500 | ) |
Consideration received, including cash, debt and equity, net | | | 15,000,000 | |
Total gain recognized | | $ | 7,564,363 | |
*During the continuing transition period, all of the inventory or working capital has not been transferred to the buyer.
During the transition period there are certain expenses and purchases incurred that are to be netted against funds collected on behalf of the buyer. On December 31, 2022, there was a receivable balance from the buyer of $449,484 net, and approximately $35,385 of accrued and unpaid interest. These are recorded on the balance sheet as other receivables. As of the date of this report, the Company continues to assist Bloomios under the transition agreement.
Investments - Bloomios:
Senior secured convertible debenture | | $ | 4,500,000 | |
Series D convertible preferred stock | | | 8,500,000 | |
Convertible Secured Subordinate Promissory Note | | | 5,000,000 | |
Excess working capital | | | 388,556 | |
Senior secured convertible debenture - OID | | | 192,690 | |
Reserve on Investments - Bloomios | | | (8,500,000 | ) |
Total Investments - Bloomios | | $ | 10,081,246 | |
Senior Secured convertible debenture:
The Company received a senior secured convertible debenture of $4,500,000, net of the original issue discount. The Debentures have a maturity date of October 26, 2024, an interest rate of 10% and are convertible into shares of Bloomios common stock. The debenture contains customary representations, warranties and indemnification provisions. The Debentures are secured by a senior security interest in all assets of the Company and its subsidiaries.
In addition, the Company received a warrant to purchase shares of Bloomios common stock. The Company did not place any value on this warrant. Bloomios has agreed to use commercially reasonable efforts to complete a Qualified Offering within six months of October 26, 2022, to file a registration statement covering the resale of the warrant shares and the underlying shares convertible with the debenture.
Series D convertible preferred stock
85,000 shares of Series D preferred stock. The preferred shares have a stated value per share of $100 and we are to receive dividends equal to 8.5% per year on a monthly basis, 30 days in arrears, for each month during which the Series D Preferred shares remain outstanding. The preferred stock shall not receive the declared dividends until the senior secured debentures are all repaid in full for all investors, including the debentures held by the Company.
Convertible Secured Subordinate Promissory Note
The note has an interest rate of eight and one-half percent (8.5%) per annum and requires Bloomios to make a prepayment to the note in the amount equal to 40% of the net proceeds received by Bloomios in connection with any offering of securities conducted in connection with an up listing. Interest is due on a monthly basis and the note is convertible, at the Company’s option, into shares of Bloomios common stock at a conversion price of $5.00 per share subject to adjustments. The full principal and interest is due on or before October 26, 2024.
The note is secured by a subordinated security interest in all assets of Infusionz pursuant to a certain pledge and security agreement, dated as of October 26, 2022, which security interest shall rank junior to all liens and security interests granted by Bloomios to the senior secured convertible note, which the Company is a holder of a portion of this security.
Summary of discontinued operations:
| | Three Months Ended December 31, | |
| | 2022 | | | 2021 | |
Discontinued Operations | | | | | | |
Revenue | | $ | 419,252 | | | $ | 9,565,802 | |
Cost of sales | | | 244,829 | | | | 5,836,328 | |
Sales, general and administrative expenses | | | 397,942 | | | | 751,028 | |
Depreciation and amortization | | | 69,388 | | | | 158,255 | |
Income (loss) from discontinued operations | | | (292,907 | ) | | | 2,280,190 | |
Accounts receivable net of allowance for doubtful accounts | | | - | | | | 791,085 | |
Fixed assets, net of accumulated depreciation | | | - | | | | 674,389 | |
Total assets | | | - | | | | 8,108,542 | |
Total liabilities | | $ | - | | | $ | 1,322,253 | |
| | Six Months Ended December 31, | |
| | 2022 | | | 2021 | |
Discontinued Operations | | | | | | |
Revenue | | $ | 3,042,878 | | | $ | 14,145,466 | |
Cost of sales | | | 1,803,643 | | | | 7,524,668 | |
Sales, general and administrative expenses | | | 1,300,102 | | | | 2,280,659 | |
Depreciation and amortization | | | 277,551 | | | | 372,456 | |
Income (loss) from discontinued operations | | | (338,418 | ) | | | 3,967,622 | |
Accounts receivable net of allowance for doubtful accounts | | | - | | | | 791,085 | |
Fixed assets, net of accumulated depreciation | | | - | | | | 674,389 | |
Total assets | | | - | | | | 8,108,542 | |
Total liabilities | | $ | - | | | $ | 1,322,253 | |
