NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Description of Business and Summary
of Significant Accounting Policies
Description
of Business
Item 9 Labs Corp. ("Item
9 Labs" or, including its subsidiaries, the "Company"), formerly Airware Labs Corp., is a Delaware corporation. The Company
was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp.
Item 9 Labs Corp. is a
holding company, investing in cannabis and cannabis-related businesses. Its subsidiaries currently compete in two different market segments:
(1) producing cannabis and cannabis-derived products and technologies through its Item 9 Labs brand (“Cultivation”), which
is currently distributed though out the State of Arizona in licensed medical and adult-use dispensaries; and (2) sell medical and adult-use
cannabis dispensary franchises under its franchise brand “Unity Rd.” (“Franchising”).
In March 2021, the Company
closed on the acquisition of OCG, Inc, dba Unity Rd, a dispensary franchisor. The transaction was structured as a reverse triangular
merger, with the effect of OCG, Inc. becoming a wholly owned subsidiary of the Company. Unity Rd has agreements with more than twenty
(20) entrepreneurial groups to open more than thirty (30) Unity Rd retail dispensary locations in twelve (12) states. The majority of
the locations are in the licensing process. We currently have one franchisee operating in Boulder, Colorado. Unity Rd will be the vehicle
to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering
entrepreneurs to operate their business and contribute to their local communities. As the Unity Rd dispensaries achieve sufficient market
penetration, Item 9 Labs aims to offer its products in those locations to expand the distribution footprint of its premium product offerings.
In March 2020, the World
Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States
declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on our operational and financial
performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and vendors,
and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
Principles
of Consolidation
The accompanying condensed
consolidated financial statements of the Company as of March 31, 2022 have been prepared by us without audit pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary
for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with
our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion
that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement
presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however,
we did not include all disclosures required by US GAAP. The results for the interim period ended March 31, 2022 are not necessarily indicative
of the results to be expected for the year ending September 30, 2022.
The condensed consolidated
financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries and a consolidated variable
interest entity (“VIE”). Intercompany balances and transactions have been eliminated.
Item
9 Labs consolidates a VIE in which the Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets
any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated
financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations
or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity
or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf
of the investor with disproportionately few voting rights. The Company makes significant judgments in determining whether an entity is
a VIE and, for each reporting period, the Company assesses whether it is the primary beneficiary of the VIE. Effective February 1, 2022,
the Company was deemed the primary beneficiary of Elevated Connections, Inc. The equity in Elevated Connections, Inc. held by its stockholder
has been presented on the balance sheet and the statement of operations as a non-controlling interest.
Certain
prior period balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current
period presentation. These reclassifications had no effect on the prior periods’ net income, net loss or accumulated deficit.
Accounting
Estimates
The preparation of financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant
estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes,
inventory, accruals and contingencies, carrying value of goodwill and intangible assets, the fair value of common stock and the estimated
fair value of stock options and warrants. Due to the uncertainties in the formation of accounting estimates, and the significance of
these items, it is reasonably possible that these estimates could be materially changed in the near term.
Inventory
Inventory is stated at the lower of cost or
net realizable value with cost being determined on the first in first out method. Inventory primarily consists of the costs directly related
to the production and cultivation of cannabis crops, cannabis oils, and cannabis concentrate products. Inventory is relieved to cost of
revenues as products are delivered to dispensaries. Inventory consists primarily of labor, utilities, costs of raw materials, packaging,
nutrients and overhead.
The Company routinely evaluates the carrying value
of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce inventory to
its estimated net realizable value. There were no inventory reserves recorded at March 31, 2022 and September 30, 2021.
Licenses
Cannabis licenses vary in term for each jurisdiction.
The Company capitalizes all costs associated with the acquisition of cannabis licenses in the year the license is obtained. Subsequent
measurement is determined by the length of the term of the license. The Company acquired licenses during the three months ended March
31, 2022 that have indefinite useful lives, subject to annual renewals. Costs associated with maintaining licenses (annual fees) are expensed
as incurred. The anticipated maintenance fees are not expected to be material to the condensed consolidated financial statements. Licenses
are included on the balance sheet under the heading Intangible assets, net at March 31, 2022 and September 30, 2021.
Revenue Recognition
Cultivation revenue
The core principle of ASC 606 requires that an entity
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle,
including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction
price, including estimating the amount of variable consideration to include in the transaction price, allocating the transaction price
to each separate performance obligation and recognizing revenue when (or as) the performance obligation is satisfied.
Substantially all of the Company's revenue is associated
with a customer contract that represents an obligation to provide cannabis products that are delivered at a single point in time.
Any costs incurred prior to the period in which the products are delivered are recorded to inventory and recognized as cost of revenues
in the period in which the performance obligation is completed. For the three months ended March 31, 2022 and 2021, all of the Company's
cultivation revenue was generated from performance obligations completed in the state of Arizona.
The Company recognizes revenue once the products are
delivered. Revenue is considered earned upon successful delivery of the product to the dispensary as the Company has no further performance
obligations at this point in time and collection is reasonably assured. The Company records revenue at the amount it expects to collect,
100% of the wholesale sales revenue. The fees paid for operating under the contract are expensed to cost of revenues.
The Company's revenues accounted for under ASC 606
do not require significant estimates or judgments based on the nature of the Company's revenue stream. The sales price is generally fixed
at the point of sale and all consideration from the contract is included in the transaction price. The Company's contracts do not include
multiple performance obligations, variable consideration, rights of return or warranties.
Franchising revenue
Through OCG, Inc., the Company enters into franchise
agreements and consulting agreements. The franchise agreement allows the franchisee to, among other things, establish a franchised outlet
under the Company’s Unity Rd. brand. Under the consulting agreements, the Company assists customers with applying for and being
awarded a retail cannabis license through the state license application process. The initial franchise fee and the consulting fee are
due upon execution of the related agreement. These payments are deferred on the condensed consolidated balance sheet and is recognized
into revenue on the condensed consolidated statement of operations when (or as) the performance obligations included in the agreements
are satisfied. Deferred revenue had a balance of $565,847 and $775,843 at March 31, 2022 and September 30, 2021, respectively, and is
included in deferred revenue on the condensed consolidated balance sheets. Revenue recognized during the three months ended March 31,
2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $204,998 and $0, respectively. Revenue recognized
during the six months ended March 31, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $209,996
and $0, respectively.
Net Income (Loss) Per Share
Basic net income (loss) per share does not include
dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted income (loss) per share reflects the potential dilution of securities that could share in the losses of an entity.
Diluted income (loss) per share data is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of shares that would be issued
upon the exercise of stock options and warrants, computed using the treasury stock method and using the if-converted method for outstanding
convertible debt. Under the treasury stock method, the Company will calculate the number of shares issuable under the terms of its
options and warrants based on the average market price of Company common stock during the period, and include that number in the
total diluted shares figure for the period. Under the if-converted method, the Company will calculate the shares issuable under the terms
of its convertible debt instruments. Dilutive securities are not included in the weighted average number of shares when inclusion
would be anti-dilutive. A reconciliation of basic and diluted income (loss) per share is as follows:
| | |
| |
| |
| |
|
| | |
Three months ended
March 31, | |
Six months ended
March 31, |
| | |
2022 | |
2021 | |
2022 | |
2021 |
| Numerator: | |
| |
| |
| |
|
| Net income (loss) attributable to Item 9 Labs Corp. | |
$ | (3,878,078 | ) | |
$ | 49,020 | | |
$ | (7,223,092 | ) | |
$ | (1,025,436 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Denominator: | |
| | | |
| | | |
| | | |
| | |
| Weighted average common shares outstanding | |
| 95,271,726 | | |
| 65,880,141 | | |
| 95,088,960 | | |
| 62,143,521 | |
| Dilutive common share equivalents | |
| | | |
| | | |
| | | |
| | |
| Options | |
| — | | |
| 2,141,528 | | |
| — | | |
| — | |
| Warrants | |
| — | | |
| 14,161,326 | | |
| — | | |
| — | |
| Convertible notes | |
| — | | |
| 2,755,240 | | |
| — | | |
| — | |
| Weighted average diluted shares outstanding | |
| 95,271,726 | | |
| 84,938,235 | | |
| 95,088,960 | | |
| 62,143,521 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income (loss) per share | |
| | | |
| | | |
| | | |
| | |
| Basic | |
$ | (0.04 | ) | |
$ | 0.00 | | |
$ | (0.08 | ) | |
$ | (0.02 | ) |
| Diluted | |
$ | (0.04 | ) | |
$ | 0.00 | | |
$ | (0.08 | ) | |
$ | (0.02 | ) |
The following table summarizes the securities outstanding
at March 31, 2022 and 2021 that were excluded from the diluted net loss per share calculation for the three and six months ended March
31, 2022 and the six months ended March 31, 2021 because the effect of including these potential shares was antidilutive due to the Company’s
net loss.
| | |
2022 | |
2021 |
| Potentially dilutive common share equivalents | |
| | | |
| | |
| Options | |
| 6,237,693 | | |
| 3,211,709 | |
| Warrants | |
| 47,938,030 | | |
| 16,500,000 | |
| Convertible notes | |
| 2,661,571 | | |
| 2,526,969 | |
| Potentially dilutive shares outstanding | |
| 56,837,294 | | |
| 22,238,678 | |
Warrants, Conversion Options
and Debt Discounts
The Company analyzes warrants issued with debt to
determine if the warrants are required to be bifurcated and accounted for at fair value at each reporting period. When bifurcation is
not required, the Company records a debt discount, based on the relative fair values of the warrants and the debt, with a corresponding
charge to equity unless the terms of the warrant require it to be classified as a liability. The warrants and corresponding note discounts
are valued using the Black-Scholes valuation model. This model uses estimates of volatility, risk free interest rate and the expected
term of the warrants, along with the current market price of the Company's stock, to estimate the value of the outstanding warrants. The
Company estimates the expected term using an average of the contractual term and vesting period of the award. The expected volatility
is measured using the average historical daily changes in the market price of the Company's common stock over the expected term of the
award or, if earlier, since March 20, 2018, the day of the merger between BSSD Group LLC ("BSSD") and Airware Labs Corp, and
the risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the
expected term of the awards.
The Company also analyzes conversion options embedded
with debt to determine if the conversion options are required to be bifurcated and accounted for at fair value at each reporting period
or to determine if there is a beneficial conversion feature. At March 31, 2022 and September 30, 2021, none of the conversion options
embedded in the Company’s debt were required to be bifurcated.
Segment Reporting
The Company defines operating segments as components
about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales
activities based on the services performed by its subsidiaries. For the three and six months ended March 31, 2022, the Company has identified
two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”)
and the sales of Unity Rd. franchises to dispensaries (“Franchising”).
Business Combination
The Company allocates the purchase price of an acquired
business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition
date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation
process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible
assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration
transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period,
which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired
in its consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages,
the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value
at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
Recently Issued Accounting
Pronouncements
Pending Adoption
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments - Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended
guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology
that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates.
ASU 2016-13 is effective for the Company on October 1, 2023, with early adoption permitted on October 1, 2019. We are assessing the provisions
of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our condensed consolidated
financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt
with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This
standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting
for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions.
In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares
impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021,
including interim periods within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is
permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We
are currently evaluating the impact of adoption of this standard on the Company’s condensed consolidated financial statements and
disclosures.
In October 2021, the FASB issued ASU No. 2021-08,
Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This
standard requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic
606 as if the acquirer had originated the contracts. For public business entities, ASU 2021-08 is effective for fiscal years beginning
after December 15, 2022, including interim periods within those years and early adoption is permitted. We are currently evaluating the
impact of adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.
There have been no other recent accounting pronouncements
or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance,
to us.
Note 2 - Going Concern
The accompanying condensed consolidated financial
statements have been prepared assuming the continuation of the Company as a going concern. The Company has not yet established an ongoing
source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated
substantial accumulated deficit, are a direct result of the Company's planned ramp up period as it is pursuing market acceptance and geographic
expansion. In view of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets
is dependent upon continued operations of the Company which in turn is dependent upon the Company's ability to meet its financing requirements,
and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors
raise substantial doubt about the Company's ability to continue as a going concern.
In order to continue as a going concern, the Company
will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management's
plans in regard to these matters are described as follows:
Sales and Marketing. Historically, the Company has
generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company's revenues
have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona
market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional
markets outside of Arizona, with construction of a cultivation and processing facility nearing completion in Nevada. The Company believes
that it will continue reducing the overall costs of revenues and costs of revenues will increase at a lower rate than revenues in future
periods, which will lead to increased profit margins.
Financing. To date, the Company has financed its operations
primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production
efficiencies, production growth, and continued marketing efforts, sales revenue will continue to grow, thus enabling the Company to reverse
its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company's overall
efforts will be successful.
If the Company is unable to generate additional sales
growth in the near term and raise additional capital, there is a risk that the Company could default on its obligations, and could be
required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable
to continue as a going concern.
Note 3 – Inventory
Inventory consisted of the following at March 31,
2022 and September 30, 2021.
| | |
March 31, | |
September 30, |
| | |
2022 | |
2021 |
| Raw materials and work in process | |
$ | 2,811,583 | | |
$ | 4,291,095 | |
| Finished goods | |
| 1,404,820 | | |
| 1,052,375 | |
| Packaging and other | |
| 603,216 | | |
| 1,047,881 | |
| | |
$ | 4,819,619 | | |
$ | 6,391,351 | |
Note 4 – Acquisitions
Oklahoma City dispensary acquisition
In January 2022, the Company signed a Co-Management
Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially
all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease.
The purchase price was $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date.
The accrued purchase price balance is $119,276 at March 31, 2022 and is included in accrued expenses on the condensed consolidated balance
sheet. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company paid the seller $65,000 in the Company’s
common stock at a 10% discount to the stock’s 10-day volume weighted average. The Company has issued 69,892 shares of common stock
related to the Co-Management Agreement.
As of March 31, 2022,
the consideration paid or accrued for this acquisition was determined as follows:
| Cash | |
$ | 190,000 | |
| Common stock | |
| 65,000 | |
| | |
$ | 255,000 | |
The following table summarizes
the allocation of the purchase price to the estimated fair values of the assets acquired as of the transaction date:
| Tangible assets acquired | |
| | |
| | |
| | |
| Cash | |
$ | 6,143 | |
| Fixed assets | |
| 80,287 | |
| Tangible net assets acquired | |
| 86,430 | |
| Goodwill | |
| 168,570 | |
| | |
| | |
| Consideration paid | |
$ | 255,000 | |
Adams County acquisition
On October 6, 2021, the
Company entered into an Asset Purchase Agreement with Nebrina Adams County LLC to purchase certain assets, which include licenses,
a lease and certain personal property to operate a licensed recreational cannabis dispensary (the “Adams County Acquisition”).
The purchase price is $1,651,789 comprised of $1.0 million of cash, a $200,000 note, and 300,000 shares of the Company’s common
stock, valued at $1.12 per share. The note has an interest rate of 5% per annum and a term of 18 months and payable in six installments
on the last day of each three-month period following the Closing Date. The Adams County Acquisition closed on March 2, 2022. The acquisition
is not considered a business combination under ASC 805, Business Combinations, as a substantive process was not acquired. Substantially
all of the consideration paid was allocated to the licenses purchased.
As of March 31, 2022, the consideration paid in this
asset acquisition was determined as follows:
| Cash | |
$ | 1,000,000 | |
| Debt | |
| 200,000 | |
| Common stock | |
| 336,000 | |
| Direct costs of acquisition | |
| 130,872 | |
| | |
$ | 1,666,872 | |
The Herbal Cure pending acquisition
On March 11, 2022, the Company entered into an Asset
Purchase Agreement with The Herbal Cure LLC (“Seller”), pursuant to which, the Company is purchasing certain assets from the
Seller. The total purchase price for the assets to be acquired is $5,750,000, payable as follows:
(i)
Upon mutual execution and delivery of the Asset Purchase Agreement, the Company shall convey to the Seller a down payment in the
amount of $250,000;
(ii)
At the Closing, the Company shall pay to Seller $3,700,000 in immediately available funds;
(iii)
$700,000 shall be financed by the Seller and paid pursuant to the terms and conditions of the Secured Promissory Note (the
"Herbal Cure Note"), which interest shall accrue at a rate of 5% per annum, for a term of 18 months commencing on the
Closing Date, and payable in even monthly installments until paid in full; and
(iv)
the Company shall pay the remainder of the purchase price in shares of its common stock on the Closing Date, in such amount of
Shares as is the quotient of $1,100,000 divided by the product of the 10 day volume weighted average price of the shares as of the
Closing Date, and 85%.
During March 2022, $225,000
of the $250,000 down payment was paid and is included in Other Assets on the condensed consolidated balance sheet as of March 31, 2022.
At March 31, 2022, this acquisition has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted
for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet
or statement of operations as of and for the three and six months ended March 31, 2022.
Note 5 – Variable Interest Entity
In January 2022, the Company
signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. Under the terms of the Co-Management Agreement,
the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses,
and assumed the dispensary’s lease (see Note 4). Further, under the Co-Management Agreement, the Company is to operate, staff, and
otherwise manage the day-to-day operations of the dispensary. The Company shall also pay all claims, costs and liabilities associated
with operating the dispensary.
The terms of the Co-Management
Agreement provide the Company with, in its judgment, the ability to manage and make decisions that most significantly affect the operations
of Elevated Connections and to absorb losses that could potentially be significant to Elevated Connections. As
such, the Company has consolidated Elevated Connections effective February 1, 2022. The purpose of Elevated Connections, as a licensed
dispensary, is to hold the cannabis and cannabis related products and licenses of the dispensary.
The assets
of the VIE cannot be used to settle obligations of the Company or its wholly owned subsidiaries. However, liabilities recognized as a
result of consolidating the VIE does represent additional claims on the Company’s general assets.
The following
table presents the carrying values of the assets and liabilities of the entity that is a VIE and consolidated by the Company at March
31, 2022.
| | |
March 31, |
| Assets | |
2022 |
| Current assets | |
| | |
| Inventory | |
$ | 24,383 | |
| Total assets | |
$ | 24,383 | |
| | |
| | |
| Liabilities | |
| | |
| Current liabilities | |
| | |
| Income tax payable | |
$ | 3,324 | |
| Total liabilities | |
$ | 3,324 | |
The following
table presents the operations (after intercompany eliminations) of the entity that is a VIE and consolidated by the Company for the three
and six months ended March 31, 2022.
| | |
Three and
six months ended March 31, |
| | |
2022 |
| Revenues, net | |
$ | 33,337 | |
| Cost of revenue | |
| 23,017 | |
| Gross profit | |
| 10,320 | |
| Income tax expense | |
| 3,324 | |
| Net income | |
$ | 6,996 | |
Note 6 – Goodwill and Intangible Assets
Goodwill and identifiable intangible assets, including
licenses, consist of the following as of March 31, 2022 and September 30, 2021:
| | |
Gross Carrying | |
Accumulated | |
Accumulated | |
|
| | |
Amount | |
Amortization | |
Impairment | |
Net |
| March 31, 2022 | |
| | | |
| | | |
| | | |
| | |
| Finite lived intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Trade names and trademarks | |
$ | 8,570,848 | | |
$ | 925,900 | | |
$ | — | | |
$ | 7,644,948 | |
| Customer relationships | |
| 290,000 | | |
| 290,000 | | |
| — | | |
| — | |
| Websites and other intellectual property | |
| 2,470,000 | | |
| 1,078,476 | | |
| 955,223 | | |
| 436,301 | |
| Franchise and consulting agreements | |
| 3,970,000 | | |
| 831,669 | | |
| — | | |
| 3,138,331 | |
| Total finite lived intangible assets | |
| 15,300,848 | | |
| 3,126,045 | | |
| 955,223 | | |
| 11,219,580 | |
| Indefinite lived intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Licenses | |
| 8,370,853 | | |
| — | | |
| — | | |
| 8,370,853 | |
| Total intangible assets | |
$ | 23,671,701 | | |
$ | 3,126,045 | | |
$ | 955,223 | | |
$ | 19,590,433 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
Gross Carrying | |
Accumulated | |
Accumulated | |
|
| | |
Amount | |
Amortization | |
Impairment | |
Net |
| September 30, 2021 | |
| | | |
| | | |
| | | |
| | |
| Finite lived intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Trade names and trademarks | |
$ | 8,570,848 | | |
$ | 497,356 | | |
$ | — | | |
$ | 8,073,492 | |
| Customer relationships | |
| 290,000 | | |
| 290,000 | | |
| — | | |
| — | |
| Websites and other intellectual property | |
| 2,470,000 | | |
| 946,488 | | |
| 955,223 | | |
| 568,289 | |
| Franchise and consulting agreements | |
| 3,970,000 | | |
| 656,667 | | |
| — | | |
| 3,313,333 | |
| Total finite lived intangible assets | |
| 15,300,848 | | |
| 2,390,511 | | |
| 955,223 | | |
| 11,955,114 | |
| Indefinite lived intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Licenses | |
| 6,703,981 | | |
| — | | |
| — | | |
| 6,703,981 | |
| Total intangible assets | |
$ | 22,004,829 | | |
$ | 2,390,511 | | |
$ | 955,223 | | |
$ | 18,659,095 | |
| | |
Gross Carrying Amount Goodwill | |
Gross Carrying Amount Goodwill Impairment |
| Changes in goodwill and indefinite lived intangibles: | |
| | | |
| | |
| Balance at September 30, 2021 | |
$ | 62,868,420 | | |
$ | 4,803,604 | |
| Additional goodwill related to Oklahoma City dispensary acquisition | |
| 168,570 | | |
| — | |
| Balance at March 31, 2022 | |
$ | 63,036,990 | | |
$ | 4,803,604 | |
As of March 31, 2022, the cultivation and processing
licenses from the state of Nevada, included above, have not been transferred to the Company as the transfer is awaiting regulatory approval.
Note 7 - Property and Equipment, Net
The following represents a summary of our property
and equipment as of March 31, 2022 and September 30, 2021:
| | |
March 31, | |
September 30, |
| | |
2022 | |
2021 |
| Cultivation and manufacturing equipment | |
$ | 525,422 | | |
$ | 506,271 | |
| Computer equipment and software | |
| 266,427 | | |
| 266,427 | |
| Leasehold improvements | |
| 49,667 | | |
| — | |
| Buildings and improvements | |
| 2,811,340 | | |
| 2,785,781 | |
| | |
| 3,652,856 | | |
| 3,558,479 | |
| Accumulated Depreciation | |
| (624,767 | ) | |
| (479,320 | ) |
| | |
| 3,028,089 | | |
| 3,079,159 | |
| Land | |
| 3,455,563 | | |
| 380,584 | |
| Construction on progress | |
| 17,526,087 | | |
| 7,418,105 | |
| Property and Equipment, Net | |
$ | 24,009,739 | | |
$ | 10,877,848 | |
During the six months ended March 31, 2022, the Company
completed the purchase of 44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original
members of BSSD and a current employee of the Company.
Construction in progress relates to multiple capital
projects ongoing during the three and six months ended March 31, 2022, including the construction of the Nevada facility and the expansion
of the Arizona facility. Construction in progress also includes interest and fees on debt that is directly related to the financing of
the Company’s capital projects.
Depreciation expense for the three months ended March
31, 2022 and 2021 was $74,710 and $32,086, respectively. Depreciation expense for the six months ended March 31, 2022 and 2021 was $146,078
and $64,570, respectively.
Note 8 - Debt
| | |
Effective
Date | |
| Maturity
Date | |
| Annual
Interest Rate | | |
| Balance at March 31,
2022 | |
| Balance at September 30,
2021 | |
| Conversion
Price |
| | C-2 | | |
3/23/2020 | |
| 9/23/2020 | | |
| 15 | % | |
| 1,100,000 | | |
| 1,100,000 | | |
| See C-2 | |
| | C-3 | | |
8/15/2011 | |
| 8/15/2012 | | |
| 8 | % | |
| 20,000 | | |
| 20,000 | | |
| 0.50 | |
| | C-5 | | |
3/19/2021 | |
| 9/19/2021 | | |
| 10 | % | |
| — | | |
| 80,000 | | |
| 2.50 | |
| | C-7 | | |
9/29/2021 | |
| 9/29/2022 | | |
| 10 | % | |
| 250,000 | | |
| 250,000 | | |
| 1.67 | |
| | C-8 | | |
9/29/2021 | |
| 9/29/2022 | | |
| 10 | % | |
| 500,000 | | |
| 500,000 | | |
| 1.67 | |
| | C-9 | | |
10/1/2021 | |
| 9/29/2022 | | |
| 10 | % | |
| 750,000 | | |
| — | | |
| 1.67 | |
| | C-10 | | |
10/29/2021 | |
| 4/29/2022 | | |
| 15 | % | |
| 750,000 | | |
| — | | |
| 1.50 | |
| | C-11 | | |
2/21/2022 | |
| 8/31/2022 | | |
| 24 | % | |
| 250,000 | | |
| — | | |
| 1.10 | |
| | | | |
| |
| | | |
| | | |
| 3,620,000 | | |
| 1,950,000 | | |
| | |
| | | | |
| Less: unamortized discounts | |
| (804,120 | ) | |
| (672,606 | ) | |
| | |
| | | | |
| |
| | | |
| | | |
$ | 2,815,880 | | |
$ | 1,277,394 | | |
| | |
(C-2) Convertible Viridis Note
On March 23, 2020 the Company borrowed proceeds from
a related party, Viridis I9 Capital LLC (“Viridis”), in the amount of $1.1 million. The note is convertible at the lesser
of a) $1.00 per share or, b) 20% discount to the ten day average closing price of the Company’s common stock, immediately prior
to the conversion date. All principal and interest were due on the maturity date. The lender has granted a payment forbearance for the
note and all unpaid principal and interest, accrued at the default interest rate of 15% per annum, will be paid at maturity, which has
been postponed to a date that has not yet been determined. At March 31, 2022 the Viridis note was in default. The Viridis note remains
in default as of this filing, though the parties are negotiating a long-term arrangement.
(C-9) Convertible Tysadco Note
On October 1, 2021, the Company entered into a convertible
note agreement. Up to fifty percent (50%) of the outstanding and unpaid principal amount is convertible into common stock. The note included
warrants to purchase a total of 825,000 shares of the Company’s common stock for $3 per share, with a 4 year term. Further, the
Company issued 67,365 shares of common stock, valued at $112,500 as an inducement to the lenders to enter into the note agreements. The
debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock.
The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature.
The resulting discount of $597,606 and an additional $75,000 discount related to a one-time interest charge of 10% of the original principal
amount, is amortized to interest expense over the term of the debt. The one-time interest charge was accrued at March 31, 2022.
(C-10) Convertible Gaines Note
On October 29, 2021, the Company entered into a convertible
note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s
common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s common stock for $3 per share,
with a 2 year term. Further, the Company issued 75,000 shares of common stock, valued at $116,250 as an inducement to the lender to enter
into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants
and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the
beneficial conversion feature. The resulting discount of $561,272, which also included debt issuance costs of $44,582, is amortized to
interest expense over the term of the debt. This convertible note is currently due on demand and interest is paid monthly.
(C-11) Convertible Goldstein Note
On February 21, 2022, the Company entered into a
convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s
common stock. The Company issued 25,000 shares of common stock, valued at $25,000 as an inducement to the lender to enter into the note
agreement. The debt included a beneficial conversion feature after consideration of the relative fair value of the shares of common stock.
The debt and shares of common stock were recorded at their relative fair values, along with the beneficial conversion feature. The resulting
discount of $50,000 is amortized to interest expense over the term of the debt.
The future minimum payments of the Company’s
convertible debt obligations as of March 31, 2022 are as follows. The unamortized discount will be amortized through September 2022.
| Year ended | |
|
| March 31, | |
Amount |
| | 2023 | | |
$ | 3,620,000 | |
| | | | |
| 3,620,000 | |
| | Less: unamortized discount | | |
| (804,120 | ) |
| | | | |
$ | 2,815,880 | |
Notes Payable
| | |
Effective
Date | |
Maturity
Date | |
Annual
Interest Rate | |
Balance at March 31,
2022 | |
Balance at September 30,
2021 | |
Secured by |
| | f | | |
5/1/2020 | |
| 11/1/2023 | | |
| 10 | % | |
| 1,386,370 | | |
| 1,386,370 | | |
2nd DOT AZ property |
| | h | | |
5/1/2020 | |
| 5/1/2023 | | |
| 15 | % | |
| 283,666 | | |
| 283,666 | | |
N/A |
| | i | | |
2/14/2020 | |
| 10/14/2022 | | |
| 2 | % | |
| — | | |
| 312,500 | | |
Secured by licenses |
| | l | | |
8/18/2021 | |
| 8/18/2022 | | |
| 36 | % | |
| 2,205,266 | | |
| 2,162,590 | | |
Future revenues |
| | n | | |
12/20/2020 | |
| 12/20/2021 | | |
| 9 | % | |
| — | | |
| 13,148 | | |
Secured by vehicles |
| | o | | |
3/19/2021 | |
| 4/1/2024 | | |
| 10 | % | |
| 734,970 | | |
| 816,582 | | |
N/A |
| | p | | |
2/1/2021 | |
| 6/30/2022 | | |
| 10 | % | |
| 370,590 | | |
| 520,590 | | |
N/A |
| | q | | |
8/6/2021 | |
| 2/6/2023 | | |
| 16 | % | |
| 13,500,000 | | |
| 13,500,000 | | |
1st AZ property and other personal property |
| | r | | |
8/6/2021 | |
| 2/6/2023 | | |
| 16 | % | |
| 5,500,000 | | |
| 5,500,000 | | |
1st NV property and other personal property |
| | s | | |
9/30/2021 | |
| 12/31/2021 | | |
| 18 | % | |
| 500,000 | | |
| 500,000 | | |
Restricted common stock |
| | t | | |
3/19/2021 | |
| 7/19/2022 | | |
| 18 | % | |
| 425,000 | | |
| 500,000 | | |
N/A |
| | u | | |
2/22/2022 | |
| 2/28/2023 | | |
| 36 | % | |
| 688,472 | | |
| — | | |
Future revenues |
| | v | | |
2/22/2022 | |
| 2/28/2023 | | |
| 36 | % | |
| 229,658 | | |
| — | | |
Future revenues |
| | w | | |
3/4/2022 | |
| On demand | | |
| 15 | % | |
| 350,000 | | |
| — | | |
|
| | x | | |
3/10/2022 | |
| 5/10/2022 | | |
| 20 | % | |
| 250,000 | | |
| — | | |
N/A |
| | y | | |
3/2/2022 | |
| 8/1/2023 | | |
| 5 | % | |
| 200,000 | | |
| — | | |
N/A |
| | | | |
| |
| | | |
| | | |
| 26,623,992 | | |
| 25,495,446 | | |
|
| | | | |
| Less:
unamortized discounts |
| (3,842,037 | ) | |
| (6,002,045 | ) | |
|
| | | | |
| |
| | | |
| | | |
$ | 22,781,955 | | |
$ | 19,493,401 | | |
|
(f) Viridis AZ
On September 13, 2018, the Company entered into a
Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC ("Viridis"), a related party, in which Viridis agreed
to loan the Company up to $1.2 million for the expansion of the Company's Arizona property. In exchange for the loan, Viridis was to be
repaid in the form of waterfall revenue participation schedules. Viridis was to receive 5% of the Company's gross revenues from the Arizona
operations until the loan was repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change
in control. The loan was originally collateralized with a Deed of Trust on the Company's 5-acre parcel in Coolidge, AZ and its two 10,000
square foot buildings. In August 2019, Viridis agreed to subordinate its first priority Deed of Trust and move into a 2nd position.
At that time, the loan was amended to include 6% annualized interest.
On May 1, 2020, under a troubled debt restructuring,
the Company renegotiated the $1,200,000 note payable. As part of the restructuring, the Company issued 1,555,556 warrants exercisable
into the Company's common stock. The warrants have an exercise price of $1.00 and a term of 5 years. Accrued interest in the amount of
$186,370 was added to the principal balance of the note, making the total principal $1,386,370. Interest only payments of $11,553 shall
be paid monthly until November 1, 2020 at which time monthly principal and interest payments of $28,144 are required for 36 months, with
a balloon payment of all outstanding principal and interest due upon the note's maturity. The note also entitles Viridis to a gross revenue
participation of the Arizona Operations equal to 1% of the gross sales (up to $20,000 monthly) upon the maturity of the note and for
the subsequent 5 year period. The debt and warrants were recorded at their relative fair values. The resulting discount is amortized
to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and
interest, accrued at the default interest rate of 12% per annum, will be added to the balloon payment at maturity.
In August 2021, the Viridis AZ and Viridis NV debt
was modified to subordinate these notes to the Pelorus Notes (see (q) and (r)). As of the date of these condensed consolidated financial statements, the terms of this modification
have not been finalized. Based on the expected modification terms, this modification was accounted for as an extinguishment of the debt
during the year ended September 30, 2021.
(h) Viridis (unsecured)
The Company's subsidiary, BSSD Group, LLC borrowed
$269,000 from Viridis, a related party, in December 2019. This note bears annualized interest at 15%. On May 1, 2020, under a troubled
debt restructuring, the Company renegotiated the $269,000 note payable. Accrued interest in the amount of $14,666 was added to the principal
balance of the note, making the total principal $283,666. As part of the restructuring, the Company issued 400,000 warrants exercisable
into the Company's common stock. The warrants have an exercise price of $.05 and a term of 5 years. Payments of principal and interest
in the amount of $9,833 are due monthly, with a balloon payment of all outstanding principal and interest is due upon the note's maturity.
The debt and warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term
of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest
rate of 18% per annum, will be added to the balloon payment at maturity.
(l) Upwise Capital
In August 2021, the Company executed on a short-term
financing arrangement. The proceeds of $2.5 million are being utilized to further expand the production capabilities of the operations
in Arizona and to complete the Nevada facility. Payments of $64,762 are due weekly until $3.264 million is repaid. This results in an
effective interest rate of approximately 36%.
On January 26, 2022, the Company executed a second
short-term financing arrangement. The proceeds of $2.5 million were used to repay the first short-term financing arrangement, discussed
above, in the amount of approximately $1.839 million, and the remainder of the proceeds was used for working capital purposes. Payments
of $66,468 are due weekly until $3.35 million has been repaid. This results in an effective interest rate of 36%. The repayment of the
first short-term financing was accounted for as an extinguishment. As such, all previously unamortized discount in the amount of $46,588
and imputed interest in the amount of $483,840 was capitalized to construction in progress during January 2022. Fees paid for the second
short-term financing arrangement in the amount of $91,000 have been recorded as a discount and will be amortized to interest expense over
the term of the arrangement.
(o) OCG Officers Debt
As part of the OCG transaction in March 2021, the
Company assumed the debt that OCG, Inc. owed to its officers. Principal and interest payments are due monthly with a balloon payment of
all outstanding principal and interest due at maturity. One of these notes is currently in default. The Company and the lender
are currently negotiating an amendment.
(p) Stockbridge Amended Debt
In February 2021, the Company and Stockbridge Enterprises,
a related party, under a trouble debt restructuring, agreed to restructure and settle its outstanding notes. The total outstanding balance
of $1,660,590, including accrued interest, were to be repaid under a new promissory note, calling for a down payment of $300,000 (paid
at time of signing), $120,000 monthly payments for 11 months with the remaining balance of $40,590 payable on February 1, 2022. This agreement
was amended to extend the maturity date to March 31, 2022 and starting with the October 1, 2021 payment, the loan payments are interest
only at an interest rate of 15% per annum until January 25, 2022. Principal payments in the amount of $50,000 are due on January 25, 2022,
February 15, 2022 and March 15, 2022, with a final payment of the remaining principal and accrued interest due on March 31, 2022. Upon
closing of an equity raise of at least $750,000, the Company will repay the outstanding balance plus any accrued interest immediately.
As part of the amendment, the Company issued 164,744 warrants to purchase the Company’s common stock. The warrants have a two-year
period and an exercise price of $1.00. The resulting discount of $58,352 was fully amortized to interest expense during the six months
ended March 31, 2022.
Effective March 31, 2022, the debt was amended to
extend the maturity date to June 30, 2022, interest payments are due on April 1, May 1 and June 1, 2022. Principal payments in the amount
of $50,000 are due on April 15, May 15 and June 15, 2022 and a final balloon payment of outstanding principal and interest in the amount
of $223,972 is due on June 30, 2022.
(s) Viridis $500,000
On September 30, 2021, the Company borrowed $500,000
from Viridis Group I9 Capital LLC, a related party. The proceeds of the debt were used to make a payment on the outstanding unpaid payroll
tax liability. The debt is collateralized by restricted common stock in the amount of twice the balance of the debt. It is anticipated
that the note will include warrants to purchase a total of 500,000 shares of the Company’s common stock for $0.60 per share, with
a five-year term. As of the date of these condensed consolidated financial statements, the terms of these warrants have not been finalized.
The debt and anticipated warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense
over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at
the default interest rate of 18% per annum beginning January 1, 2022, will be paid at maturity, which has been postponed to a date that
has not yet been determined.
(t) Chessler note
Prior to the acquisition, OCG entered into a settlement
agreement with it former landlord, which included a note agreement for $500,000. During March 2022, this note agreement was modified to
extend the maturity date to July 19, 2022 and add an interest rate of 18% per annum. The modified note also calls for principal payments
of $75,000 on the effective date of the note, $75,000 on April 10, 2022, $100,000 on May 22, 2022 and $250,000 at maturity, plus accrued
and unpaid interest.
(u) Lendspark
In February 2022, the Company executed on a short-term
financing arrangement for proceeds of $750,000. Payments of $20,400 are due weekly until approximately $1.02 million is repaid. This results
in an effective interest rate of approximately 36%. Administrative fees in the amount of $22,500 have been recorded as a discount and
will be amortized to interest expense over the term of the arrangement.
(v) Upwise Capital 2
In February 2022, the Company executed on a third
short-term financing arrangement with Upwise Capital for proceeds of $250,000. Payments of $6,746 are due weekly until $340,000 is repaid.
This results in an effective interest rate of approximately 36%. Origination fees in the amount of $7,500 have been recorded as a discount
and will be amortized to interest expense over the term of the arrangement.
(w) Viridis working capital loan
In March 2022, the Company received a short-term working
capital loan from Viridis, a related party, in the amount of $400,000. The terms of this loan are still being determined, however, an
interest rate of 15% has been estimated.
(x) Non-convertible Gaines Note
On March 10, 2022, the Company entered into a
short-term promissory note for $250,000. The short-term promissory note is due and payable in monthly payments of interest only,
with all principal and any accrued and unpaid interest due at maturity. This convertible note is currently due on demand and
interest is paid monthly.
(y) Nebrina Adams County Note
Effective with the close of the Adams County acquisition
(see Note 4), the Company entered into a note for $200,000 with the seller as part of the purchase price. The note is payable in six
installments on the last day of each three-month period following the Closing Date.
The future minimum payments of the Company’s
notes payable obligations as of March 31, 2022 are as follows. The unamortized discount will be amortized through November 2023.
| Year ended | |
|
| March 31, | |
Amount |
| | 2023 | | |
$ | 25,321,267 | |
| | 2024 | | |
| 2,227,019 | |
| | 2025 | | |
| — | |
| | | | |
| 27,548,286 | |
| | Less: unamortized discount | | |
| (3,842,037 | ) |
| | Less: imputed interest | | |
| (924,294 | ) |
| | | | |
| 22,781,955 | |
| | Less: current portion | | |
| (21,136,912 | ) |
| | | | |
$ | 1,645,043 | |
A summary of interest expense for the three and six
months ended March 31, 2022 and 2021 is as follows.
| | |
| |
| |
| |
|
| | |
Three months ended
March 31, | |
Six months ended
March 31 |
| | |
2022 | |
2021 | |
2022 | |
2021 |
| Amortization of debt discounts | |
$ | 1,626,013 | | |
$ | 122,038 | | |
$ | 3,491,724 | | |
$ | 248,302 | |
| Stated interest paid or accrued | |
| 1,361,523 | | |
| 346,349 | | |
| 2,565,455 | | |
| 915,793 | |
| Finance charges and other interest | |
| 2,178 | | |
| — | | |
| 2,995 | | |
| 12,659 | |
| | |
| 2,989,714 | | |
| 468,387 | | |
| 6,060,174 | | |
| 1,176,754 | |
| Less: interest capitalized to construction in progress | |
| (1,892,341 | ) | |
| — | | |
| (3,752,411 | ) | |
| — | |
| | |
$ | 1,097,373 | | |
$ | 468,387 | | |
$ | 2,307,763 | | |
$ | 1,176,754 | |
Note 9 - Concentrations
For the three and six months ended March 31, 2022
and 2021, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder,
although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license
holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services
Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following
circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or
willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state
or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is
not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation
of the dispensary license.
Note 10 - Commitments and Contingencies
The production and possession of cannabis is prohibited
on a national level by the Controlled Substances Act, though the state of Arizona allows these activities to be performed at licensed
facilities such as BSSD. If the federal government decides to change its policy on the enforcement of the Controlled Substances Act,
it would have a material adverse effect on our business.
The Company entered into a 60 month lease with VGI
Citadel LLC, a related party, to rent office space for its corporate headquarters which began in June 2019. The monthly lease payments
were $6,478
for the first twelve months and include all utilities
and an estimated amount for common area maintenance and real estate taxes. The monthly lease payments increase to $6,653,
$6,828,
$7,003,
and $7,178
for years two through five, respectively. Rent
expense for the three months ended March 31, 2022 and 2021 on this lease was $20,957 and $20,127, respectively. Rent expense for the
six months ended March 31, 2022 and 2021 on this lease was $44,157 and $40,837, respectively. Interest was imputed using a discount rate
of 20%. The lease does not include renewal options.
In February 2022, the Company assumed a lease to rent
approximately 3,100 square feet of retail space in Oklahoma City, Oklahoma as part of the Oklahoma City acquisition disclosed in Note
4. The lease calls for base rent payments of $21 per square foot ($5,483), plus a prorated share of taxes, insurance and common area maintenance
expenses, per month and increasing each year by 3% through the end of the lease term on February 28, 2029. The lease may be extended for
two additional 5 year periods. Rent expense for the three and six months ended March 31, 2022 and 2021 on this lease was $14,277 and $0,
respectively. Interest was imputed using a discount rate of 18%.
In March 2022, the Company assumed a lease to rent
approximately 2,650 square feet of retail space in Adams County, Colorado as part of the Adams County acquisition disclosed in Note 4.
The lease calls for base rent payments of $15,450, plus a prorated share of operating costs of the building, per month and escalate each
year to $15,913 in the final year which ends on February 1, 2024. The lease may be extended for one additional 3 year period. Rent expense
for the three and six months ended March 31, 2022 and 2021 on this lease was $16,048 and $0, respectively. Interest was imputed using
a discount rate of 18%.
The future lease payments are as follows.
| Year ended | |
|
| March 31, | |
Amount |
| | 2023 | | |
$ | 337,663 | |
| | 2024 | | |
| 330,987 | |
| | 2025 | | |
| 86,615 | |
| | 2026 | | |
| 74,425 | |
| | 2027 | | |
| 76,658 | |
| | Thereafter | | |
| 153,136 | |
| | | | |
| 1,059,484 | |
| | Less:
imputed interest | | |
| (321,191 | ) |
| | | | |
| 738,293 | |
| | Less:
current portion: | | |
| (219,773 | ) |
| | | | |
$ | 518,520 | |
In August 2021, the Company signed a ten-year lease
to rent approximately 7,000 square feet of retail space in Broomfield, Colorado. The lease will call for base rent payments of $12,097,
plus a prorated share of taxes and operating expenses, per month for the first year and escalate each year to $15,786 per month in year
10. The commencement of this lease is contingent upon the Company obtaining a license for the retail sale of recreational and medical
marijuana. The Company shall pay $3,500 per month as consideration to the landlord for keeping the premises available until the contingency
is met. The contingency was not met and the agreement has ended.
In September 2021, the Company signed a seven-year
lease to rent approximately 3,000 square feet of retail space in Biddeford, Maine. The lease will call for base rent payments of $6,604,
plus taxes and operating expenses, per month for the first year and escalate each year to $7,886 per month in year seven. The commencement
of this lease is contingent upon the issuance and receipt of a license and city approval. The Company shall pay $4,500 per month, plus
utilities and operating expenses as consideration to the landlord for keeping the premises available until the contingency is met. The
agreement will terminate if the contingency is not met. At March 31, 2022, the contingency has not been met. As such, the future minimum
rental payments under this lease have not been included in the Company’s right of use asset and liability at March 31, 2022 or the
future lease payments schedule above.
In October 2021, the Company entered into a commercial
lease agreement to rent 12,000 square feet located in Denver, Colorado. The lease has a term of five years with escalating monthly base
rent beginning at $6,354 and escalating each year to $7,295 in year five. Commencement of the lease is contingent upon the Company receiving
an approved retail license within 120 days from October 22, 2021. The agreement will terminate if the contingency is not met. As of March
31, 2022, the contingency has not been met and the Company is currently considering its options in regards to this agreement. The future
minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at March 31, 2022
or the future lease payments schedule above.
As of March 31, 2022 and September 30, 2021, the Company
has accrued unpaid payroll taxes and estimated penalties and interest of approximately $1,900,000 and $2,400,000, respectively, and is
included in accrued expenses in the accompanying condensed consolidated balance sheets. The Company is making monthly payments of $94,278,
beginning March 1, 2022, to pay this liability.
There are no material pending legal proceedings in
which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record
or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material
interest adverse to the Company.
Note 11 - Related Party Transactions
As discussed in Note 7, the Company completed the
purchase of 44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original members of BSSD
and a current employee of the Company.
As discussed in Note 8, the Company has entered into
various loan agreements with Viridis or its related entities. Two members of Viridis serve on the Company’s board of directors and
one of these members also serves as the Company’s Chief Executive Officer.
As discussed in Note 8, the Company has a loan agreement
with Stockbridge Enterprises. Stockbridge Enterprises holds more than 5% of the Company’s common stock.
As discussed in Note 10, the Company has a lease agreement
with VGI Capital LLC. Two members of VGI Capital LLC serve on the Company’s board of directors and one of these members also serves
as the Company’s Chief Executive Officer.
During the three months ended March 31, 2022 and 2021,
the Company purchased cultivation supplies from a related party in the amount of $18,715 and $15,440, respectively. During the six months
ended March 31, 2022 and 2021, the Company purchased cultivation supplies from a related party in the amount of $31,708 and $25,529, respectively.
This related party is owned by the father of a stockholder that holds more than 5% of the Company’s common stock.
Included in our accounts payable at March 31, 2022
and September 30, 2021 is approximately $236,000, and $138,000, respectively in amounts due to related parties.
Note 12 - Stockholders' Equity
Unit Offering
During the three months ended March 31, 2022, the
Company began offering up to 28,000,000 units of the Company for $1.40 per Unit on a “best-efforts/no minimum” basis pursuant
to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. Each Unit is comprised of one share of
common stock and one-half of one warrant to purchase a share of common stock. Only whole warrants are exercisable. Each whole warrant
entitles the holder to purchase one share of common stock for $2.00 per share, subject to certain adjustments, from the date of issuance
until the second anniversary of the date of issuance and is redeemable by the Company under certain conditions. Effective May 4, 2022,
the Company repriced the offering to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company
has incurred approximately $800,000 in fees related to this offering. These fees are included in Other assets on the condensed consolidated
balance sheet at March 31, 2022 and will be netted against the proceeds received in the offering.
Warrants
The following table summarizes the Company’s
warrant activity for the six months ended March 31, 2022:
| | |
Common
Shares Issuable Upon Exercise of Warrants | |
Weighted
Average Exercise Price | |
Weighted
Average Contractual Term in Years | |
Aggregate
Intrinsic Value |
| Balance of warrants at September 30, 2021 | |
| 46,095,000 | | |
| 2.08 | | |
| 3.9 | | |
| 14,243,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Warrants
granted | |
| 1,843,030 | | |
| 2.76 | | |
| 2.9 | | |
| 57,660 | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance of warrants at
March 31, 2022 | |
| 47,938,030 | | |
$ | 2.10 | | |
$ | 3.7 | | |
$ | 10,467,660 | |
| |
(1) |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock as of March 31, 2022, for those awards that have an exercise price currently below the closing price as of March 31, 2022. Awards with an exercise price above the closing prices as of March 31, 2022 are considered to have no intrinsic value. |
The following range of assumptions were used to estimate
the fair value of warrants issued during the six months ended March 31, 2022, using the Black-Scholes option-pricing model, excluding
the 103,286 whole warrants issued as part of the Company’s unit offering.
| | |
Six months ended
March 31, |
| | |
2022 |
| Expected stock price volatility | |
| 92% - 130% | |
| Risk-free interest rate | |
| 0.10% - 0.30% | |
| Expected term (years) | |
| 1.0 - 2.0 | |
| Expected dividend yield | |
| 0% | |
| Black-scholes value | |
| $0.34 - $0.89 | |
Stock Options
On June 21, 2019, our shareholders voted to approve
the 2019 Equity Incentive Plan (the “2019 Plan”). Pursuant to the 2019 Plan, the maximum aggregate number of Shares available
under the Plan through awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the adoption of the plan by 2
percent of the then-outstanding shares, or (b) 10,000,000 shares. The maximum contractual term of the award is 10 years. The vesting period
for options outstanding at March 31, 2022 ranges from 3 months to three years.
The following table summarizes the Company’s
stock option activity for the six months ended March 31, 2022:
| | |
Common
Shares Issuable Upon Exercise of Options | |
Weighted
Average Exercise Price | |
Weighted
Average Remaining Contractual Term in Years | |
Aggregate
Intrinsic Value (1) |
| Balance of Options at September 30, 2021 | |
| 5,217,315 | | |
| 1.23 | | |
| 8.9 | | |
| 2,633,375 | |
| | |
| | | |
| | | |
| | | |
| | |
| Options
granted | |
| 1,153,444 | | |
| 1.55 | | |
| 6.9 | | |
| 26,800 | |
| Exercised | |
| (41,104 | ) | |
| 0.87 | | |
| 8.3 | | |
| 19,730 | |
| Forfeited/Cancelled | |
| (91,962 | ) | |
| 0.94 | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance of Options at
March 31, 2022 | |
| 6,237,693 | | |
$ | 1.29 | | |
| 8.1 | | |
$ | 1,815,182 | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable at March 31, 2022 | |
| 2,373,123 | | |
$ | 1.34 | | |
| 7.7 | | |
$ | 952,342 | |
| Unvested at March 31, 2022 | |
| 3,864,570 | | |
$ | 1.26 | | |
| | | |
| | |
| | |
Number of Options | |
Weighted Average Grant Date Fair Value |
| Unvested at March 31, 2022 | | |
| 3,864,570 | | |
$ | 1.20 | |
| Granted during the six months ended March 31, 2022 | | |
| 1,153,444 | | |
$ | 1.37 | |
| Vested during the six months ended March 31, 2022 | | |
| 264,866 | | |
$ | 1.73 | |
| Forfeited during the six months ended March 31, 2022 | | |
| 91,962 | | |
$ | 2.16 | |
| |
(1) |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock as of March 31, 2022, for those awards that have an exercise price currently below the closing price as of March 31, 2022. Awards with an exercise price above the closing prices as of March 31, 2022 are considered to have no intrinsic value. |
The following range of assumptions were used to estimate
the fair value of stock options granted during the six months ended March 31, 2022, using the Black-Scholes option-pricing model.
| | |
Six months ended March 31, |
| | |
2022 |
| Expected stock price volatility | |
| 126% - 176% | |
| Risk-free interest rate | |
| .7% - 1.5% | |
| Expected term (years) | |
| 2.8 - 6.5 | |
| Expected dividend yield | |
| 0% | |
| Black-scholes value | |
| $0.68 - $3.01 | |
During the three months ended March 31, 2022 and
2021, the Company recognized compensation expense of $1,091,560 and $304,672, respectively. During the six months ended March 31, 2022
and 2021, the Company recognized compensation expense of $1,598,854 and $609,344, respectively. At March 31, 2022, there was $3,224,992
of total unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average vesting period
of 1.2 years.
Note 13 – Segment Information
The Company has identified two segments: the
cultivation, production and sale of cannabis products (Cultivation) and the sales of Unity Rd. franchises to dispensaries (Franchising).
The following tables presents segment information for the three and six months ended March 31, 2022. Segment information for the three
and six months ended March 31, 2021 has not been presented as the Company did not acquire the Franchising segment until the closing of
the acquisition of OCG, Inc. effective March 19, 2021.
| | |
Cultivation | |
Franchising | |
Corporate | |
Total |
| Six months ended March 31, 2022 | |
| |
| |
|
| Revenues from external customers | |
$ | 12,499,107 | | |
$ | 258,498 | | |
$ | 66,592 | | |
$ | 12,824,197 | |
| Operating income (loss) | |
| 3,009,817 | | |
| (1,703,385 | ) | |
| (6,213,329 | ) | |
| (4,906,897 | ) |
| Interest expense | |
| 157,062 | | |
| 43,216 | | |
| 2,107,485 | | |
| 2,307,763 | |
| Depreciation and amortization | |
| 62,532 | | |
| 601,525 | | |
| 217,555 | | |
| 881,612 | |
| Additions to property, equipment and | |
| | | |
| | | |
| | | |
| | |
| construction in progress | |
| — | | |
| 50,797 | | |
| 13,220,286 | | |
| 13,271,083 | |
| | |
| | | |
| | | |
| | | |
| | |
| Three months ended March 31, 2022 | |
| | | |
| | | |
| | | |
| | |
| Revenues from external customers | |
$ | 6,357,890 | | |
$ | 228,080 | | |
$ | 52,216 | | |
$ | 6,638,186 | |
| Operating income (loss) | |
| 1,440,522 | | |
| (744,246 | ) | |
| (3,468,549 | ) | |
| (2,772,273 | ) |
| Interest expense | |
| 156,866 | | |
| 20,406 | | |
| 920,101 | | |
| 1,097,373 | |
| Depreciation and amortization | |
| 31,267 | | |
| 300,786 | | |
| 110,424 | | |
| 442,477 | |
| | |
| | | |
| | | |
| | | |
| | |
| At March 31, 2022 | |
| | | |
| | | |
| | | |
| | |
| Property, equipment and construction in progress, net | |
| 627,009 | | |
| 77,346 | | |
| 23,305,384 | | |
| 24,009,739 | |
| Total assets (after intercompany eliminations) | |
| 6,804,504 | | |
| 67,876,897 | | |
| 46,192,548 | | |
| 120,873,949 | |
Note 14 - Subsequent
Events
Subsequent to March 31, 2022 the following events
have occurred.
Effective May 4, 2022,
the Company repriced the Unit offering pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2
offerings to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company has sold 215,129 units for
total proceeds of $263,104 subsequent to March 31, 2022.
The Company received a short-term loan in the amount
of $200,000 from Viridis, a related party. The terms of this short-term loan are being determined as of the date of the filing.