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 is a holding company, investing in cannabis
and cannabis-related businesses. Its subsidiaries currently compete in two different market segments: (1) production of 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) sale of 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 June 30, 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 June 30, 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 June 30, 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 nine months ended June 30,
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 June 30, 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 and nine months ended June 30, 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 $560,849 and $775,843 at June 30, 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 June 30, 2022 and 2021
that was included in deferred revenue at September 30, 2021 and 2020 was $4,998 and $0, respectively. Revenue recognized during the nine
months ended June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $214,994 and $0, respectively.
Net Loss Per Share
Basic net 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 net loss per share reflects the potential dilution of securities that could share in the losses of an entity.
Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. The following table
summarizes the securities outstanding at June 30, 2022 and 2021 that were excluded from the diluted net loss per share calculation for
the three and nine months ended June 30, 2022 and 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 | |
| 6,223,462 | | |
| 3,211,709 | |
| Warrants | |
| 48,069,687 | | |
| 41,415,000 | |
| Convertible notes | |
| 3,510,792 | | |
| 2,707,238 | |
| Potentially dilutive shares
outstanding | |
| 57,803,941 | | |
| 47,333,947 | |
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 June 30, 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 nine months ended June 30, 2022 and 2021, 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 reduce 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 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 additional 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 June 30, 2022
and September 30, 2021.
| | |
June 30, | |
September 30, |
| | |
2022 | |
2021 |
| Raw materials and work in process | |
$ | 1,817,094 | | |
$ | 4,291,095 | |
| Finished goods | |
| 1,596,924 | | |
| 1,052,375 | |
| Packaging and other | |
| 716,761 | | |
| 1,047,881 | |
| | |
$ | 4,130,779 | | |
$ | 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.
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. The accrued purchase price balance is $49,274 at June 30, 2022 and is included in accrued expenses
on the condensed consolidated balance sheet.
As of June 30, 2022, the consideration paid or accrued
for this acquisition was 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 June 30, 2022, the consideration paid in this
asset acquisition was 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%.
At June 30, 2022, the $250,000
down payment was paid and is included in Other Assets on the condensed consolidated balance sheet. At June 30, 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 nine months ended June 30, 2022. The Company can provide no assurance that it will be successful in finalizing
this acquisition.
Sessions pending acquisition
On May 18, 2022, the Company
and its wholly owned subsidiary, OCG Management Ontario, Inc., a corporation formed under the laws of the Province of Ontario (“Purchaser”)
solely for the purpose of completing this transaction, entered into a Share Purchase Agreement pursuant to which the Purchaser is purchasing
all, but not less than all, of the issued and outstanding shares in the capital of Wild Card Cannabis Incorporated, a corporation formed
under the laws of the Province of Ontario free and clear of all Liens from the Shareholders.
The total purchase price for
the Shares is Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD) (the "Purchase Price"), as adjusted,
plus the Earnout Payment, if any (collectively, the “Purchase Price”) payable as follows:
(i) The
Company has delivered the Exclusivity Deposit in the amount of $156,902 to the Escrow Agent on March 4, 2022.
(ii) At
the Closing, Purchaser shall pay to Shareholders the Estimated Purchase Price of Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00
USD), as adjusted, in immediately available funds;
(iii) Four
Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number
of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s
common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the First Earnout Period
(the date that is 12 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect
of the First Earnout Period is greater than or equal to the Target Net Revenue for the First Earnout Period; and
(iv) Four
Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number
of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s
common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the Second Earnout Period
(the date that is 24 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect
of the Second Earnout Period is greater than or equal to the Target Net Revenue for the Second Earnout Period.
At June 30, 2022, the $156,902
Exclusivity Deposit has been paid and is included in Other Assets on the condensed consolidated balance sheet. At June 30, 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 nine months ended June 30, 2022. The Company can provide no assurance that it will be successful
in finalizing this acquisition.
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 June 30, 2022.
| | |
June 30, |
| Assets | |
2022 |
| Current assets | |
| | |
| Inventory | |
$ | 27,773 | |
| Total assets | |
$ | 27,773 | |
| | |
| | |
| Liabilities | |
| | |
| Current liabilities | |
| | |
| Income tax payable | |
$ | 7,948 | |
| Total liabilities | |
$ | 7,948 | |
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 nine months ended June 30, 2022.
| | |
Three months ended June 30, | |
Nine months ended June 30, |
| | |
2022 | |
2022 |
| Revenues, net | |
$ | 40,245 | | |
$ | 73,582 | |
| Cost of revenue | |
| 21,111 | | |
| 44,128 | |
| Gross profit | |
| 19,134 | | |
| 29,454 | |
| Income tax expense | |
| 4,624 | | |
| 7,948 | |
| Net income | |
$ | 14,510 | | |
$ | 21,506 | |
Note 6 – Goodwill and Intangible Assets
Goodwill and identifiable intangible assets, including
licenses, consist of the following as of June 30, 2022 and September 30, 2021:
| | |
Gross Carrying | |
Accumulated | |
Accumulated | |
|
| | |
Amount | |
Amortization | |
Impairment | |
Net |
| June 30, 2022 | |
| | | |
| | | |
| | | |
| | |
| Finite lived intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Trade names and trademarks | |
$ | 8,570,848 | | |
$ | 1,140,172 | | |
$ | — | | |
$ | 7,430,676 | |
| Customer relationships | |
| 290,000 | | |
| 290,000 | | |
| — | | |
| — | |
| Websites and other intellectual property | |
| 2,470,000 | | |
| 1,144,470 | | |
| 955,223 | | |
| 370,307 | |
| Franchise and consulting agreements | |
| 3,970,000 | | |
| 919,170 | | |
| — | | |
| 3,050,830 | |
| Total finite lived intangible assets | |
| 15,300,848 | | |
| 3,493,812 | | |
| 955,223 | | |
| 10,851,813 | |
| Indefinite lived intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Licenses | |
| 8,370,853 | | |
| — | | |
| — | | |
| 8,370,853 | |
| Total intangible assets | |
$ | 23,671,701 | | |
$ | 3,493,812 | | |
$ | 955,223 | | |
$ | 19,222,666 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
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 |
| | |
Gross Carrying | |
Amount |
| | |
Amount | |
Goodwill |
| | |
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 June 30, 2022 | |
$ | 63,036,990 | | |
$ | 4,803,604 | |
As of June 30, 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.
During the three months ended June 30, 2022, the Company
has noted indicators of the possible impairment of its goodwill and intangible assets. The Company will analyze these indicators during
the fourth quarter of the year ended September 30, 2022 and determine if any impairment has occurred. Given the carrying value of the
Company’s goodwill and intangible assets at June 30, 2022, the occurrence of an impairment may be material to the Company’s
financial position and results of operations.
Note 7 - Property and Equipment, Net
The following represents a summary of our property
and equipment as of June 30, 2022 and September 30, 2021:
| | |
June 30, | |
September 30, |
| | |
2022 | |
2021 |
| Cultivation and manufacturing equipment | |
$ | 551,045 | | |
$ | 506,271 | |
| Computer equipment and software | |
| 266,427 | | |
| 266,427 | |
| Leasehold improvements | |
| 49,667 | | |
| — | |
| Buildings and improvements | |
| 2,811,340 | | |
| 2,785,781 | |
| | |
| 3,678,479 | | |
| 3,558,479 | |
| Accumulated Depreciation | |
| (696,052 | ) | |
| (479,320 | ) |
| | |
| 2,982,427 | | |
| 3,079,159 | |
| Land | |
| 3,455,563 | | |
| 380,584 | |
| Construction on progress | |
| 19,869,222 | | |
| 7,418,105 | |
| Property and Equipment, Net | |
$ | 26,307,212 | | |
$ | 10,877,848 | |
During the nine months ended June 30, 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 nine months ended June 30, 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 June
30, 2022 and 2021 was $71,285 and $35,965, respectively. Depreciation expense for the nine months ended June 30, 2022 and 2021 was $217,363
and $100,535, respectively.
Note 8 – Debt
| | |
Convertible Notes |
| | |
| |
| | |
| | | |
| | |
| | |
| |
| | |
Effective | |
| Maturity | |
| Annual
Interest | | |
| Balance
at | |
| Balance
at | |
| Conversion |
| | |
Date | |
| Date | |
| Rate | | |
| June
30, 2022 | |
| September
30, 2021 | |
| 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 | |
| (353,821 | ) | |
| (672,606 | ) | |
| | |
| | | | |
| |
| | | |
| | | |
$ | 3,266,179 | | |
$ | 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 June 30, 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 June 30, 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 June 30, 2022 are as follows. The unamortized discount will be amortized through September 2022.
| Year ended | |
|
| June 30, | |
Amount |
| | 2023 | | |
$ | 3,620,000 | |
| | | | |
| 3,620,000 | |
| | Less:
unamortized discount | | |
| (353,821 | ) |
| | | | |
$ | 3,266,179 | |
| | |
Notes Payable |
| | |
| |
| |
| |
| |
| |
|
| | |
Effective | |
Maturity | |
Annual Interest | |
Balance at | |
Balance at | |
|
| | |
Date | |
Date | |
Rate | |
June
30, 2022 | |
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 | |
1/25/2023 | |
| 36 | % | |
| 1,713,707 | | |
| 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 | % | |
| 670,932 | | |
| 816,582 | | |
N/A |
| | p | | |
2/1/2021 | |
6/30/2022 | |
| 15 | % | |
| 270,590 | | |
| 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 | % | |
| 250,000 | | |
| 500,000 | | |
N/A |
| | u | | |
2/22/2022 | |
2/28/2023 | |
| 36 | % | |
| 547,806 | | |
| — | | |
Future revenues |
| | v | | |
2/22/2022 | |
2/28/2023 | |
| 36 | % | |
| 176,453 | | |
| — | | |
Future revenues |
| | w | | |
3/4/2022 | |
On
demand | |
| 15 | % | |
| 3,652,000 | | |
| — | | |
|
| | x | | |
3/10/2022 | |
5/10/2022 | |
| 20 | % | |
| 250,000 | | |
| — | | |
N/A |
| | y | | |
3/2/2022 | |
8/1/2023 | |
| 5 | % | |
| 166,667 | | |
| — | | |
N/A |
| | | | |
| |
| |
| | | |
| 28,868,191 | | |
| 25,495,446 | | |
|
| | | | |
| Less:
unamortized discounts |
| (2,886,822 | ) | |
| (6,002,045 | ) | |
|
| | | | |
| |
| |
| | | |
$ | 25,981,369 | | |
$ | 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. See Note 14.
(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.
(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. This note is currently due on demand and interest is paid monthly.
(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 its 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. The principal balance of this note plus accrued and unpaid interest was paid subsequent to June 30, 2022.
(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%. Fees in the amount of $48,765 have been recorded as a discount and are being amortized
to interest expense over the term of the arrangement. See Note 14.
(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%. Fees in the amount of $16,255 have been recorded as a discount and are being amortized
to interest expense over the term of the arrangement. See Note 14.
(w) Viridis working capital loans
During the nine months ended June 30, 2022, the Company
received several short-term working capital loans from Viridis, a related party, in the amount of $3,702,000. The terms of these short
term loans 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 | |
|
| June 30, | |
Amount |
| | 2023 | | |
$ | 27,563,901 | |
| | 2024 | | |
| 1,862,175 | |
| | 2025 | | |
| — | |
| | | | |
| 29,426,076 | |
| | Less:
unamortized discount | | |
| (2,886,822 | ) |
| | Less:
imputed interest | | |
| (557,885 | ) |
| | | | |
| 25,981,369 | |
| | Less:
current portion | | |
| (24,532,509 | ) |
| | | | |
$ | 1,448,860 | |
A summary of interest expense for the three
and nine months ended June 30, 2022 and 2021 is as follows.
| | |
| |
| |
| |
|
| | |
Three months ended
June 30, | |
Nine months ended
June 30, 2022 |
| | |
2022 | |
2021 | |
2022 | |
2021 |
| Amortization of debt discounts | |
$ | 1,440,535 | | |
$ | 316,320 | | |
$ | 4,932,259 | | |
$ | 564,622 | |
| Stated interest paid or accrued | |
| 1,508,210 | | |
| 301,933 | | |
| 4,073,665 | | |
| 1,217,726 | |
| Finance charges and other interest | |
| 22,021 | | |
| 11,012 | | |
| 25,016 | | |
| 23,671 | |
| | |
| 2,970,766 | | |
| 629,265 | | |
| 9,030,940 | | |
| 1,806,019 | |
| Less: interest capitalized to construction in progress | |
| (1,345,611 | ) | |
| — | | |
| (5,098,022 | ) | |
| — | |
| | |
$ | 1,625,155 | | |
$ | 629,265 | | |
$ | 3,932,918 | | |
$ | 1,806,019 | |
Note 9 - Concentrations
For the three and nine months ended June 30, 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. One of our license holder’s customers that the Company’s products are distributed to accounts for 33% of our cultivation
revenue for the nine months ended June 30, 2022. Should our products no longer be distributed to this customer of our license holder,
it would have a material adverse effect on our operations.
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 June 30, 2022 and 2021 on this lease was $20,782 and $20,617, respectively. Rent expense for the nine months
ended June 30, 2022 and 2021 on this lease was $64,939 and $61,454, 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 nine months ended June 30, 2022 on this lease was $22,129 and $36,406, respectively.
There was no rent expense on this lease during the three and nine months ended June 30, 2021. 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 nine months ended June 30, 2022 on this lease was $52,822 and $68,870, respectively. There was no rent expense on this
lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.
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 calls 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 lease may
be extended for two terms of 5 years each. The commencement of this lease is contingent upon the issuance and receipt of a license and
city approval. The agreement will terminate if the contingency is not met. At June 30, 2022, the contingency has not been met, however,
control over the use of the leased premises has been received by the Company. As such, the Company has recorded the right of use asset
and liability to the condensed consolidated balance sheet. Rent expense for the three and nine months ended June 30, 2022 on this lease
was $21,781 and $48,197, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021.
Interest was imputed using a discount rate of 18%.
The future lease payments are as follows.
| Year ended | |
|
| June 30, | |
Amount |
| | 2023 | | |
$ | 420,720 | |
| | 2024 | | |
| 359,998 | |
| | 2025 | | |
| 158,342 | |
| | 2026 | | |
| 163,093 | |
| | 2027 | | |
| 167,985 | |
| | Thereafter | | |
| 266,399 | |
| | | | |
| 1,536,537 | |
| | Less:
imputed interest | | |
| (523,462 | ) |
| | | | |
| 1,013,075 | |
| | Less:
current portion: | | |
| (256,471 | ) |
| | | | |
$ | 756,604 | |
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 June
30, 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 June 30, 2022
or the future lease payments schedule above.
As of June 30, 2022 and September 30, 2021, the Company
has accrued unpaid payroll taxes and estimated penalties and interest of approximately $1,350,000 and $2,400,000, respectively, and is
included in accrued payroll and payroll taxes in the accompanying condensed consolidated balance sheets. The Company is making monthly
payments of $94,278, beginning March 1, 2022, to pay this liability. Further, during the three months ended June 30, 2022, the Company
received approximately $294,000 of Employee Retention Credits ("ERCs") that were used to reduce the unpaid payroll taxes liability.
The ERCs were recorded to payroll and employee related expenses on the condensed consolidated statement of operations.
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 June 30, 2022 and 2021,
the Company purchased cultivation supplies from a related party in the amount of $0 and $13,868, respectively. During the nine months
ended June 30, 2022 and 2021, the Company purchased cultivation supplies from a related party in the amount of $31,708 and $39,397, respectively.
This related party is owned by the parent of a stockholder that holds more than 5% of the Company’s common stock.
Included in our accounts payable at June 30, 2022 and
September 30, 2021 is approximately $231,000, and $138,000, respectively in amounts due to related parties.
Note 12 - Stockholders' Equity
Unit Offering
Prior to the three months ended June 30, 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 $922,000 in fees related to this offering. These fees are included in Other assets on the condensed consolidated
balance sheet at June 30, 2022 and will be netted against the proceeds received in the offering.
Warrants
The following table summarizes the Company’s
warrant activity for the nine months ended June 30, 2022:
| | |
Common Shares Issuable Upon Exercise of | |
Weighted Average | |
Weighted Average Contractual | |
Aggregate |
| | |
Warrants | |
Exercise
Price | |
Term
in Years | |
Intrinsic
Value |
| Balance of warrants at September
30, 2021 | |
| 46,095,000 | | |
| 2.08 | | |
| 3.9 | | |
| 14,243,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Warrants
granted | |
| 1,974,687 | | |
| 2.68 | | |
| 2.8 | | |
| — | |
| Exercised | |
| — | | |
| — | | |
| — | | |
| — | |
| Forfeited/Cancelled | |
| — | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance of warrants at
June 30, 2022 | |
| 48,069,687 | | |
$ | 2.10 | | |
$ | 3.7 | | |
$ | 1,375,000 | |
| |
(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 June 30, 2022, for those awards that have an exercise price currently below the closing price as of June 30, 2022. Awards with an exercise price above the closing prices as of June 30, 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 nine months ended June 30, 2022, using the Black-Scholes option-pricing model, excluding
the 234,943 whole warrants issued as part of the Company’s unit offering.
| | |
Nine months ended
|
| | |
June 30, 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, the Company’s 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 June 30, 2022 ranges from vesting immediately to three years.
The following table summarizes the Company’s
stock option activity for the nine months ended June 30, 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 | |
| 1,161,582 | | |
| 1.55 | | |
| 6.7 | | |
| 15,800 | |
| Exercised | |
| (41,104 | ) | |
| 0.87 | | |
| 8.3 | | |
| 19,730 | |
| Forfeited/Cancelled | |
| (114,331 | ) | |
| 0.94 | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance of Options at
June 30, 2022 | |
| 6,223,462 | | |
$ | 1.29 | | |
| 7.9 | | |
$ | 67,175 | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable at June 30, 2022 | |
| 2,456,774 | | |
$ | 1.33 | | |
| 7.3 | | |
$ | 33,588 | |
| Unvested at June 30, 2022 | |
| 3,766,688 | | |
$ | 1.27 | | |
| | | |
| | |
| |
Number of Options | |
Weighted Average Grant
Date Fair Value |
| Unvested at June 30, 2022 |
| 3,766,688 | | |
$ | 1.21 | |
| Granted during the nine months ended June 30, 2022 |
| 1,161,582 | | |
$ | 1.37 | |
| Vested during the nine months ended June 30, 2022 |
| 358,004 | | |
$ | 1.49 | |
| Forfeited during the nine months ended June 30, 2022 |
| 114,331 | | |
$ | 1.91 | |
| |
(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 June 30, 2022, for those awards that have an exercise price currently below the closing price as of June 30, 2022. Awards with an exercise price above the closing prices as of June 30, 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 nine months ended June 30, 2022, using the Black-Scholes option-pricing model.
| | |
Nine months ended |
| | |
June 30, 2022 |
| Expected stock price volatility | |
| 126%
- 176% | |
| Risk-free interest rate | |
| .7%
- 2.6% | |
| Expected term (years) | |
| 2.8
- 6.5 | |
| Expected dividend yield | |
| 0% | |
| Black-scholes value | |
| $0.68
- $3.01 | |
During the three months ended June 30, 2022 and 2021,
the Company recognized compensation expense of $934,681 and $304,672, respectively. During the nine months ended June 30, 2022 and 2021,
the Company recognized compensation expense of $2,533,535 and $914,016, respectively. At June 30, 2022, there was $2,299,311 of total
unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average vesting period of 1 year.
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 nine months ended June 30, 2022 and 2021. The Company acquired the Franchising
segment at the closing of the acquisition of OCG, Inc. effective March 19, 2021.
| | |
Cultivation | |
Franchising | |
Corporate | |
Total |
| Nine months ended June 30, 2022 | |
| |
| |
|
| Revenues from external customers | |
$ | 17,360,844 | | |
$ | 280,529 | | |
$ | 114,146 | | |
$ | 17,755,519 | |
| Operating income (loss) | |
| 3,993,350 | | |
| (2,705,153 | ) | |
| (10,042,901 | ) | |
| (8,754,704 | ) |
| Interest expense | |
| 460,524 | | |
| 79,993 | | |
| 3,392,401 | | |
| 3,932,918 | |
| Depreciation and amortization | |
| 90,362 | | |
| 901,675 | | |
| 328,627 | | |
| 1,320,664 | |
| Additions to property, equipment and construction in progress | |
| 25,623 | | |
| — | | |
| 15,631,945 | | |
| 15,657,568 | |
| | |
| | | |
| | | |
| | | |
| | |
| Three months ended June 30, 2022 | |
| | | |
| | | |
| | | |
| | |
| Revenues from external customers | |
$ | 4,861,737 | | |
$ | 22,031 | | |
$ | 47,554 | | |
$ | 4,931,322 | |
| Operating income (loss) | |
| 983,533 | | |
| (1,001,768 | ) | |
| (3,829,572 | ) | |
| (3,847,807 | ) |
| Interest expense | |
| 303,462 | | |
| 36,777 | | |
| 1,284,916 | | |
| 1,625,155 | |
| Depreciation and amortization | |
| 27,830 | | |
| 300,150 | | |
| 111,072 | | |
| 439,052 | |
| | |
| | | |
| | | |
| | | |
| | |
| At June 30, 2022 | |
| | | |
| | | |
| | | |
| | |
| Property, equipment and construction in progress, net | |
$ | 421,757 | | |
$ | 20,899 | | |
$ | 25,864,556 | | |
$ | 26,307,212 | |
| Total assets (after intercompany eliminations) | |
| 5,102,841 | | |
| 68,217,019 | | |
| 47,207,983 | | |
| 120,527,843 | |
| | |
| | | |
| | | |
| | | |
| | |
| Three and nine months ended June 30, 2021 | |
| | | |
| | | |
| | | |
| | |
| Revenues from external customers | |
$ | 6,585,396 | | |
$ | 78,418 | | |
$ | 29,247 | | |
$ | 6,693,061 | |
| Operating income (loss) | |
| 2,315,224 | | |
| (484,351 | ) | |
| (2,078,147 | ) | |
| (247,274 | ) |
| Interest expense | |
| 123,286 | | |
| 112,419 | | |
| 393,560 | | |
| 629,265 | |
| Depreciation and amortization | |
| 16,530 | | |
| 5,633 | | |
| 89,996 | | |
| 112,159 | |
| | |
| | | |
| | | |
| | | |
| | |
| At June 30, 2021 | |
| | | |
| | | |
| | | |
| | |
| Property, equipment and construction in progress, net | |
$ | 1,526,319 | | |
$ | 34,990 | | |
$ | 7,852,680 | | |
$ | 9,413,989 | |
| Total assets (after intercompany eliminations) | |
| 12,313,816 | | |
| 118,976,427 | | |
| 18,633,128 | | |
| 149,923,371 | |
Note 14 - Subsequent
Events
Subsequent to June 30, 2022 the following events have
occurred.
The Company’s North Denver dispensary location
began operations on July 11, 2022, making it the Company’s first corporate-owned shop in Colorado under the Company’s cannabis
dispensary brand, Unity Rd.
The Company has sold 1,700 units under its offering
pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings for total proceeds of $1,904
subsequent to June 30, 2022.
The Company received short-term loans in the aggregate
amount of $1,370,000 from Viridis, a related party. The terms of these short-term loans are being determined as of the date of the filing.
On July 20, 2022, the Company entered into short-term
financing arrangement with Capybara Capital. The proceeds of $0.5 million were used for working capital purposes. Payments of $18,889
are due weekly until $0.68 million has been repaid. This results in an effective interest rate of 36%.
On July 22, 2022, the Company entered into a short-term
financing arrangement with Upwise Capital. The proceeds of $1.954 million were used to repay the second short-term financing arrangement
(see (l) in Note 8 above) and the Upwise Capital 2 financing arrangement (see (v) in Note 8 above). Payments of $55,552 are due weekly
until $2.598 million has been repaid. This results in an effective interest rate of 33%.
On July 22, 2022, the Company entered into a short-term
financing arrangement with Lendspark. The proceeds of $0.65 million were used to repay the previous Lendspark short-term financing (see
(u) in Note 8 above) in the amount of $0.591 million, and the remainder of the proceeds, approximately $0.05 million was used for working
capital purposes. Payments of $17,680 are due weekly until $0.884 million has been repaid. This results in an effective interest rate
of 36%.