x
| Nevada | 46-5268202 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.001 per share | KSHB | OTCQX | ||||||
Yes ☒ No ☐
| Large accelerated filer | ☐ | Accelerated filer | |||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
| Emerging growth company | |||||||||||||||||
☒
YES
No ☒
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.
The identification in this report of factors that may affect our future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:
Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance. A more detailed description of risk factors that may affect our operating results can be found in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 filed with the SEC on November 12, 2019, and our other filings with the Securities and Exchange Commission. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
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10, 2020. Significant estimates relied upon in preparing these condensed consolidated financial statements include revenue recognition, accounts receivable reserves, inventory and related reserves, expected future cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, stock-based compensation expenses, and recoverability of the Company’s net deferred tax assets and any related valuation allowance. As of August 31, 2020, the Company had $10,497 of inventory reserve. sheets. The fair value of Company's investment in XS Financial was $2,321 as of November 30, 2020. The fair value of Company's investment in XS Financial was $1,225 as of August 31, 2020. Revenue Recognition other retail channels, including convenience, pet care, and beauty channels. respectively, in connection with the issuance of shares of common stock and options to purchase common stock. Stock-based compensation expense is included in selling, general and administrative expense in the Company's condensed consolidated statements of operations. February 29,
2020 August 31,
2019 ASSETS Current assets: Cash $ 11,378 $ 3,944 Accounts receivable, net 16,860 25,972 Inventory 26,423 43,768 Prepaid expenses and other current assets 13,920 12,209 Total current assets 68,581 85,893 Goodwill 52,267 52,267 Intangible assets, net 2,630 3,103 Property and equipment, net 9,390 11,054 Other assets 10,665 6,917 Total Assets $ 143,533 $ 159,234 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,743 $ 10,907 Accrued expenses and other current liabilities 15,738 9,460 Line of credit — 12,261 Total current liabilities 20,481 32,628 Long-term liabilities: Notes payable 21,011 18,975 Warrant liability 849 5,444 Other non-current liabilities 5,766 833 Total long-term liabilities 27,626 25,252 Total liabilities 48,107 57,880 Commitments and contingencies (Note 12) Stockholders' equity Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding — — Common stock, $0.001 par value, 265,000 shares authorized, 119,118 and 90,041 shares issued and outstanding, respectively 119 90 Additional paid-in capital 215,182 164,258 Accumulated deficit (119,875 ) (62,994 ) Total stockholders' equity 95,426 101,354 Total liabilities and stockholders' equity $ 143,533 $ 159,234 November 30,
2020August 31,
2020ASSETS Current assets: Cash $ 5,663 $ 10,476 Accounts receivable, net 11,959 9,427 Inventory, net 34,717 28,049 Prepaid expenses and other current assets 14,449 9,054 Total current assets 66,788 57,006 Goodwill 52,267 52,267 Intangible assets, net 872 1,000 Property and equipment, net 8,224 8,801 Other assets 9,465 8,582 Total Assets $ 137,616 $ 127,656 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,497 $ 4,282 Customer deposits 5,319 3,188 Accrued expenses and other current liabilities 6,723 8,195 Current portion of notes payable 18,304 20,692 Line of credit 4,320 0 Total current liabilities 43,163 36,357 Long-term liabilities: Note payable 763 0 Warrant liability 548 365 Other non-current liabilities 3,765 4,205 Total long-term liabilities 5,076 4,570 Total liabilities 48,239 40,927 Commitments and contingencies (Note 11) 0 0Stockholders' equity Preferred stock, $0.001 par value, 10,000 shares authorized, 0 shares issued and outstanding 0 0 Common stock, $0.001 par value, 265,000 shares authorized, 131,962 and 125,708 shares issued and outstanding as of November 30, 2020 and August 31, 2020, respectively 132 126 Additional paid-in capital 234,345 227,253 Accumulated deficit (145,100) (140,650) Total stockholders' equity 89,377 86,729 Total liabilities and stockholders' equity $ 137,616 $ 127,656 For the Three Months Ended For the Six Months Ended February 29,
2020 February 28,
2019 February 29,
2020 February 28,
2019 Net revenue $ 30,143 $ 35,176 $ 65,105 $ 60,496 Cost of goods sold 39,051 30,654 66,742 52,745 Gross profit (loss) (8,908 ) 4,522 (1,637 ) 7,751 Operating expenses: Selling, general and administrative 27,183 18,766 48,258 31,312 Gain on disposition of assets — — — (1,254 ) Change in fair value of contingent consideration — (5,602 ) — (5,208 ) Restructuring costs 7,301 — 7,301 — Total operating expenses 34,484 13,164 55,559 24,850 Loss from operations (43,392 ) (8,642 ) (57,196 ) (17,099 ) Other income (expense): Change in fair value of warrant liability 1,391 1,271 4,595 1,055 Change in fair value of equity investment (696 ) (1,128 ) (1,091 ) (592 ) Interest expense (1,619 ) (491 ) (3,107 ) (978 ) Other income (expense), net (59 ) 75 (82 ) 120 Total other income (expense) (983 ) (273 ) 315 (395 ) Loss before income taxes (44,375 ) (8,915 ) (56,881 ) (17,494 ) Income tax expense — — — — Net loss $ (44,375 ) $ (8,915 ) $ (56,881 ) $ (17,494 ) Net loss per share: Basic net loss per common share $ (0.40 ) $ (0.10 ) $ (0.54 ) $ (0.21 ) Diluted net loss per common share $ (0.40 ) $ (0.12 ) $ (0.54 ) $ (0.22 ) Basic weighted average number of common shares outstanding 110,008 86,772 105,823 84,305 Diluted weighted average number of common shares outstanding 110,008 87,066 105,823 84,557 For the Three Months Ended November 30,
2020November 30,
2019Net revenue $ 26,761 $ 34,963 Cost of goods sold 21,022 27,692 Gross profit 5,739 7,271 Operating expenses: Selling, general and administrative 8,812 21,075 Restructuring costs 8 0 Total operating expenses 8,820 21,075 Loss from operations (3,081) (13,804) Other income (expense): Change in fair value of warrant liability (183) 3,204 Change in fair value of equity investment 1,251 (395) Interest expense (1,546) (1,488) Loss on extinguishment of debt (877) 0 Other income (expense), net (14) (23) Total other income (expense) (1,369) 1,298 Loss before income taxes (4,450) (12,506) Income tax expense 0 0 Net loss $ (4,450) $ (12,506) Net loss per share: Basic net loss per common share $ (0.03) $ (0.12) Diluted net loss per common share $ (0.03) $ (0.12) Basic weighted average number of common shares outstanding 127,201 101,638 Diluted weighted average number of common shares outstanding 127,201 101,638 5 Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Issued Amount Capital Deficit Equity Balances at August 31, 2019 90,041 $ 90 $ 164,258 $ (62,994 ) $ 101,354 Stock-based compensation 99 — 3,189 — 3,189 Stock sold to investors, net of offering costs 17,198 17 27,362 — 27,379 Stock issued for acquisitions 23 — — — — Net loss — — — (12,506 ) (12,506 ) Balances at November 30, 2019 107,361 $ 107 $ 194,809 $ (75,500 ) $ 119,416 Stock-based compensation 89 — 3,141 — 3,141 Issuance of restricted stocks 15 — — — — Stock sold to investors 10,000 10 14,706 — 14,716 Stock issued for equity investment 1,653 2 2,526 — 2,528 Net loss — — — (44,375 ) (44,375 ) Balances at February 29, 2020 119,118 $ 119 $ 215,182 $ (119,875 ) $ 95,426 Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Issued Amount Capital Deficit Equity Balances at August 31, 2018 78,273 $ 78 $ 104,918 $ (23,358 ) $ 81,638 Stock option exercises 281 1 41 — 42 Stock-based compensation 5 — 2,297 — 2,297 Net loss — — — (8,579 ) (8,579 ) Balances at November 30, 2018 78,559 $ 79 $ 107,256 $ (31,937 ) $ 75,398 Stock option exercises 89 — — — - Stock-based compensation 125 — 3,178 — 3,178 Stock sold to investors, net of offering costs 9,077 9 41,584 — 41,593 Stock issued for acquisition of Hybrid 162 — 140 — 140 Net loss — — — (8,915 ) (8,915 ) Balances at February 28, 2019 88,012 $ 88 $ 152,158 $ (40,852 ) $ 111,394 Common Stock Shares Issued Amount Balances at August 31, 2020 125,708 $ 126 $ 227,253 $ (140,650) $ 86,729 Stock-based compensation 1,566 1 3,404 — 3,405 Stock issued for conversion of debt 4,688 5 3,688 — 3,693 Net loss — — — (4,450) (4,450) Balances at November 30, 2020 131,962 $ 132 $ 234,345 $ (145,100) $ 89,377 Common Stock Shares Issued Amount Balances at August 31, 2019 90,041 $ 90 $ 164,258 $ (62,994) $ 101,354 Stock-based compensation 99 — 3,189 — 3,189 Stock sold to investors 17,198 17 27,362 — 27,379 Stock issued for acquisitions 23 — — — — Net loss — — — (12,506) (12,506) Balances at November 30, 2019 107,361 $ 107 $ 194,809 $ (75,500) $ 119,416 For the Six Months Ended February 29,
2020 February 28,
2019 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (56,881 ) $ (17,494 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,032 1,078 Amortization of debt discount 2,503 — Provision for bad debt 9,462 1,115 Provision for sales returns 116 — Inventory obsolescence 1,157 — Provision for inventory reserve 12,483 1,504 Loss (gain) on disposal of assets 21 (1,254 ) Impairment of assets 6,901 — Change in fair value of equity investment 1,091 592 Stock compensation expense 8,089 6,534 Change in fair value of warrant liability (4,595 ) (1,055 ) Change in fair value of contingent consideration — (5,208 ) Changes in operating assets and liabilities: Accounts receivable 2,029 (3,830 ) Inventory 4,863 (25,604 ) Prepaid expenses and other current assets (5,222 ) (2,287 ) Other non-current assets 17 — Accounts payable (6,438 ) 8,042 Accrued expenses and other current liabilities 3,611 3,113 Net cash used in operating activities (18,761 ) (34,754 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, equipment, and intangibles (3,550 ) (2,868 ) Security deposits — (68 ) Net cash used in investing activities (3,550 ) (2,936 ) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of capital leases (62 ) (47 ) Proceeds from stock option exercises — 41 Proceeds from issuance of common stock 42,095 41,593 Proceeds from line of credit 49,331 54,325 Repayments on line of credit (61,619 ) (53,747 ) Net cash provided by financing activities 29,745 42,165 NET INCREASE (DECREASE) IN CASH 7,434 4,475 CASH AT BEGINNING OF YEAR 3,944 13,467 CASH AT END OF YEAR $ 11,378 $ 17,942 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID FOR: Interest $ 488 $ 827 NON-CASH INVESTING AND FINANCING ACTIVITIES Capital leases $ — $ 240 Services prepaid for in common stock $ 296 $ 697 Accrued and unpaid amounts for purchase of property & equipment $ 276 $ 232 Stock issuance for acquisition of Hybrid $ — $ 140 Shares issued in exchange for equity investment in Xtraction Services $ 2,528 $ — Equity Investment $ — $ 1,791 For the Three Months Ended November 30,
2020November 30,
2019CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (4,450) $ (12,506) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 845 962 Amortization of debt discount 1,492 1,181 Bad debt (recovery)/provision (60) 362 Bad debt recovery on note receivable (513) 0 Sales return (recovery)/provision (150) 45 Inventory reserve (recovery)/provision (1,336) 604 Loss (gain) on disposal of assets 0 21 Change in fair value of equity investment (1,251) 395 Stock compensation expense 2,360 4,662 Change in fair value of warrant liability 183 (3,204) Loss on extinguishment of debt 877 0 Right-of-use assets amortization 175 603 Changes in operating assets and liabilities: Accounts receivable (2,322) (1,223) Inventory (5,332) 3,120 Prepaid expenses and other current assets (4,882) (5,858) Other non-current assets (10) (164) Accounts payable 4,204 (922) Customer deposits 2,131 2,352 Accrued expenses and other current liabilities (677) 1,954 Other non-current liabilities (388) (482) Net cash used in operating activities (9,104) (8,098) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, equipment, and intangibles (129) (1,940) Net cash used in investing activities (129) (1,940) CASH FLOWS FROM FINANCING ACTIVITIES Financing cost paid in connection with extinguishment of debt (98) 0 Repayment of capital leases 0 (27) Proceeds from issuance of common stock 0 27,379 Proceeds from line of credit 30,962 25,112 Repayments on line of credit (26,444) (31,651) Net cash provided by financing activities 4,420 20,813 NET INCREASE (DECREASE) IN CASH (4,813) 10,775 CASH AT BEGINNING OF PERIOD 10,476 3,944 CASH AT END OF PERIOD $ 5,663 $ 14,719 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID FOR: Interest $ 35 $ 351 NON-CASH INVESTING AND FINANCING ACTIVITIES Services prepaid for in common stock $ 0 $ 171 Accrued and unpaid amounts for purchase of property & equipment $ 11 $ 103 Stock issued for amendment of debt agreement $ 3,693 $ 0 7 NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIESNature of BusinessKushCo Holdings, Inc. (formerly known as Kush Bottles, Inc.) markets and sells a wide variety of ancillary products and services to customers operating in the regulated medical and recreational cannabis and cannabidiol (“CBD”) industries. These complementary products and services include compliant and custom packaging products; vape hardware; hydrocarbons and solvents; natural products; stainless steel tanks; custom branded anti-counterfeit and authentication labels; hemp trading services; and retail services focused on CBD mass distribution, industry education and compliance.As a leader in custom and child-resistant packaging, exclusive vape products, and unique product and service offerings, such as our stainless steel tanks, custom branded anti-counterfeit and authentication labels, and hemp trading and retail services, we combine creativity with compliance to provide the right solutions for our customers. The ability to source and deliver almost anything a customer needs makes us a one-stop-shop solutions provider.Our products primarily consist of bottles, jars, bags, tubes, containers, vape cartridges, vape batteries and accessories, labels and processing supplies, hydrocarbons, solvents, natural products, stainless steel tanks, and custom branded anti-counterfeit and authentication labels. We maintain relationships with a broad range of manufacturers, which enables us to source a plethora of products in a cost-effective manner and to pass such cost savings to our customers. This allows us to offer quick solutions to our customers and ensure that their products will be of superior grade and made with environmentally safe materials. In addition to a complete product line, we have sophisticated labeling and customization capabilities, which allow us to add significant value to our customers’ packaging design processes. Our products are utilized by local urban farmers, green house growers, processors, brand owners, and medical and recreational cannabis dispensaries.Our services consist of hemp trading, which connects buyers and sellers of hemp commodities, as well as CBD mass distribution services through our internal resources and our partnerships with leading consumer packaged goods (“CPG”) sales agencies. Our retail services division focuses on building distribution networks of compliant hemp-derived CBD brands across conventional and other retail channels, including industry education and compliance initiatives. Our services also include custom branding on packaging products, which allows our customers to turn their packaging into an effective marketing tool.the CompanyKushCo Holdings, Inc. (the “Company”) and its wholly-owned subsidiaries and have been prepared in accordance with GAAPU.S. generally accepted accounting principles (“GAAP”) for interim financial information pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all of the information and notes required by generally accepted accounting principlesGAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included in the condensed consolidated financial statements for the interim periods presented herein, but are not necessarily indicative of operating results to be achieved for full fiscal years or other interim periods. The condensed consolidated balance sheet as of August 31, 20192020 was derived from the audited financial statements as of that date but does not include all disclosures as required by GAAP. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended August 31, 20192020 and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year then ended and filed with the SEC on November 12, 2019.The Company is subject to a number of risks similar to those of other companies of similar size and with a focus on serving the cannabis and CBD industries, including, the development of certain products, competition, a limited number of suppliers, integration of acquisitions, substantial indebtedness, disruptions in the U.S. and global economy and financial markets, including as a result of COVID-19, government regulations, protection of proprietary rights, and dependence on key individuals. If the Company does not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, the Company could lose revenue opportunities.their current financial condition. The Company’s net accounts receivable balance was $11,959 and $9,427 as of November 30, 2020 and August 31, 2020, respectively. The Company’s allowance for doubtful accounts was $8,342$2,336 and $1,058$2,439 as of February 29,November 30, 2020 and August 31, 2019,2020, respectively. The increase in allowance for doubtful accounts was driven primarily byCompany wrote-off $43 of customers' balances during the deteriorating credit conditions in California exhibited by the Company’s customers in this market, which have significantly impacted the Company’s ability to collect, in part or in full, amounts owed by these customers.three month period ended November 30, 2020. The Company’s sales return reserve was $593 $182$477$332 as of February 29,November 30, 2020 and August 31, 2019,2020, respectively, and is included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheet.$26,423$43,878 and $43,768$38,546 as of February 29,November 30, 2020 and August 31, 2019,2020, respectively. The Company also makes prepayments against the future delivery of inventory classified as prepaid inventory. The Company’s prepaid inventory was $7,473$8,304 and $7,134$3,373 as of February 29,November 30, 2020 and August 31, 2019, respectively.2020, respectively and is included in prepaid expenses and other current assets on the accompanying balance sheets. The Company regularly reviews inventory and, when appropriate, records a provision for obsolete and excess inventory. The provision is based on actual loss experience and a forecast of product demand compared to its remaining shelf life. As of February 29,November 30, 2020, the Company had $14,442$9,161 of inventory reserve. in Xtraction Services (“Xtraction Services”), a provider of equipment leasing solutions to owners and operators of cannabis and hemp companies in the United States in order to provide such solutions to the Company’s network of compliantregulated cannabis and CBDhemp-derived cannabidiol ("CBD") operators. The Company’s Chief Financial Officer, Stephen Christoffersen, has served on the board of directors for XS Financial since May 2019. Under the terms of its agreement with Xtraction Services, the Company received 19.9% of the outstanding equity interests of Xtraction Services, on an as-converted basis, in the form of Proportionate Voting Shares (the “XS Shares”). UponXS Financial, upon the closing of the transaction, the Company issued 1,653 of its common shares in exchange for 10,600 XSproportionate voting shares of Xtraction Services,XS Financial (the “XS Shares”), the equivalent of 19.9% of Xtraction ServicesXS Financials' market capitalization on the closing date. On January 30, 2020, the value of the Company's shares issued in exchange for the equity investment in Xtraction ServicesXS Financial was $2,528. The Company’s investment in Xtraction ServicesXS Financial is included in “Other assets” on the Company’s condensed consolidated balance sheet.earningsloss by the sum of (a) the weighted average number of shares of common stock outstanding during the period and (b) the potentially dilutive securities outstanding during the period. Stock options and warrants are potentially dilutive securities; and the number of dilutive options is computed using the treasury stock method.and six months ended February 29,November 30, 2020 and 2019, basic and diluted weighted average shares are the same, as the Company generated a net loss for the period. The computation for the three and six months ended February 29,November 30, 2020 does not include 14,55310,782 options and 21,737 warrants, as their inclusion would have an anti-dilutive effect on net loss per share.For the three and six months ended February 28, 2019,net loss is adjusted for changes in fair value of warrants recorded as a liability (see Note 9 below) and weighted average diluted shares includes dilutive warrants.The computation of diluted net loss per share for the three and six months ended February 28,November 30, 2019 does not include 12,00314,407 options and 6,98816,737 warrants, as their inclusion would have an anti-dilutive effect on net loss per share.compliantbottles, jars, bags, tubes, containers, vape cartridges, vape batteries and custom packaging products; vape hardware; hydrocarbonsaccessories, labels and solvents;processing supplies, solvents, natural products; products,tanks;tanks, custom branded anti-counterfeit and authentication labels; hemp trading services;labels, and retail services focused on building distribution networks of compliant hemp-derived CBD mass distribution, industry educationbrands across conventional and compliance.●Identify the contract with a customer.●Identify the performance obligations in the contract.●Determine the transaction price.●Allocate the transaction price to the performance obligations in the contract.●Recognize revenue when the Company satisfies a performance obligation.$96$3 and $285$81 for the three months ended February 29,November 30, 2020 and February 28,November 30, 2019, respectively. Advertising costs were $178$778$4,662 for the sixthree months ended February 29,November 30, 2020 and February 28,November 30, 2019, respectively.2018,2020, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)2018-13,ChangesASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number of models used to Disclosure Requirementsaccount for Fair Value Measurements, which will improveconvertible instruments, amends diluted EPS calculations for convertible instruments, and amends the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements.a contract (or embedded derivative) that is potentially settled in an entity's own shares to be classified in equity. The ASU removes, modifies, and addsamendments add certain disclosure requirements to increase transparency and decision-usefulness about a convertible instrument's terms and features. Under the amendment, the Company must use the if-converted method for including convertible instruments in diluted EPS as opposed to the treasury stock method. ASU 2020-06 is effective for fiscal years, and interimannual reporting periods within those fiscal years, beginning after December 15, 2019.2021 (the Company's Fiscal 2023). Early adoption is allowed under the standard with either a modified retrospective or full retrospective method. The Company is currently evaluating this guidance to determine the potential impact of adoption of this standardit may have on its consolidated financial statements.itsthe impact it may have on its consolidated financial statements.2020-01,2020-1, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-012016-1 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.The Company is evaluating the potential impact of adoption of this standard on its consolidated financial statements.
Customer Concentrations
| February 29, | August 31, | |||||||
| 2020 | 2019 | |||||||
| Machinery and equipment | $ | 5,352 | $ | 4,430 | ||||
| Vehicles | 540 | 603 | ||||||
| Office Equipment | 3,253 | 3,232 | ||||||
| Leasehold improvements | 1,589 | 3,296 | ||||||
| Construction in progress | 1,054 | 1,930 | ||||||
| 11,784 | 13,491 | |||||||
| Accumulated Depreciation | (2,394 | ) | (2,437 | ) | ||||
| $ | 9,390 | $ | 11,054 | |||||
| November 30, 2020 | August 31, 2020 | ||||||||||
| Machinery and equipment | $ | 9,567 | $ | 9,540 | |||||||
| Vehicles | 410 | 410 | |||||||||
| Office Equipment | 376 | 376 | |||||||||
| Leasehold improvements | 1,590 | 1,591 | |||||||||
| Construction in progress | 774 | 660 | |||||||||
| 12,717 | 12,577 | ||||||||||
| Accumulated Depreciation | (4,493) | (3,776) | |||||||||
| $ | 8,224 | $ | 8,801 | ||||||||
| As of February 29, 2020 | As of August 31, 2019 | |||||||||||||||||||||||||||
| Weighted | ||||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||||
| Estimated | Gross | Gross | ||||||||||||||||||||||||||
| Useful | Carrying | Accumulated | Net | Carrying | Accumulated | Net | ||||||||||||||||||||||
| Description | Life | Value | Amortization | Amount | Value | Amortization | Amount | |||||||||||||||||||||
| Trade name | 6 years | 2,600 | (1,228 | ) | 1,372 | 2,600 | (1,011 | ) | 1,589 | |||||||||||||||||||
| Non-compete agreement | 4 years | 2,370 | (1,112 | ) | 1,258 | 2,370 | (856 | ) | 1,514 | |||||||||||||||||||
| $ | 4,970 | $ | (2,340 | ) | $ | 2,630 | $ | 4,970 | $ | (1,867 | ) | $ | 3,103 | |||||||||||||||
| As of November 30, 2020 | As of August 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Description | Weighted Average Estimated Useful Life | Gross Carrying Value | Accumulated Amortization | Net Amount | Gross Carrying Value | Accumulated Amortization | Net Amount | |||||||||||||||||||||||||||||||||||||
| Trade name | 6 years | 1,400 | (1,400) | 0 | 1,400 | (1,400) | 0 | |||||||||||||||||||||||||||||||||||||
| Non-compete agreement | 4 years | 2,370 | (1,498) | 872 | 2,370 | (1,370) | 1,000 | |||||||||||||||||||||||||||||||||||||
| $ | 3,770 | $ | (2,898) | $ | 872 | $ | 3,770 | $ | (2,770) | $ | 1,000 | |||||||||||||||||||||||||||||||||
The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of February 29,November 30, 2020:
| For the year ended August 31, | ||||
| 2020 (remaining six months) | $ | 474 | ||
| 2021 | 881 | |||
| 2022 | 747 | |||
| 2023 | 528 | |||
| $ | 2,630 | |||
| For the year ended August 31, | ||||||||
| 2021 (remaining nine months) | $ | 319 | ||||||
| 2022 | 314 | |||||||
| 2023 | 239 | |||||||
| $ | 872 | |||||||
| February 29, | August 31, | |||||||
| 2020 | 2019 | |||||||
| Customer deposits | $ | 3,812 | $ | 2,992 | ||||
| Accrued compensation | 3,742 | 3,485 | ||||||
| Sales tax payable | 757 | 1,047 | ||||||
| Lease liability | 1,952 | — | ||||||
| Other accrued expenses | 5,475 | 1,936 | ||||||
| $ | 15,738 | $ | 9,460 | |||||
| November 30, 2020 | August 31, 2020 | ||||||||||
| Accrued compensation | $ | 1,978 | $ | 2,798 | |||||||
| Sales tax payable | 750 | 727 | |||||||||
| Operating lease liability | 1,635 | 1,583 | |||||||||
| Other accrued expenses | 2,360 | 3,087 | |||||||||
| $ | 6,723 | $ | 8,195 | ||||||||
The Company adopted ASC 842“Leases” (“ASC 842”) effective September 1, 2019 utilizing the modified retrospective approach for adoption for all leases that existed at or are commenced after the date of initial application with an option to use certain practical expedients. The package of practical expedients allowed the Company to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also used (i) hindsight when evaluating contractual lease options, (ii) the practical expedient that allows lessees to treat lease and non-lease components of leases as a single lease component, (iii) the portfolio approach which allows similar leased assets to be grouped and accounted for together, and (iv) the short-term lease for leases with a term of 12 months or less.
The adoption of ASC 842 had a material impact on the condensed consolidated balance sheet due to the recognition of Right of Use (“ROU”) assets and lease liabilities. The adoption of this ASC did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows. The Company did not recognize a material cumulative effect adjustment to the opening balance sheet retained earnings on September 1, 2019. Because the modified retrospective approach was elected, the ASU was not applied to periods prior to adoption and did not have an impact on previously reported results. At adoption, the Company recognized operating lease ROU assets and lease liabilities that reflect the present value of the future payments. As the rate implicit in the lease could not be determined for any of the Company’s leases, an estimated incremental borrowing rate of 10.7%, which reflects the interest rate the Company would pay to borrow funds over a similar term and in a similar economic environment, was used to determine the present value of lease payments. Based on the impact of ASC 842 on the lease population, the Company recorded $7.6 million in lease liabilities and $6.8 million for ROU assets based upon the lease liabilities adjusted for deferred rent. ROU assets are included in “Other assets” and lease liabilities are included in “Accrued expenses and other current liabilities” and “Other non-current liabilities” on the Company’s condensed consolidated balance sheet.
The Company determines if an arrangement is a lease at inception.
Lease Liabilities
Lease liabilities as
| Current portion of lease liabilities | $ | 1,952 | ||
| Long term lease liabilities, net of current portion | 5,766 | |||
| Total lease liabilities | $ | 7,718 |
| November 30, 2020 | August 31, 2020 | ||||||||||
| Operating leases - ROU assets (included in Other assets) | $ | 2,952 | $ | 3,127 | |||||||
| Current portion of lease liabilities | $ | 1,635 | $ | 1,583 | |||||||
| Long term lease liabilities, net of current portion | 3,716 | 4,157 | |||||||||
| Total lease liabilities | $ | 5,351 | $ | 5,740 | |||||||
| Year ended August 31, | ||||
| 2020 (remaining six months) | $ | 1,245 | ||
| 2021 | 2,383 | |||
| 2022 | 2,306 | |||
| 2023 | 1,676 | |||
| 2024 | 787 | |||
| Thereafter | 579 | |||
| Total minimum lease payments | 8,976 | |||
| Less imputed interest | (1,258 | ) | ||
| Total lease liabilities | $ | 7,718 | ||
| Year ended August 31, | ||||||||
| 2021 (remaining nine months) | $ | 1,631 | ||||||
| 2022 | 2,137 | |||||||
| 2023 | 1,544 | |||||||
| 2024 | 951 | |||||||
| 2025 | 619 | |||||||
| Thereafter | 39 | |||||||
| Total minimum lease payments | 6,921 | |||||||
| Less imputed interest | (1,570) | |||||||
| Total lease liabilities | $ | 5,351 | ||||||
three months ended November 30, 2020. Cash paid for amounts included in the measurement of lease liabilities was $388 for the three months ended November 30, 2020.
The borrowing base is subject to eligible inventory and accounts receivable. The available borrowing capacity as of November 30, 2020 was $10,915.
facility.
On
Senior Note with HB Sub Fund
Long-term Debt
The fair value of the warrants was determined using a Black-Scholes model as of August 21, 2019 and was equal to $792. Similar to the terms of the Original Note, the NewFirst Amended Senior Note matureswas set to mature on October 30, 2020, at which time the Company mustwould have had to pay the Investor an amount in cash representing 120% of all outstanding principal, less original issue discount, plus any accrued and unpaid interest and accrued and unpaid late charges. Similar to the terms of the Original Note, the NewFirst Amended Senior Note willdid not bear interest except upon the occurrence of an event of default.
November 30, 2019. Level 1 – Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. Six Months Ended These lawsuits are described below. dismiss with leave to amend. On November 2, 2020, after the lead plaintiffs failed to file an amended complaint, the Court entered judgment in favor of the defendants, dismissing the action with prejudice. On December 2, 2020, the lead plaintiffs filed a notice of appeal of the judgment to the U.S. Court of Appeals for the Ninth Circuit. parties, which expired in December 2020. future. the extinguishment of debt. These decreases were partially offset by a $1.7 million increase in unrealized equity investment gains. common stock during the three months ended November 30, 2019 was $27.4 million. Off-Balance Sheet Transactions These lawsuits are described below. dismiss with leave to amend. On November 2, 2020, after the lead plaintiffs failed to file an amended complaint, the Court entered judgment in favor of the defendants, dismissing the action with prejudice. On December 2, 2020, the lead plaintiffs filed a notice of appeal of the judgment to the U.S. Court of Appeals for the Ninth Circuit. parties, which expired in December 2020. Chairman and Chief Executive Officer Chief Financial Officer warrants2018 Warrants have a term of five years from the date of issuance. Pursuant to ASC Topic 815, the initial fair value of the warrants2018 Warrants of $15,350 was recorded as a warrant liability on the issuance date. The estimated fair values of the warrants were2018 Warrants was computed at issuance using a Black-Scholes option pricing model.warrant liabilities associated with the 2018 Warrants was $849$548 and $5,444$365 as of February 29,November 30, 2020 and August 31, 2019,2020, respectively.warrantCompany's liability associated with the 2018 Warrants are included as a component of “Other expense” in the accompanying condensed consolidated statements of operations for the respective period. The changes to the liability associated with the 2018 Warrants resulted in an increase of $183 in liability and a corresponding loss for warrantsthe three months ended November 30, 2020. The changes to the liability associated with the 2018 Warrants resulted in a decrease of $1,390 and $4,595$3,204 in warrant liability and a corresponding gain for the three and six months ended February 29, 2020, respectively. The changes to the liability for warrants resulted in a decrease of $1,271 and $1,055 in warrant liability and a corresponding gain for the three and six months ended February 28, 2019, respectively.warrants2018 Warrants was computed as of February 29,November 30, 2020 using the Black Scholes model with the following assumptions: stock price of $1.07,$0.85, volatility of 83.1%94.9%, risk-free rate of 0.86%0.18%, annual dividend yield of 0% and expected life of 3.32.5 years. capital lease obligations approximate their fair values based on their short-term nature. The carrying amount of the Company’s long-term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities.the RUBRowl-Uh-Bowl (the “RUB”) web domain and inventory related to this product line and in exchange, received 1,410 shares of Smoke Cartel common stock. The fair value of the Company’s investment as of August 31, 20192020 and February 29,November 30, 2020 was based upon the closing stock price of Smoke Cartel.Cartel's common stock on each respective date. The investment was classified as a Level 2 financial instrument.Xtraction ServicesXS Financial at fair value. The fair value of the Company’s investment at February 29,November 30, 2020 was based upon the closing stock price of Xtraction Services.XS Financial common stock on each respective date. The investment was classified as a Level 12 financial instrument.warrants to purchase shares of its common stock,the 2018 Warrants, which are accounted for as a warrant liability (see Note 9 above.) The estimated fair value of the liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.The estimated fair value Fair Value at February 29, 2020 Total Level 1 Level 2 Level 3 Assets: Equity investment $ 2,028 $ 1,923 $ 105 $ — Liabilities: Warrant liability $ 849 $ — $ — $ 849 Fair Value at August 31, 2019 Total Level 1 Level 2 Level 3 Assets: Equity investment $ 592 $ — $ 592 $ — Liabilities: Warrant liability $ 5,444 $ — $ — $ 5,444 Fair Value at November 30, 2020 Total Level 1 Level 2 Level 3 Assets: Equity investment $ 3,408 $ 0 $ 3,408 $ 0 Liabilities: Warrant liability $ 548 $ 0 $ 0 $ 548 Fair Value at August 31, 2020 Total Level 1 Level 2 Level 3 Assets: Equity investment $ 2,157 $ 0 $ 2,157 $ 0 Liabilities: Warrant liability $ 365 $ 0 $ 0 $ 365 activity forestimated fair value of the Company’s warrant liability forwith respect to the June 2018 registered offeringWarrants measured at fair value using Level 3 inputs: Warrant
Liability As of August 31, 2019 $ 5,444 Adjustments to estimated fair value (3,204 ) As of November 30, 2019 $ 2,240 Adjustments to estimated fair value (1,391 ) As of February 29, 2020 $ 849 Warrant
Liability As of August 31, 2018 $ 14,430 Adjustments to estimated fair value 216 As of November 30, 2018 $ 14,646 Adjustments to estimated fair value (1,271 ) As of February 28, 2019 $ 13,375 The following table reflects the activity for the Company’s contingent acquisition liabilities measured at fair value using Level 3 inputs: Contingent
Consideration
Payable As of August 31, 2018 $ 5,488 Change in fair value 394 As of November 30, 2018 $ 5,882 Change in fair value (5,602 ) Cash payments (140 ) Settled in shares- Hybrid (140 ) As of February 28, 2019 $ - As of August 31, 2020 $ 365 Adjustments to estimated fair value 183 As of November 30, 2020 $ 548 NOTE 11 – STOCKHOLDERS’ EQUITYPreferred StockThe Company’s authorized preferred stock is 10,000 shares with a par value of $0.001. As of February 29, 2020, and August 31, 2019, there were no shares of preferred stock issued or outstanding.Common StockThe Company’s authorized common stock is 265,000 shares with a par value of $0.001. As of February 29, 2020, and August 31, 2019, there were 119,118 and 90,041 shares issued and outstanding, respectively.On September 26, 2019, the Company entered into purchase agreements with certain accredited investors pursuant to which the Company issued and sold an aggregate of 17,198 units (“Units”), with each unit consisting of one share of its common stock and a warrant to purchase half a share of common stock in a registered direct offering (the “September 2019 Offering”). The purchase price for a unit was $1.75. The closing of the September 2019 Offering occurred on September 30, 2019 and resulted in aggregate gross proceeds of approximately $30.1 million. The aggregate net proceeds from the September 2019 Offering, after deducting the placement agent fees and other offering expenses, was approximately $27.4 million. Subject to certain ownership limitations, the warrants were immediately exercisable at an exercise price equal to $2.25 per share of Common Stock. The warrants are exercisable for five years from the date of issuance.On February 6, 2020, the Company entered into purchase agreements with certain accredited investors pursuant to which the Company issued and sold an aggregate of 10,000 units, with each unit consisting of one share of its common stock and a warrant to purchase half a share of common stock in a registered direct offering (the “February 2020 Offering”). The purchase price for a unit was $1.60. The closing of the February 2020 Offering occurred on February 10, 2020 and resulted in aggregate gross proceeds of approximately $16.0 million. The aggregate net proceeds from the February 2020 Offering, after deducting the placement agent fees and other offering expenses, was approximately $14.6 million. Subject to certain ownership limitations, the warrants were immediately exercisable at an exercise price equal to $2.00 per share of Common Stock. The warrants are exercisable for five years from the date of issuance.Share-based CompensationThe Company recorded total stock-based compensation expense of $3,427 and $4,725 for the three months ended February 29, 2020 and February 28, 2019, respectively, and $8,089 and $6,534 for the six months ended February 29, 2020 and February 28, 2019, respectively, in connection with the issuance of shares of common stock and options to purchase common stock. Stock-based compensation expense is included in selling, general and administrative expense in the Condensed Consolidated Statements of Operations.On September 1, 2019, the Company adopted Accounting Standards Update 2018-07 which addresses several aspects of the accounting for nonemployee share-based payment transactions and expands the scope of ASC 718,Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the simplified standard, nonemployee options will be valued once at the date of grant. At adoption, all awards without established measurement dates were revalued one final time and did not have a material impact on the condensed consolidated financial statements.Stock Incentive PlanThe Company’s 2016 Stock Incentive Plan (the “Plan”) was adopted on February 9, 2016. The Plan authorizes the issuance of up to 18,000 shares of common stock in the form of stock-based awards to the Company’s employees and directors. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant and have 10-year contractual terms. The option awards generally vest over three years subject to the recipient’s continuous service.The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of its stock price over the expected option term, expected risk-free interest rate over the expected option term, and expected dividend yield rate over the expected option term. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC 718. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted during the six months ended February 29, 2020 and February 28, 2019: February 29, 2020 February 28, 2019 Expected term in years 5.3 – 5.9 3.0 Expected volatility 64% – 87% 72% – 87% Risk-free interest rate 1.4% – 1.7% 2.4% – 3.0% Expected dividend yield 0.0% 0.0% The expected term is based on management judgement and reflects expected exercise patterns. The expected volatility is based on management’s analysis of historical volatility. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected term of the related option at the time of the grant. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.The following table summarizes the stock option activity during the six months ended February 29, 2020: Weighted Weighted Average Average Remaining Aggregate Stock Exercise Contractual Intrinsic Options Price Term (years) Value Balance Outstanding, August 31, 2019 14,761 $ 4.89 9.0 $ 3,192 Granted 2,867 2.50 Exercised (9 ) 2.06 $ 14 Forfeited (3,066 ) 4.79 Balance Outstanding, February 29, 2020 14,553 $ 4.44 8.6 $ 6 Vested and expected to vest at February 29, 2020 12,831 4.45 8.6 $ 6 Exercisable, February 29, 2020 6,728 $ 4.47 8.2 $ 6 Stock compensation expense related to stock options was $5,845 and $3,452 for the six months ended February 29, 2020 and February 28, 2019, respectively. The weighted-average grant-date fair value of options granted during the six months ended February 29, 2020 and February 28, 2019, was $1.48 and $3.07, respectively.As of February 29, 2020, there was $19,565 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. The expense is expected to be recognized over a weighted-average period of 2.0 years.Restricted Stock and Restricted Stock UnitsDuring the six months ended February 29, 2020, the Company awarded 180 shares of restricted stock to consultants in exchange for $296 of services rendered.During the six months ended February 28, 2019, the Company issued 130 shares of restricted stock to consultants in exchange for $33 of services rendered and $738 of prepaid services, for a total of $771. The prepaid services are included in prepaid expenses on the condensed consolidated balance sheet as of February 28, 2019.Stock-based compensation expense related to restricted stock awards was $2,206 and $2,720, respectively, for the six months ended February 29, 2020 and February 28, 2019.During the six months ended February 29, 2020, the Company awarded 174 shares of restricted stock units to directors for serving on the board of directors.As of August 31, 2019 $ 5,444 Adjustments to estimated fair value (3,204) As of November 30, 2019 $ 2,240 As of February 29, 2020, $824 of total unrecognized compensation cost related to restricted stock units is expected to be recognized over a weighted average period of 1.3 years.1211 – COMMITMENTS AND CONTINGENCIESFebruary 29,November 30, 2020. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.eachcertain of the current members of the Company’s Board of Directors, and certain of the Company’s current and former officers, alleging, among other things, certain federal securities law violations and/or related breaches of fiduciary duties in connection with the Company’s April 2019 restatement of certain prior period financial statements. In general, the lawsuits assert the same or similar allegations, including that the defendants artificially inflated the Company’s securities prices by knowingly making materially false and misleading statements and omissions to the investing public about the Company’s financial statements, business, operations, management, and internal controls.The Company intendsIn September 2020, the Court granted the defendants’ motion to vigorously defend itself against these claims.parties.parties.parties, which expired in December 2020.
Bruno, et al. v. Kovacevich, et al. Filed September 26, 2019. Case No. A-19-802660-C, Eighth Judicial District Court of the State of Nevada and Majchrzak v. Kovacevich, et al. Filed October 2, 2019. Case No. A-19-902945-B, First Judicial District Court of the State of Nevada. These purported shareholder derivative actions against certain current and former directors and officers allege, among other things, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The Company is named as a nominal defendant in each action and the plaintiffs seek, among other things, equitable relief and unspecified damages from the defendants, to be paid to the Company. In May 2020, the Company accepted service of the complaints. The plaintiffs have indicated that they intend to move to stay each action, which stays expired in December 2020.1312 – 2020 PLAN & RESTRUCTURING CHARGESprocess that seeksplan designed to rationalize all aspects of its operations by, among other things, significantly reducing its overhead, implementing tightermore stringent expense controls, consolidating its warehouses, reducing its inventory, and drastically altering its sales strategy to focus more on these customers. The Company believes that this strategic shift and associated restructuring should resulthas resulted in a better forecast of demand, reduction of inventory and warehouse space, improved collections and cash flow, and potential revenue upside from these customers’ continued expansion and consolidation in the marketplace.completed, or isincurred $8.4 million in the processrestructuring charges as of completing, the following restructuring activities in connection with theNovember 30, 2020, Plan:·Severance: The Company is in the process of implementing a more efficient and automated approach to serving a smaller more targeted group of customers, which will require substantially fewer dedicated sales representatives, project managers, warehouse personnel, and other related personnel. As part of this process, the Company determined that certain positions at the Company were no longer essential to the execution of the Company’s strategy going forward. As a result, the Company underwent reductions in force to right-size and better align its workforce with this new strategy. During the second quarter of fiscal 2020, the Company terminated 28 employees, and incurred $379 in severance-related restructuring costs. In March 2020, the Company terminated 49 employees, and incurred $400 in severance-related restructuring costs.·Facility-Related Lease Termination Costs: As a result of the Company’s decision to discontinue nearly all of its stock inventory, the Company determined that it no longer needs the vast majority of its current warehouse space, and is currently in the process of negotiating with its landlords to terminate and exit the impacted warehouses. In March 2020, the Company vacated its Las Vegas, Nevada facility, and is planning to vacate additional facilities throughout the remainder of fiscal 2020 in order to consolidate its warehouse footprint.Asset Impairment: With the Company’s planned facility closures, the Company has determined that the fair value of its fixed assets at these closing facilities is now below their carrying value, and that an impairment has occurred. The Company also determined that its product molds and tooling are no longer necessary assets, given its shift to focus exclusively on custom and best-selling stock inventory, creating an additional need for impairment. As a result, the Company recognized a total impairment charge related of approximately $3.9 million related to these fixed assets during the second quarter of its fiscal 2020. In addition, because of the Company’s decision to consolidate its warehouses, the Company determined that it will incur impairment charges to its right-of-use (“ROU”) assets. Based on internal calculations, the Company recognized impairment charges related to these assets of $3.0 million during the second quarter of its fiscal 2020.The Company expects to incur a total of $11.1$9.6 million in restructuring charges uponunder the completion of the plan,2020 Plan, which represents the Company’s best estimate as of February 29,November 30, 2020. The 2020 Plan is expected to be completed by the end of fiscal 2020.2021. The recognition of restructuring charges requires that the Company make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reductions of workforce and facility, ROU and asset impairment costs. At the end of each reporting period, the Company will evaluate the remaining accrued balance to ensure that no excess accruals are retained, and the utilization of the provisions areFebruary 29,November 30, 2020: Severance
related costs Facility, ROU
and asset
impairment Total Balance at December 1, 2019 $ — $ — $ — Provisions/Additions 400 6,901 7,301 Utilized/Paid (400 ) (6,901 ) (7,301 ) Balance at February 29, 2020 $ — $ — $ — Severance
related costsFacility, ROU
and asset
impairmentFacility Exit Cost Total Balance at September 1, 2020 $ 0 $ 0 $ 0 $ 0 Provisions/Additions 0 0 8 8 Utilized/Paid 0 0 (8) (8) Balance at November 30, 2020 $ 0 $ 0 $ 0 $ 0 and six months ended February 29,November 30, 2020 are included within “Restructuring costs” in the Condensed Consolidated Statementscondensed consolidated statement of Operations.operations.following discussionidentification in this report of factors that may affect our future performance and analysisthe accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be readevaluated with the understanding of their inherent uncertainty. conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item I within this Quarterly Report on Form 10-Q and the audited consolidatedreflect our current views with respect to future events or to our future financial statementsperformance. A more detailed description of risk factors that may affect our operating results can be found in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, 20192020 filed with the SEC on November 12, 2019. This report contains “forward-looking statements.” The statements contained in this report that are10, 2020, and our other filings with the SEC. Given these uncertainties, you should not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements basedplace undue reliance on current expectations and assumptions. Various risks and uncertainties could cause actual results to differ materially from those expressed inthese forward-looking statements. The forward-looking events discussed in this report, the documents to which we refer you and other statements made from time to timeExcept asus or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties, and assumptions about us. For these statements, we claim the protection of the “bespeaks caution” doctrine. All forward-looking statements in this document are based on information currently available to us as of the date of this report, andlaw, we assume no obligation to update or revise these forward-looking statements for any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may causereason, even if new information becomes available in the actual results to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements.complementarya wide variety of ancillary products and services to customers operating in the regulated medical and recreational cannabis hemp and CBDhemp-derived cannabidiol ("CBD") industries. Theseservices include compliantaccessories, labels and custom packaging products; vape hardware; hydrocarbons and solvents;processing supplies, solvents, natural products;products, stainless steel tanks;tanks, and custom branded anti-counterfeit and authentication labels; hemp trading services; and retail services focused on CBD mass distribution, industry education and compliance. We provide custom branding on packaging products. Our packaging products primarily consist of bottles, bags, tubes and containers.labels. We maintain relationships with a broad range of domestic and international manufacturers, which enables us to source a wide variety of products in a cost-effective manner and alsoto pass such cost savings on to our customers. In addition to a complete product line, we have sophisticated in-house labeling and customization capabilities. We sellcapabilities, which allow us to add significant value to our customers’ packaging and vape hardware design processes, enabling them to turn their packaging and branding into an effective marketing tool. As more multi-state operators (“MSOs”), licensed producers (“LPs”), and leading brands seek ways to further differentiate their brands and product lines, our customization capabilities and premium customer service help us win new product opportunities with both existing and new customers. Our products are relied upon by brand owners, growers, processors, producers, distributors, and licensed medical and adult recreational cannabis retailers.wide selectionleader in custom and child-resistant compatible packaging, exclusive vape products, and unique product and service offerings, such as our stainless steel tanks and retail services, we serve as a “one-stop-shop” for our customers, combining creativity with compliance knowledge and experience to provide solutions in various stages of vaporizer cartridgesthe cannabis and CBD supply chain.varietytrusted and established source for nearly all of core materialstheir ancillary cannabis and heating technologies,CBD solutions.wide selectiongeneral negative effect on the ability of batteriesour sales force to matchmeet with potential customers and secure new orders; andcartridges.COVID-19 pandemic, such as operating with a lighter-than-normal staff in our warehouses and periodically closing our warehouses to conduct deep cleaningultra-pure hydrocarbon gases, including isobutene, n-butane, propane, ethanol, pre-mixes, custom blendssolutions to reduce further impact and delays. However, we are unable to determine the full impact of these delays as they are out of our control. We have also experienced, and could continue to experience, delays in orders from vendors, particularly in countries where the pandemic has had a significant impact, such as in China.solvents,disinfectants at workstations;essentialuncertain, out of our control and cannot be predicted at this time.For the three months ended November 30, (in thousands, except percentages) 2020 2019 Variance Percent Change Net revenue $ 26,761 $ 34,963 $ (8,202) (23.5) % extraction process. markets where we operate in as a result of the COVID-19 pandemic, and supply chain disruptions linked to the COVID-19 pandemic, resulting in shipping capacity constraints from China. The COVID-19 pandemic has resulted in customers ordering less frequently and at irregular intervals possibly due to less visibility in their businesses, overall demand, and general economic conditions.For the three months ended November 30, (in thousands, except percentages) 2020 2019 Variance Percent Change Cost of goods sold $ 21,022 $ 27,692 $ (6,670) (24.1) % Gross profit 5,739 7,271 (1,532) (21.1) % Gross profit percentage (gross profit as a percent of revenue) 21.4 % 20.8 % 0.6 % For the three months ended November 30, (in thousands, except percentages) 2020 2019 Variance Percent Change Selling, general and administrative $ 8,812 $ 21,075 $ (12,263) (58.2) % Restructuring costs $ 8 $ — $ 8 100.0 % services include hemp trading solutions, retail servicesoperating expenses for the three months ended November 30, 2020 decreased to $8.8 million, or 33.0% of total revenue, from $21.1 million, or 60.3% of total revenue, for the three months ended November 30, 2019. The reduction in selling, general and custom brandingadministrative expense is primarily due to decreases in compensation and benefits of $4.5 million, stock compensation of $2.3 million, professional fees of $1.4 million, bad debt of $0.9 million, facilities of $0.8 million, and travel and entertainment expenses of $0.6 million. The three months ended November 30, 2020 also included a restructuring charge of $8.0 thousand for facility-related expenses.For the three months ended November 30, (in thousands, except percentages) 2020 2019 Variance Percent Change Loss from operations $ (3,081) $ (13,804) $ 10,723 (77.7) % For the three months ended November 30, (in thousands, except percentages) 2020 2019 Variance Percent Change Other (expense) income, net $ (1,369) $ 1,298 $ (2,667) (205.5) % packaging products.For the three months ended November 30, (in thousands, except percentages) 2020 2019 Variance Percent Change Net Loss $ (4,450) $ (12,506) $ 8,056 (64.4) % (in thousands, except percentages) November 30, 2020 August 31, 2020 Cash and cash equivalents $ 5,663 $ 10,476 Accounts receivable, net $ 11,959 $ 9,427 Total current assets $ 66,788 $ 57,006 Total current liabilities $ 43,163 $ 36,357 Working capital surplus $ 23,625 $ 20,649 we have created oneour level of liquidity sources, which includes available borrowing under our revolving credit facility, cash on hand, funds provided by operations, adoption of the largest product libraries2020 Plan and participation in available funding programs instituted by various state and federal governments in response to COVID-19 will be adequate to fund our expenditures and working capital requirements for the cannabisnext 12 months.CBD industries, allowing usUses of CashFor the three months ended November 30, (in thousands, except percentages) 2020 2019 Cash provided by (used in): Operating activities $ (9,104) $ (8,098) Investing activities $ (129) $ (1,940) Financing activities $ 4,420 $ 20,813 be a comprehensive solutions provider$8.1 million for the three months ended November 30, 2019. The change is primarily attributable to our customers. Our extensive knowledgehigher levels of the regulatory environment applicableinventory and prepaid inventory expenses to support anticipated sales and avoid supply disruption due to the cannabisChinese New Year holiday and CBD industries allows usCOVID-19.quickly adapt$1.9 million for the three months ended November 30, 2019. The decrease is due to lower levels of equipment purchases, technology investments and leasehold improvements during the current fiscal period.customers’ packaging requirements. We also haveline offlexibility to introduce new products and services to our vast customer network. We have no supplier “take or pay” arrangements.prior period's net repayment on line of credit of $6.5 million. In addition, to these factors, we believe that we offer competitive pricing, prompt deliveries, and excellent customer service. We expect continued growth as we take measures to expand into new markets, invest in our systems and personnel, forge strategic alliances and invest in our own molds and intellectual property.Linecash proceeds from issuance of Credit and Long-Term Debtalso includes an accordion feature that permits us to increase the available revolving commitments under the Monroe Revolving Credit Facility by up to an additional $15.0 million, subject to satisfaction of certain conditions. The Monroe Revolving Credit Facility has a five-year5-year term maturing on August 21, 2024 and is secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries.Long-termApril 29, 2019,November 10, 2020, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to which we issued and sold a senior note (the “Original Note”) to the Investor in a private placement offeringFourth Amended Senior Note in the aggregate principal amount of $21.3$19.0 million with an original issue discount of $1.3 million, and received net proceeds of $20.0 million.(the “Amended Senior Note”). The OriginalAmended Senior Note was a senior unsecured obligation, and unless earlier redeemed, was scheduled towill mature on October 30, 2020. The Original Note did not bear interest, except upon the occurrence of an event of default.On August 21, 2019, we entered into an exchange agreement (the “Exchange Agreement”) with the Investor in order to amend and waive certain provisions of the Purchase Agreement and the Original Note and to exchange the Original Note for (i) a new senior note (the “New Senior Note”) for the same aggregate principal amount as the Original Note and (ii) a warrant to purchase up to 650 shares of our common stock at an exercise price of $4.25. The warrant has an expiration date of August 21, 2024 and has not been exercised as of FebruaryApril 29, 2020. As of August 21, 2019, the warrants were reclassified from a derivative liability to equity with a corresponding adjustment to additional paid-in capital.Similar2021, subject to the terms of the Original Note, the New Senior Note matures on October 30, 2020, at which timeholder’s right to extend such maturity date. Upon maturity, we must pay the Investorholder an amount in cash representing 120% of allthe aggregate outstanding principal, less original issue discount, plus any accrued and unpaid interest and accrued and unpaid late charges. Similar to the terms of the Original Note, the NewThe Amended Senior Note willdoes not bear interest except upon the occurrence (and during the continuance) of an eventEvent of default.On November 8, 2019, we entered into a Second Exchange Agreement (“Second Exchange Agreement”) withDefault (as such term is defined in the Investor, pursuant toAmended Senior Note), in which we amendedcase the NewAmended Senior Note (as amended,will bear interest at a rate of 18.0% per annum (the “Default Rate”). The Amended Senior Note is redeemable by us at any time after the “Amendedissuance in an amount equal to the outstanding principal and any accrued interest or late charges. The Amended Senior Note”). PursuantNote contains customary affirmative and negative covenants, including a limitation on our ability to incur additional indebtedness, subject to certain permitted exceptions. The Amended Senior Note includes customary events of default including, among others, payment defaults, breach of covenant defaults, bankruptcy and insolvency defaults, cross defaults with certain indebtedness, a change of control default, judgment defaults, and inaccuracies of representations and warranties defaults. Under the terms of the Amended Senior Note, the maturity dateholder may require us to redeem, upon the occurrence of an Event of Default, all or a portion of the Amended Senior Note was extendedat a redemption premium of 135% of the outstanding principal and any accrued interest or late charges. Any amount of principal or other amounts due to the holder under the Securities Purchase Agreement, dated April 29, 20212019, as amended, between us and the holder, or the Amended Senior Note that is not paid when due (except to the extent such amount is simultaneously accruing interest at the Default Rate) will result in a late charge being incurred and payable by us in an amount equal to interest on such amount at the rate of 18.0% per annum from the date such amount was due until the same is paid in full.Amended Senior Note was increasedU.S. Small Business Administration, bears interest at a fixed rate of 1.0% per annum, a maturity of two years with the first six months of interest, principal and fees deferred. The principal and interest of the PPP Loan is eligible for forgiveness under the Paycheck Protection Program to approximately $24.0 millionthe extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program, including eligible payroll costs, covered rent, business mortgage interest, and covered utility payments incurred by the Company during the elected 24 week covered period after loan disbursement. The Company has applied for forgiveness of the PPP Loan with respect to these covered expenses and the original issue discount was increasedCompany's principal and interest payments will continue to $1.5 million. Uponbe deferred until the SBA remits the loan forgiveness amount to the PPP lender. To the extent that all or part of the PPP Loan is not forgiven, the Company will be required to pay a combined monthly principal and interest payment commencing on the date of the forgiveness decision rendered by the SBA with payments made through the maturity we must pay the Investor an amount in cash representing 120% of alldate; any outstanding principal, less original issue discount, plus any accrued and unpaid interest and accrued and unpaid late charges. Similar tobalance will be payable in full on the maturity date. The terms of the Original Note, the Amended Senior Note will not bear interest, exceptPPP Loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loan may be accelerated upon the occurrence of an event of default.Results As of Operations – ComparisonNovember 30, 2020, the non-current portion of Three Months Ended February 29, 2020 and February 28, 2019RevenueFor the three months ended February 29, 2020, our revenue decreasedPPP Loan amounted to $30.1 million compared to $35.2 million for the three months ended February 28, 2019, which represents a decrease of $5.1 million, or 14%. The decrease was primarily attributed to lower sales from Vape and natural products$763, and the disruptions linkedcurrent portion amounted to the COVID-19 coronavirus resulted in the extension of the Chinese New Year holiday which in turn delayed production$1,137, and shipment from China.Gross Profit (Loss)Gross loss for the three months ended February 29, 2020 was $8.9 million, or negative 30% of revenue, compared to gross profit of $4.5 million, or 13% of revenue, for the three months ended February 28, 2019. The decrease in gross profit percentage is due primarily to an increase of $10.8 million related to inventory write downs as a result of right sizing inventory levels to align with our 2020 Plan, $3.3 millionpurchase order cancellation chargesand lower product sales, partially offset by tariff revenues.Operating ExpensesOur operating expenses for the three months ended February 29, 2020 increased to $34.5 million, or 114% of total revenue, from $13.2 million, or 37% of total revenue, for the three months ended February 28, 2019. The increase in selling, general and administrative expenseis primarily due to restructuring expense by $7.3 million related to severance and asset impairment charges associated with warehouse facilities we plan to close, bad debt of $8.6 million, consulting fees of $0.8 million offset by a decrease in stock base compensation of $0.9 million.For the three months ended February 28, 2019, operating expenses included a gain of $5.6 millionrelated to the change in the fair value of contingent consideration.Loss from OperationsLoss from operations for the three months ended February 29, 2020 was $43.4 million compared to $8.6 million for the three months ended February 28, 2019. The increase is primarily attributable to inventory write downs related to right sizing inventory levels to align with our new inventory strategy moving forward, restructuring charges related to severance and asset impairment charges associated with warehouse facilities we plan to close, purchase order cancellation charges, bad debt and lower product sales.Other Income (Expense), netOther Income (Expense), net for the three months ended February 29, 2020 was expense of $1.0 million compared to expense of $0.3 million for the three months ended February 28, 2019. The increase in other expense is primarily attributable to a $1.1 million increase in interest expense, offset by favorable change in fair value of equity investment by $0.4 million, when compared to the three months ended February 28, 2019.Net LossLoss from operations for the three months ended February 29, 2020 was $44.4 million compared to $8.9 million for the three months ended February 28, 2019. To align with the 2020 Plan,the increase in net loss is primarily attributable to inventory write downs related to right sizing inventory levels. restructuring charges related to, severance and asset impairment charges associated with rationalizing the warehouse footprint, purchase order cancellation charges and bad debt expense. The increase was also attributable to increase in interest expense, compensation cost, stock-based compensation and consulting fees and lower product sales.Results of Operations – Comparison of Six Months Ended February 29, 2020 and February 28, 2019RevenueFor the six months ended February 29, 2020, our revenue increased to $65.1 million compared to $60.5 million for the six months ended February 28, 2019, which represents an increase of $4.6 million, or 8%. The increase was primarily attributable to higher tariffs and hemp trading revenues, partially offset by lower sale of natural products and the disruptions linked to the COVID-19 coronavirus resulted in the extension of the Chinese New Year holiday which in turn delayed production and shipment from China.Gross Profit (Loss)Gross loss for the six months ended February 29, 2020 was $1.6 million, or negative 3% of revenue, compared to gross profit of $7.8 million, or 13% of revenue, for the six months ended February 28, 2019. The decrease in gross profit percentage is due primarily to an increase of $11.0 million related to inventory write downs as a result of right sizing inventory levels to align with our strategy moving forward, $3.3 millionpurchase order cancellation chargesand lower product sales, partially offset by tariff revenues.Operating ExpensesOur operating expenses for the six months ended February 29, 2020 increased to $55.6 million, or 85% of total revenue, from $24.9 million, or 41% of total revenue, for the six months ended February 28, 2019. The increase in selling, general and administrative expenseis primarily due to bad debt expense of $8.3 million, restructuring expense by $7.3 million related to severance and asset impairment charges associated with warehouse facilities the Company plans to close, compensation cost of $3.5 million, stock based compensation of $1.9 million, consulting fees of $1.6 million, facilities cost of $0.8 million and other selling,general and administrative expense of $0.8 million. For the six months ended February 28, 2019, operating expenses included a gain of $5.6 millionrelated to the change in the fair value of contingent consideration.Loss from OperationsLoss from operations for the six months endedFebruary 29, 2020 was $57.2 million compared to $17.1 million for the six months endedFebruary 28, 2019. The increase is primarily attributable to inventory write downs related to right sizing inventory levels to align with our new inventory strategy, restructuring charges related to severance and asset impairment charges associated with rationalizing the warehouse footprint as part of the new plan, purchase order cancellation charges, bad debt, increases in compensation cost, stock-based compensation, and consulting fees and lower product sales.Other Income (Expense), netOther Income (Expense), net for thesix months ended February 29, 2020was income of $0.3 million compared to expense of $0.4 million for thesix months ended February 28, 2019.The income increase is primarily attributable to $3.5 million favorable change in fair value of warrant liability, offset by $2.1 million increase in interest expense, an unfavorable change in fair value of equity investment by $0.5 million.Net LossLoss from operations for the six months ended February 29, 2020 was $56.9 million compared to $17.5 million for the six months ended February 28, 2019. To align with the 2020 Plan,the increase in net loss is primarily attributable to inventory write downs related to right sizing inventory levels. restructuring charges related to, severance and asset impairment charges associated with rationalizing the warehouse footprint, purchase order cancellation charges and bad debt expense. The increase was also attributable to increase in interest expense, compensation cost, stock-based compensation and consulting fees and lower product sales.Liquidity and Capital ResourcesAtFebruary 29, 2020 and February 28, 2019, we had cash of $11.4 million and $17.9 million, respectively, and a working capital surplus of $48.1 million and $60.2 million, respectively.We believe that our level of liquidity sources, which includes available borrowing under our revolving credit facility, cash on hand, funds provided by operations, adoption of the 2020 plan andparticipation in all available funding programs instituted by various state and federal governments in response to COVID-19will be adequate to fund our expenditures and working capital requirements for the next 12 months.Cash Flows from Operating ActivitiesNet cash used in operating activities for the six months ended February 29, 2020 was $18.8 million compared to $34.8 million for the six months ended February 28, 2019. The change is primarily attributed to reduced level of inventory consistent with our efforts to improve our inventory management process.Cash Flows from Investing ActivitiesNet cash used in investing activities for the six months ended February 29, 2020 was $3.5 million compared to $2.9 million for the six months ended February 28, 2019. The increase is primarily attributed to higher levels of equipment purchases, technology investments and leasehold improvements duringwithin the current fiscal year.Cash Flows from Financing ActivitiesNet cash provided by financing activities forportion of notes payable on the six months ended February 29,accompanying balance sheet. As of August 31, 2020, the PPP Loan amounted to $1,900, and was $29.7 million compared to $42.2 million forincluded within the six months ended February 28, 2019. The decrease is primarily attributed tocurrent portion of notes payable on the $12.3 million in net repayments on our line of credit, compared to $0.6 million in net borrowings in the prior year.We manage our liquidity and financial position in the context of our overall business strategy. We continually forecast and manage our cash, working capital balances, and capital structure to meet the short-term and long-term obligations of our business while seeking to maintain liquidity and financial flexibility. We have historically funded our operations primarily through the cash flows generated from our operations, borrowings available under our credit facility and from proceeds from the issuance of debt and equity.We believe that cash generated from our operations, along with the funds available through debt or equity financings, primarily for the purposes of expanding current operations, making capital acquisitions, or consummating strategic transactions are adequate to fund our financial obligations for at least the next twelve months. Additional equity or debt financing may not be available when needed, on terms favorable to us or at all.Securities Exchange Act, of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (who is also the Company’s chairman, secretary and principal executive officer), and our chief financial officer (who is also the Company’s principal financial and accounting officer) to allow for timely decisions regarding required disclosure. Thus, in accordance with RulesRule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of February 29,November 30, 2020, which is the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, as disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019,2020 , and our failure to timely file two Current Reports on Form 8-K as described in the Amendment No. 1 to Quarterly Report on Form 10-Q/A filed on January 11, 2021 and Amendment No. 1 to Annual Report on Form 10-K/A filed on January 11, 2021, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to material weaknesses identified in our internal control over financial reporting, described below.Moreover, the Company implemented additional internal controls to evaluate future transactions in accordance with ASC 842.February 29,November 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.2019.2020. Our remediation efforts will continue to be implemented throughout our 20202021 fiscal year. We believe that the controls that we will be implementinghave implemented and intend to implement will improve the effectiveness of our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measuressteps to address the material weaknessweaknesses or determine to supplement or modify certain of theour planned remediation measures described above.measures. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.eachcertain of the current members of the Company’s Board of Directors, and certain of ourthe Company’s current and former officers, alleging, among other things, certain federal securities law violations and/or related breaches of fiduciary duties in connection with the Company’s April 2019 restatement of certain prior period financial statements. In general, the lawsuits assert the same or similar allegations, including that the defendants artificially inflated the Company’s securities prices by knowingly making materially false and misleading statements and omissions to the investing public about the Company’s financial statements, business, operations, management, and internal controls.The Company intendsIn September 2020, the Court granted the defendants’ motion to vigorously defend itself against these claims.parties.parties.parties, which expired in December 2020.2019,2020, filed with the SEC on November 12, 2019,10, 2020, contains risk factors that could materially and adversely affect our business, financial condition and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. To our knowledge, except as described below, there have been no material changes in the risk factors described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019.The spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, havereacted by instituting quarantines, mandating business and school closures and restricting travel. Many experts predict that the outbreak will trigger a period of global economic slowdown or a global recession. COVID-19 or another pandemic could have material and adverse effects on our ability to successfully operate due to, among other factors:●a general decline in business activity, especially as it relates to our customers’ expansion or consolidation activities;●the potential that certain state, province, or local jurisdictions do not consider medical or recreational cannabis stores or dispensaries to be “essential” during a stay-at-home order or other similar mandate, and thus requiring these retail outlets to temporarily shut down or materially adjust their operations in a manner that could be determinantal to our business;●the destabilization of the markets could negatively impact our customer growth and access to capital, along with our customers’ ability to make payments for their purchase orders;●our difficulty accessing the capital and credit markets on favorable terms, or at all, and a severe disruption and instability in the global financial markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis;●the potential negative impact on the health of our personnel, or the personnel of our customers, vendors, and partners, especially if a significant number of them are impacted;●a deterioration in our ability to ensure business continuity during a disruption;●a material disruption in our supply chain, which could significantly affect our ability to source products from vendors on a timely basis or on favorable terms;●a potential inability to execute against the 2020 Plan as desired or planned, including consolidating our warehouse footprint in a timely and favorable manner, or at all;.●the potential inability to collect and use judicial proceedings for customer accounts receivables in a timely manner.The rapid development and fluidity of this situation makes it nearly impossible to predict the ultimate adverse impact of COVID-19 on our business and operations. Nevertheless, COVID-19 presents material uncertainty which could adversely affect our results of operations, financial condition and cash flows. The Company continues to assess the potential impact of COVID-19, which remains uncertain at this time.None.None.27 Exhibit Number Description of Exhibit 4.1Form of Warrant, dated February 6, 2020 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 000-55418) filed February 10, 2020)10.1Form of Securities Purchase Agreement dated February 6, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-55418) filed February 10, 2020)10.2Placement Agency Agreement dated as of February 6, 2020 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 000-55418) filed February 10, 2020)101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. *Filed herewith.**This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.28 Date: April 9, 2020January 11, 2021By: /s/ Nicholas Kovacevich Nicholas Kovacevich
(principal executive officer)Date: January 11, 2021 By: /s/ Stephen Christoffersen Date: April 9, 2020By:/s/ Christopher TedfordStephen Christoffersen Christopher Tedford
(principal financial and accounting officer)