UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal quarter endedDecemberMarch 31, 20172022
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
STEM HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
| Nevada | 000-55751 | 61-1794883 | ||
(State of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
20283 State Rd 7, Building 400, 2201 NW Corporate Blvd, Suite 220,
205, Boca Raton, FL 3349833431
(Address of principal executive offices) (Zip code)
Issuer’s telephone number: (561) 237-2931(561) 948-5410
Securities registered underpursuant to Section 12(g)12(b) of the Exchange Act:Common Stock par value $0.0001
| Title of each class | Trading Symbol | Name of exchange on which registered | ||
| Common Stock par value $0.001 | STMH | OTCQX |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] ☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. [ ]☐
| Large Accelerated Filer | Accelerated Filer |
| Non-accelerated Filer | Smaller Reporting Company |
| Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] ☐ No [X] ☒
There were 7,503,694 shares outstanding of registrant’s common stock, par value $0.001 per share, as of February 12, 2018.May 6, 2022.
Transitional Small Business Disclosure Format (check one): Yes [ ]☐ No [X]☒
TABLE OF CONTENTS
| 2 | ||
STEM HOLDINGS, INC.
Stem Holdings, Inc.CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except for share and per share amounts)
Condensed Consolidated Statements of Financial Position
| March 31, | September 30, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | * | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,260 | $ | 5,464 | ||||
| Accounts receivable, net of allowance for doubtful accounts | 310 | 260 | ||||||
| Note receivable | 447 | 430 | ||||||
| Inventory | 3,184 | 3,126 | ||||||
| Prepaid expenses and other current assets | 1,095 | 2,187 | ||||||
| Assets held for sale | - | 9,324 | ||||||
| Total current assets | 6,296 | 20,791 | ||||||
| Property and equipment, net | 11,917 | 12,598 | ||||||
| Investment in equity method investees | 720 | 1,008 | ||||||
| Investments in affiliates | - | 230 | ||||||
| Deposits and other assets | 13 | 13 | ||||||
| Right of use asset | 3,981 | 4,235 | ||||||
| Intangible assets, net | 10,421 | 10,856 | ||||||
| Goodwill | 7,429 | 7,429 | ||||||
| Due from related party | 28 | 28 | ||||||
| Total assets | $ | 40,805 | $ | 57,188 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | 2,827 | 2,547 | ||||||
| Convertible notes, net | 2,967 | 2,940 | ||||||
| Convertible notes, net related party | - | 223 | ||||||
| Current maturities of long-term debt | 1,500 | - | ||||||
| Short term notes and advances | 589 | 650 | ||||||
| Due to related party | - | 1 | ||||||
| Lease liability | 499 | 467 | ||||||
| Warrant liability | 450 | 2,277 | ||||||
| Liabilities held for sale | - | 6,801 | ||||||
| Total current liabilities | 8,832 | 15,906 | ||||||
| Lease liability - long term | 3,601 | 3,855 | ||||||
| Finance liability | 1,093 | 1,093 | ||||||
| Long-term debt, mortgages | 600 | 2,100 | ||||||
| Total liabilities | 14,126 | 22,954 | ||||||
| Commitments and contingencies (Note 17) | - | - | ||||||
| Shareholders’ equity | ||||||||
| Preferred stock, Series A; $ par value; shares authorized, outstanding as of March 31, 2022, and September 30, 2021 | - | - | ||||||
| Preferred stock, Series B; $ par value; shares authorized, outstanding as of March 31, 2022, and September 30, 2021 | - | - | ||||||
| Preferred stock | - | - | ||||||
| Common stock, $ par value; shares authorized; and shares issued, issuable and outstanding as of March 31, 2022, and September 30, 2021, respectively | 224 | 230 | ||||||
| Additional paid-in capital | 148,213 | 148,249 | ||||||
| Stock subscription receivable | - | (135 | ) | |||||
| Accumulated deficit | (123,286 | ) | (115,750 | ) | ||||
| Total Stem Holdings stockholder’s equity | 25,151 | 32,594 | ||||||
| Noncontrolling interest | 1,528 | 1,640 | ||||||
| Total shareholders’ equity | 26,679 | 34,234 | ||||||
| Total liabilities and shareholders’ equity | $ | 40,805 | $ | 57,188 | ||||
| * | Derived from audited information |
| December 31, 2017 | September 30, 2017 | |||||||
| ASSETS | (Unaudited) | * | ||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 2,179,017 | $ | 391,389 | ||||
| Prepaid expenses | 28,808 | 106,466 | ||||||
| Subscriptions receivable | - | 100,000 | ||||||
| Total current assets | 2,207,825 | 597,855 | ||||||
| Property and equipment, net | 3,825,585 | 3,258,850 | ||||||
| Other assets | ||||||||
| Due from related parties | - | |||||||
| Project costs | 10,000 | 10,000 | ||||||
| Deposits | 95,318 | 185,318 | ||||||
| Deferred rent | 580,670 | 298,441 | ||||||
| Total other assets | 685,988 | 493,759 | ||||||
| Total Assets | $ | 6,719,398 | $ | 4,350,464 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Accounts payable and accrued expenses | 49,272 | 101,377 | ||||||
| Due to related parties | 16,500 | 16,500 | ||||||
| Notes payable, net of discount | 157,706 | 47,902 | ||||||
| - | - | |||||||
| Total Current Liabilities | 223,478 | 165,779 | ||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, Series A; $0.001 par value; 50,000,000 shares authorized, none outstanding as of December 31, 2017 | - | - | ||||||
| Preferred stock, Series B; $0.001 par value; 50,000,000 shares authorized, none outstanding as of December 31, 2017 | - | - | ||||||
| Common stock; $0.001 par value; 100,000,000 shares authorized; 7,411,984 and 6,354,860 shares issued, issuable and outstanding as of December 31, 2017 and September 30, 2017 respectively | 7,503 | 6,433 | ||||||
| Additional paid-in capital | 10,010,611 | 7,012,603 | ||||||
| Accumulated deficit | (3,522,194 | ) | (2,834,351 | ) | ||||
| Total equity | 6,495,920 | 4,184,685 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 6,719,398 | $ | 4,350,464 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
*Derived from audited information
| 3 |
Stem Holdings, Inc.STEM HOLDINGS, INC.
Condensed Consolidated Statement of OperationsUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(in thousands except for share and per share amounts)
For the three months ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenues | $ | 309,829 | $ | - | ||||
| Consulting fee's | 55,450 | 6,250 | ||||||
| Professional fee's | 140,598 | - | ||||||
| General and administration | 432,368 | 72,718 | ||||||
| Impairment of advance-related party | - | - | ||||||
| Stock based compensation | 359,546 | 468,000 | ||||||
| Total expenses | 987,962 | 546,968 | ||||||
| Operating loss | (678,133 | ) | $ | (546,968 | ) | |||
| Other income and expenses | ||||||||
| Interest expense | (9,736 | ) | - | |||||
| Interest income | 26 | 35 | ||||||
| Total other income | (9,710 | ) | 35 | |||||
| Net loss before income taxes | $ | (687,843 | ) | $ | (546,933 | ) | ||
| Provision for income taxes | - | - | ||||||
| Net loss for the period | $ | (687,843 | ) | $ | (546,933 | ) | ||
| Basic and diluted loss per common share | $ | (0.10 | ) | $ | (0.11 | ) | ||
| Basic and diluted weighted average common shares outstanding | 6,596,074 | 4,761,090 | ||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | 4,136 | $ | 5,489 | $ | 8,346 | $ | 10,758 | ||||||||
| Cost of goods sold | 3,796 | 3,562 | 7,191 | 7,021 | ||||||||||||
| Gross Profit | 340 | 1,927 | 1,155 | 3,737 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Consulting fees | 342 | 1,420 | 529 | 2,062 | ||||||||||||
| Professional fees | 716 | 872 | 1,992 | 1,786 | ||||||||||||
| General and administration | 2,749 | 1,834 | 6,189 | 4,896 | ||||||||||||
| Impairment of intangible assets | - | - | 795 | - | ||||||||||||
| Total operating expenses | 3,807 | 4,126 | 9,505 | 8,744 | ||||||||||||
| Loss from operations | (3,467 | ) | (2,199 | ) | (8,350 | ) | (5,007 | ) | ||||||||
| Other income (expenses), net | ||||||||||||||||
| Interest expense | (180 | ) | (646 | ) | (358 | ) | (1,355 | ) | ||||||||
| Change in fair value of derivative liability | - | 34 | - | 242 | ||||||||||||
| Change in fair value of warrant liability | 192 | (6,278 | ) | 1,931 | (6,188 | ) | ||||||||||
| Foreign currency exchange gain (loss) | (68 | ) | 22 | (28 | ) | (21 | ) | |||||||||
| Other income | 92 | 1,170 | 101 | 1,288 | ||||||||||||
| Other loss | (30 | ) | - | (30 | ) | - | ||||||||||
| Gain from disposal of subsidiary | - | - | 831 | - | ||||||||||||
| Total other income (expense) | 6 | (5,698 | ) | 2,447 | (6,034 | ) | ||||||||||
| Loss from continuing operations | (3,461 | ) | (7,897 | ) | (5,903 | ) | (11,041 | ) | ||||||||
| Loss from discontinued operations, net of tax | - | (728 | ) | (1,745 | ) | (864 | ) | |||||||||
| Net loss | $ | (3,461 | ) | $ | (8,625 | ) | $ | (7,648 | ) | $ | (11,905 | ) | ||||
| Net loss attributable to non-controlling interest | 11 | (14 | ) | (112 | ) | (105 | ) | |||||||||
| Net loss attributable to Stem Holdings | $ | (3,472 | ) | $ | (8,611 | ) | $ | (7,536 | ) | $ | (11,800 | ) | ||||
| Loss from continuing operations, per share | (0.02 | ) | (0.06 | ) | (0.02 | ) | (0.10 | ) | ||||||||
| Loss from discontinued operations, per share | - | (0.00 | ) | (0.01 | ) | (0.01 | ) | |||||||||
| Net loss per share, basic and diluted | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) | $ | (0.11 | ) | ||||
| Weighted-average shares outstanding, basic and diluted | 223,687,067 | 137,762,917 | 226,995,272 | 103,351,512 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
Stem Holdings, Inc.STEM HOLDINGS, INC.
Condensed Consolidated Statements of Cash FlowsUNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)(in thousands, except for share and per share amounts)
| For the Three Months ended December | ||||||||
| 2017 | 2016 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss for the period | $ | (687,843 | ) | $ | (546,933 | ) | ||
| Adjustments to reconcile net loss to cash used in opereations | ||||||||
| Stock-based compensation | 359,546 | 468,000 | ||||||
| Non-cash interest | 3,854 | - | ||||||
| Depreciation and amortization | 75,688 | 8,143 | ||||||
| (Increase) decrease in operating assets: | ||||||||
| Prepaid expenses | 77,658 | (36,750 | ) | |||||
| Deposits and other assets | - | (95,000 | ) | |||||
| Deferred rent | (282,229 | ) | - | |||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable and accrued expenses | (52,104 | ) | 6,715 | |||||
| Net Cash Flows Used In Operating Activities | (505,430 | ) | (195,825 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Fixed asset purchases | (530,672 | ) | (935,163 | ) | ||||
| Project cost expenditures | - | (10,000 | ) | |||||
| Advances to related entities | - | (68,001 | ) | |||||
| Note receivable-related party | (99,000 | ) | ||||||
| Net Cash Flows used in Investing Activities | (530,672 | ) | (1,112,164 | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from issuance of common shares | 2,647,031 | 1,407,500 | ||||||
| Proceeds from notes payable | 200,000 | - | ||||||
| Repayments of notes payable | (23,301 | ) | - | |||||
| Net Cash Flows Provided By Financing Activities | 2,823,730 | 1,407,500 | ||||||
| Net increase in cash and cash equivalents | 1,787,628 | 99,511 | ||||||
| Cash and cash equivalents at beginning of period | 391,389 | 798,198 | ||||||
| Cash and cash equivalents at end of period | $ | 2,179,017 | $ | 897,709 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 1,882 | $ | - | ||||
| Cash paid for taxes | $ | - | $ | - | ||||
| Non-Cash Supplemental information | - | |||||||
| Purchase of fixed assets with note payable | $ | 21,780 | - | |||||
| Transfer of deposit to fixed assets | $ | 90,000 | $ | - | ||||
| Project costs transferred to PP&E | $ | - | $ | 41,250 | ||||
| Shares | Amount | Capital | Receivable | Deficit | Equity | Interest | Equity | |||||||||||||||||||||||||
| Total Stem | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Subscription | Accumulated | Holdings Shareholders’ | Non-Controlling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Deficit | Equity | Interest | Equity | |||||||||||||||||||||||||
| Balance as of September 30, 2021 | 229,988,620 | 230 | 148,249 | (135 | ) | (115,750 | ) | 32,594 | 1,640 | 34,234 | ||||||||||||||||||||||
| Common stock issued for cash | 3,223,611 | 3 | 282 | - | - | 285 | - | 285 | ||||||||||||||||||||||||
| Issuance of common stock in connection with consulting agreement | 130,000 | - | 30 | - | - | 30 | - | 30 | ||||||||||||||||||||||||
| Stock based compensation | 1,000,000 | 1 | 219 | - | - | 220 | - | 220 | ||||||||||||||||||||||||
| Issuance of common stock related to interest expense | 555,953 | 1 | 66 | - | - | 67 | - | 67 | ||||||||||||||||||||||||
| Common stock cancelled related to discontinued operations | (11,506,700 | ) | (12 | ) | (1,169 | ) | 135 | - | (1,046 | ) | - | (1,046 | ) | |||||||||||||||||||
| Issuance of options in connection with employment agreement | - | - | 292 | - | - | 292 | - | 292 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | (4,064 | ) | (4,064 | ) | (123 | ) | (4,187 | ) | ||||||||||||||||||||
| Balance as of December 31, 2021 | 223,391,484 | $ | 223 | $ | 147,969 | $ | - | $ | (119,814 | ) | $ | 28,378 | $ | 1,517 | $ | 29,895 | ||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employment agreement | 1,000,000 | 1 | 67 | - | - | 68 | - | 68 | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to interest expense | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Common stock cancelled related to discontinued operations | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Issuance of warrants in connection with consulting agreement | - | - | 158 | - | - | 158 | - | 158 | ||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | - | 19 | - | - | 19 | - | 19 | ||||||||||||||||||||||||
| Net loss | (3,472 | ) | (3,472 | ) | 11 | (3,461 | ) | |||||||||||||||||||||||||
| Balance as of March 31, 2022 | 224,391,484 | $ | 224 | $ | 148,213 | $ | - | $ | (123,286 | ) | $ | 25,151 | $ | 1,528 | $ | 26,679 | ||||||||||||||||
| Balance as of September 30, 2020 | 68,258,745 | $ | 68 | $ | 76,310 | $ | - | $ | (51,386 | ) | $ | 24,992 | $ | 1,840 | $ | 26,832 | ||||||||||||||||
| Issuance of common stock in connection with consulting agreement | 1,569,570 | 2 | 587 | - | - | 589 | - | 589 | ||||||||||||||||||||||||
| Common stock to be issued | 6,833,069 | 7 | 2,863 | - | - | 2,870 | - | 2,870 | ||||||||||||||||||||||||
| Stock based compensation | 1,868,750 | 2 | 560 | - | - | 562 | - | 562 | ||||||||||||||||||||||||
| Cancellation of common stock related to convertible notes | (525,400 | ) | (1 | ) | 1 | - | - | - | - | - | ||||||||||||||||||||||
| Issuance of common stock related to rent and interest expense | 501,561 | 1 | 208 | - | - | 209 | - | 209 | ||||||||||||||||||||||||
| Issuance of subscription receivable | - | - | 600 | (600 | ) | - | - | - | - | |||||||||||||||||||||||
| Issuance of warrants in connection with employment agreement | - | - | 132 | - | - | 132 | - | 132 | ||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | - | 61 | - | - | 61 | - | 61 | ||||||||||||||||||||||||
| Acquisition of Driven Deliveries, Inc. | 101,968,944 | 101 | 43,224 | (135 | ) | - | 43,190 | 43,190 | ||||||||||||||||||||||||
| Net loss | - | - | - | (3,188 | ) | (3,188 | ) | (91 | ) | (3,279 | ) | |||||||||||||||||||||
| Balance as of December 31, 2020 | 180,475,239 | $ | 180 | $ | 124,546 | $ | (735 | ) | $ | (54,574 | ) | $ | 69,417 | $ | 1,749 | $ | 71,166 | |||||||||||||||
| Issuance of common stock in connection with consulting agreement | 1,262,500 | 1 | 1,096 | - | - | 1,097 | - | 1,097 | ||||||||||||||||||||||||
| Issuance of common stock in connection with convertible debt | 4,054,206 | 4 | 2,071 | - | - | 2,075 | - | 2,075 | ||||||||||||||||||||||||
| Issuance of common stock in connection with deposit for an asset acquisition | 300,000 | - | 210 | - | - | 210 | - | 210 | ||||||||||||||||||||||||
| Stock based compensation | 1,464,009 | 1 | 867 | - | - | 868 | - | 868 | ||||||||||||||||||||||||
| Issuance of common stock related to interest expense | 164,366 | 1 | 121 | - | - | 122 | - | 122 | ||||||||||||||||||||||||
| Issuance of warrants in connection with employment agreement | - | - | 17 | - | - | 17 | - | 17 | ||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | - | 78 | - | - | 78 | - | 78 | ||||||||||||||||||||||||
| Issuance of common stock related to settlement payment | 500,000 | 1 | 5,439 | - | - | 5,440 | - | 5,440 | ||||||||||||||||||||||||
| Issuance of common stock related to Private Placement Memorandum, net | 5,263,996 | 5 | 2,060 | - | - | 2,065 | - | 2,065 | ||||||||||||||||||||||||
| Issuance of common stock related to Prospectus | 2,333,990 | 2 | 1,000 | - | - | 1,002 | - | 1,002 | ||||||||||||||||||||||||
| Net loss related to discontinued operations | - | - | - | - | (728 | ) | (728 | ) | - | (728 | ) | |||||||||||||||||||||
| Net loss | - | - | - | - | (7,883 | ) | (7,883 | ) | (14 | ) | (7,897 | ) | ||||||||||||||||||||
| Balance as of March 31, 2021 | 195,818,306 | $ | 195 | $ | 137,505 | $ | (735 | ) | $ | (63,185 | ) | $ | 73,780 | $ | 1,735 | $ | 75,515 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
Stem Holdings, Inc.STEM HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| 2022 | 2021 | |||||||
| For the Six Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (7,648 | ) | $ | (11,905 | ) | ||
| Loss from discontinued operations, net of tax | 1,745 | 864 | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | 704 | 1,720 | ||||||
| Issuance of common stock in connection with consulting agreements | 188 | 1,686 | ||||||
| Issuance of common stock related to rent and interest expense | - | 331 | ||||||
| Impairment of investments | 288 | - | ||||||
| Depreciation and amortization | 876 | 918 | ||||||
| Amortization of intangible assets | 435 | 1,310 | ||||||
| Amortization of debt discount | 10 | 608 | ||||||
| Gain on sale of equity method investments | - | (200 | ) | |||||
| Change in fair value of derivative liability | - | (242 | ) | |||||
| Change in fair value of warrant liability | (1,931 | ) | 6,188 | |||||
| Foreign currency adjustment | 27 | 20 | ||||||
| Gain from disposal of subsidiary | (831 | ) | - | |||||
| Other | 61 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net of allowance for doubtful accounts | (50 | ) | (96 | ) | ||||
| Prepaid expenses and other current assets | 217 | (2,336 | ) | |||||
| Inventory | (58 | ) | (630 | ) | ||||
| Other assets | 1,284 | - | ||||||
| Accounts payable and accrued expenses | 348 | (2,197 | ) | |||||
| Net cash used in continuing operating activities | (4,335 | ) | (3,961 | ) | ||||
| Net cash provided by (used in) discontinued operating activities | 340 | (864 | ) | |||||
| Net cash used in operating activities | (3,995 | ) | (4,825 | ) | ||||
| Cash flows from investing activities | ||||||||
| Investment in equity method investees, Michigan & Massachusetts | - | 197 | ||||||
| Purchase of property and equipment | (195 | ) | (279 | ) | ||||
| Investments | 200 | (250 | ) | |||||
| Related party payments | (1 | ) | - | |||||
| Net cash used in continuing investing activities | 4 | (332 | ) | |||||
| Net cash used in investing activities | 4 | (332 | ) | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of common stock | 285 | 9,804 | ||||||
| Proceeds from notes payable and advances | - | 22 | ||||||
| PPP and debt forgiveness | - | (951 | ) | |||||
| Repayments of notes payable | (498 | ) | (1,242 | ) | ||||
| Net cash provided by (used in) financing activities from continuing operations | (213 | ) | 7,633 | |||||
| Net cash provided by financing activities from discontinued operations | - | - | ||||||
| Net cash provided by (used in) financing activities | (213 | ) | 7,633 | |||||
| Net (decrease) increase in cash and cash equivalents | (4,204 | ) | 2,476 | |||||
| Cash and cash equivalents at the beginning of the period | 5,464 | 2,129 | ||||||
| Cash and cash equivalents at the end of the period | $ | 1,260 | $ | 4,605 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 348 | $ | 833 | ||||
| Supplemental disclosure of noncash activities: | ||||||||
| Financed Insurance | $ | 427 | $ | 283 | ||||
| Interest paid in the form of common stock | $ | 66 | $ | - | ||||
| Issuance of common stock related to separation agreement | $ | - | $ | 290 | ||||
| Conversion of debt and accrued interest to equity | $ | - | $ | 2,075 | ||||
| Issuance of common stock for settlement | $ | - | $ | 5,440 | ||||
| Refinancing of mortgage | $ | - | $ | 1,100 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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STEM HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Incorporation and Operations and Going Concern
Stem Holdings, Inc. (the(“Stem” or the “Company”) is a Nevada corporation incorporated on June 7, 2016. 2016, and is a leading omnichannel, vertically-integrated cannabis branded products and technology company with state-of-the-art cultivation, processing, extraction, retail, distribution, and delivery-as-a-service (DaaS) operations throughout the United States. Stem’s family of award-winning brands includes TJ’s Gardens™, TravisxJames™, and Yerba Buena™ flower and extracts; Cannavore™ edible confections; and e-commerce delivery platforms provide direct-to consumer proprietary logistics and an omnichannel UX (user experience)/CX (customer experience).
The Company intends to purchase, improve,purchases, improves, leases, operates, and leaseinvests in properties for use in the cannabis production, distribution and sales industry beginningof cannabis and cannabis-infused products licensed under the laws of the states of Oregon, Nevada, Massachusetts and California, As of March 31, 2022, Stem had ownership interests in 24 state issued cannabis licenses including nine (9) licenses for cannabis cultivation, three (3) licenses for cannabis processing, two (2) licenses for cannabis wholesale distribution, three (3) licenses for hemp production and (7) cannabis dispensary licenses. Subsequently, pursuant to a secondary stock purchase agreement, the Company sold its equity investment in the state of Oregon. In September and October 2016, the Company subleased its first production facility and acquired its first commercial location, respectively. In February 2017 and May 2017, the Company acquired its second commercial location and acquired its second production facility, respectively. The Company intends to enter into 4 leasesMassachusetts retail license in consideration for these properties (see Note 7).cash.
As shown in the accompanying consolidated financial statements, the Company has experienced recurring losses, and has accumulated a deficit of approximately $3,522,194 million as of December 31, 2017. For the three months ended December 31, 2017 we had a net loss of $687,843 million. In January 2018, the Company completed the purchase of the farm property in Mulino, Oregon (see Note 8), which will require the Company to invest approximately $1.525 million in its purchase in the coming years.
The Company has entered into four leases with tenants in which it has committed the Company to improve those properties which will require additional fundingnine wholly-owned subsidiaries, including Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri, Inc., Stem Holdings Oregon Acquisitions 1, Corp., Stem Holdings Oregon Acquisitions 2, Corp., Stem Holdings Oregon Acquisitions 3, Corp., Stem Holdings Oregon Acquisitions 4 Corp., 2336034 Alberta Ltd., Stem, through its subsidiaries, is currently in the amountprocess of $2.7 million (see Note 7). In addition, the Company continues to work towards acquiring additional properties to lease to cannabis operators to grow its business.
To date,acquisition of entities or be acquired by entities directly in the Company has raised substantial funds through private placements. Afterproduction and sale of cannabis. Driven Deliveries, Inc., a former wholly-owned subsidiary, was sold during the quarter ended December 31, 2017,2021 (see Note 3).
The Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the symbol “STEM” and the OTCQX exchange under the symbol “STMH”.
In June 2021, the Company’s shareholders approved a proposal to amend the Company’s Articles of Incorporation to increase the number of authorized common shares from shares to shares.
Going Concern
On March 31, 2022, the Company had approximate balances of cash and cash equivalents of 1.3 million, negative working capital of approximately $2.5million, and an accumulated deficit of $123 million.
These unaudited consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.
While the recreational use of cannabis is legal under the laws of certain States, where the Company has continuedand is working towards further finalizing the acquisition of entities or investment in entities that directly produce or sell cannabis, the use and possession of cannabis is illegal under United States Federal Law for any purpose, by way of Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, otherwise known as the Controlled Substances Act of 1970 (the “ACT”). Cannabis is currently included under Schedule 1 of the Act, making it illegal to raise fundscultivate, sell or otherwise possess in its private placements, raisingthe United States.
On January 4, 2018, the office of the Attorney General published a memo regarding cannabis enforcement that rescinds directives promulgated under former President Obama that eased federal enforcement. In a January 8, 2018 memo, Jefferson B. Sessions, then Attorney General of the United States, indicated enforcement decisions will be left up to the U.S. Attorney’s in excesstheir respective states clearly indicating that the burden is with “federal prosecutors deciding which cases to prosecute by weighing all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of $1.525 millionthe crime, the deterrent effect of federal prosecution, and the cumulative impact of particular crimes on the community.” Subsequently, in April 2018, former President Trump promised to support congressional efforts to protect states that have legalized the cultivation, sale and possession of cannabis; however, a bill has not yet been finalized in order to implement legislation that would, in effect, make clear the federal government cannot interfere with states that have voted to legalize cannabis. Further in December 2018, the U.S. Congress passed legislation, which the President signed on December 20, 2018, removing hemp from being included with Cannabis in Schedule I of the Act.
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In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to several other countries, including the United States. On June 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, as of the datetime of the filing of this Annual Report on Form 10-K, several states in the United States have declared states of emergency, and several countries around the world, including the United States, have taken steps to restrict travel. The existence of a worldwide pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments in response to COVID-19, or any, pandemic, to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business operations disruptions to our retail operations and our ability to collect rent from the properties which we own, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects throughout our business. If we need to close any of our facilities or a critical number of our employees become too ill to work, our production ability could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse consequences due to COVID-19, or any other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the markets in which we operate. Any of these uncertainties could have a material adverse effect on our business, financial statements. In addition,condition, or results of operations.
These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Should the United States Federal Government choose to begin enforcement of the provisions under the “ACT”, the Company through its wholly owned subsidiaries could be prosecuted under the “ACT” and the Company may have to immediately cease operations and/or be liquidated upon its closing of the acquisition or investment in entities that engage directly in the production and or sale of cannabis.
Management believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities. However, if the Company is currently in initial discussions with potential investorsunable to invest in the Company at significantly higher amounts. The Company also expects thatraise additional capital, it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce, eliminating outside consultants, and reducing legal fees to conserve its cash outflow from operation will decrease significantly in fiscal year 2018 as three ofamounts sufficient to sustain operations and meet its four subleases to cannabis operators begin generating cash flow inobligations. These matters raise substantial doubt about the third quarter of the fiscal year. The Company expects its cash outflows from operations to decrease significantly after the second quarter of Fiscal 2018 and its current cash balance plus expected private placement and other investment proceeds allow itCompany’s ability to continue operating and build out its properties.
Basis of preparation
as a going concern. The accompanying consolidated financial statements havedo not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements included herein are unaudited. Such financial statements, in the opinion of management, contain all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2018 or for any other period. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, and because of this, for further information, readers should refer to the financial statements and footnotes included in its Form 10 for the fiscal year ended September 30, 2017 filed on January 16, 2018. The Company believes that the disclosures are adequate to make the interim information presented not misleading.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of Stem Holdings, Inc.the Company and its wholly-owned subsidiary, Patch International, Inc.wholly owned subsidiaries. All material intercompany accounts transactions, and profitstransactions have been eliminated in consolidation.
Revenue Recognition
during the consolidation process. The Company recognizes rental revenue from tenants, including rental abatements, lease incentivesmanages its operations as a single segment for the purposes of assessing performance and contractual fixed increases attributablemaking operating decisions.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to operating leases, on a straight-line basis overmake estimates and assumptions that affect the termapplication of accounting policies and the related leases when collectability is reasonably assured.
reported amounts of assets, liabilities, income, and expenses. The Company makesmost significant estimates ofincluded in these consolidated financial statements are those associated with the collectabilityassumptions used to value equity instruments, valuation of its tenant receivables relatedlong live assets for impairment testing, valuation of intangible assets, and the valuation of inventory. These estimates and assumptions are based on current facts, historical experience and various other factors believed to base rents, straight-line rentbe reasonable given the circumstances that exist at the time the financial statements are prepared. Actual results may differ materially and other revenues. Inadversely from these estimates. To the current fiscal year,extent there are material differences between the Company began significant rental operations. The Company considers such things as historical bad debts, tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments relevant to a tenant’s business,estimates and changes in tenants’ payment patterns in its analysis of accounts receivable and its evaluation of the adequacy of the allowance for doubtful accounts. Specifically, for straight-line rent receivables,actual results, the Company’s assessment includes an estimationfuture results of a tenant’s ability to fulfill its rental obligations over the remaining lease term.operations will be affected.
Real Estate Acquisition ValuationReclassifications
All assets acquired and liabilities assumed in an acquisition of real estate are measured at their acquisition date fair values. The acquisition value of land, building and improvements are included in real estate investments on the accompanying consolidated balance sheets. Acquisition pursuit costs associated with asset acquisitions are capitalized. The Company has early adopted ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as businesses acquisitions. As a result of early adopting ASU 2017-01, real estate acquisitions did not meet the definition of a business combination and were deemed asset acquisitions, and the Company therefore capitalized its acquisition pursuit costs associated with these acquisitions.
Reclassifications
Certain amounts in the Company’s consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.
Principles of Consolidation
The Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock. In addition, the Company consolidates entities that meet the definition of a variable interest entity (“VIE”) for which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third party’s holding of equity interest is presented as noncontrolling interests in the Company’s Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity. The portion of net loss attributable to the noncontrolling interests is presented as net loss attributable to noncontrolling interests in the Company’s Consolidated Statements of Operations.
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Use of estimates
The preparation of theseaccompanying consolidated financial statements requires management to make judgments, estimatesinclude the accounts of Stem Holdings, Inc. and assumptions that affectits wholly owned subsidiaries, Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Holdings Agri, Inc., Stem Oregon Acquisitions 2 Corp., Stem Oregon Acquisitions 3 Corp., Stem Oregon Acquisitions 4 Corp., 7LV USA Corporation, and Stem Oregon Acquisitions 1 Corp., and Driven Deliveries, Inc., which was subsequently divested. In addition, the application of accounting policiesCompany has consolidated YMY Ventures, WCV, LLC and NVD RE, Inc. under the reported amounts of assets, liabilities, income and expenses. Estimates and judgments used are based on management’s experience and the assumptions used are believed to be reasonable given the circumstances that exist at the time the financial statements are prepared. The significant estimates included in these financial statements are those associated with the assumptions used to value options issued to consultants and the estimated rent payment deferral period at inception of its cannabis operation subleases. Actual results may differ from these estimates.variable interest requirements.
Warrants to Purchase Common Stock and Other Derivative Financial Instruments
We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock. We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess the classification of warrants issued to purchase our common stock and any other financial instrument at each reporting date to determine whether a change in classification between assets and liabilities is required.
Cash and cash equivalentsCash Equivalents
Cash and cash equivalents include short-termThe Company considers all highly liquid investments with original maturitiesa maturity of three months or less and are recorded at cost, which approximates fair market value given the short-term nature.
Concentrationstime of Credit Risk
purchase to be cash equivalents. Financial instruments that potentially subject the Company to significant concentrationsa concentration of credit risk consist of cash and cash equivalents. The Company’s cash is primarily of cash.maintained in checking accounts. These balances may, at times, exceed the U.S. Federal Deposit Insurance Corporation insurance limits. As of DecemberMarch 31, 2017,2022, and September 30, 2021, the Company had no cash equivalents or short-term investments. The Company has not experienced any losses on deposits in a major financial institution in excessof cash and cash equivalents.
Accounts Receivable
Accounts receivable is shown on the face of the FDIC insurance limit.consolidated balance sheets, net of an allowance for doubtful accounts. The Company believesanalyzes the riskaging of lossaccounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. As of March 31, 2022, the reserve for doubtful accounts was approximately $78,000.
Inventory
Inventory is comprised of raw materials, finished goods and work-in-progress such as pre-harvested cannabis plants and by-products to be minimalextracted. The costs of growing cannabis including but not limited to labor, utilities, nutrition, and irrigation, are capitalized into inventory until the time of harvest.
Inventory is stated at the lower of cost or net realizable value, determined using weighted average cost. Cost includes expenditures directly related to manufacturing and distribution of the products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes.
Net realizable value is defined as it maintains its cash balancesthe estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure inventory at wellthe lower of cost or net realizable value. Factors considered in the determination of obsolescence include slow-moving or non-marketable items.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include consulting, advertising, insurance, and service or other contracts requiring up-front payments.
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Property and Equipment
Property, equipment, and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance expenditures that do not extend the useful lives of related assets are expensed as incurred.
Expenditures for major renewals and improvements are capitalized, financial institutions.
Carrying value, recoverabilitywhile minor replacements, maintenance, and impairment of long-lived assets
repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’)continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, to evaluate its long-lived assets. The Company’s long-lived assets, which include property“Property, Plant, and equipment are reviewed for impairment wheneverEquipment.” When such events or changes in circumstances indicate thatare present, the carrying amount of an asset may not be recoverable. The Company does not test for impairment in the year of acquisition of properties so long as those properties are acquired from unrelated third parties.
The Company assesses the recoverability of its long-lived assets by comparingdetermining whether the projectedcarrying value of such assets will be recovered through undiscounted netexpected future cash flows. If the total of the future cash flows associated withis less than the related long-lived asset or groupcarrying amount of long-livedthose assets, over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, isthe Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of thosethe assets. Fair valueSee “Note 3 – Property, Equipment and Leasehold Improvements”.
Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally determined usingprovided on a straight-line method over the asset’s expected future discounted cash flows or market value, if readily determinable. If long- lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the assets. The Company estimates useful lives as follows:
Schedule of Estimated Useful Life of Assets
| Buildings | 20 years |
| Leasehold improvements | Shorter of term of lease or economic life of improvement |
| Furniture and equipment | 5 years |
| Signage | 5 years |
| Software and related | 5 years |
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, are depreciatedwhich include property and amortized overequipment, for indicators of impairment whenever events or changes in circumstances indicate that the newly determined remaining estimated useful lives.
carrying value of an asset or asset group may not be recoverable. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.
Through DecemberThe Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.
An impairment expense of $795 thousand was recorded for the six months ended March 31, 20172022. During the six months ended March 31, 2021, the Company has not experienced determined that 0impairment losses on its long-lived assets.was required.
Capitalization of Project Costs
The Company’s policy is to capitalize all costs that are directly identifiable with a specific property, would be capitalized if the Company had already acquired the property, and when the property, or an option to acquire the property, is being actively sought after, and either funds are available or will likely become available in order to exercise their option. All amounts shown capitalized prior to acquisition of a property are included under the caption of Project Costs within the “Prepaid expenses and other current assets” line item in the consolidated balance sheet.
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Income Taxes
Equity Method Investments
Income taxes
Investments in unconsolidated affiliates are providedaccounted for under the equity method of accounting, as appropriate. The Company accounts for investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5.0% of the investee’s outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s investment and adjusted each period for the tax effectsCompany’s share of the investee’s income or loss, and dividends paid.
During the six months ended March 31, 2022, the Company recorded $0 of investee losses.
Asset Acquisitions
The Company has adopted ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions reported inshould be accounted for as businesses acquisitions. As a result of adopting ASU 2017-01, acquisitions of real estate and cannabis licenses do not meet the financial statementsdefinition of a business combination and consist of currently due plus deferred taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting carrying amountswere deemed asset acquisitions, and the respective tax basesCompany therefore capitalized these acquisitions, including its costs associated with these acquisitions.
Goodwill and Intangible Assets
Goodwill. Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and liabilities and are measured using tax rates and lawsis subject to annual impairment testing on or between annual tests if an event or change in circumstance occurs that are expectedwould more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company has the option to be in effect whenfirst assess qualitative factors to determine whether the differences are expectedexistence of events or circumstances lead to be recovered or settled. Valuation allowances are provided against deferred tax assets ifa determination that it is more likely than not that the deferred taxfair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. If the Company concludes otherwise, the Company is required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than the carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill.
Intangible Assets. Intangible assets willdeemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life is evaluated.
An intangible asset with an indefinite useful life is not be realized.amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losses is not permitted.
During the six months ended March 31, 2022, and 2021, the Company determined that there were 0t any losses related to the impairment of goodwill and intangible assets, respectively.
Business Combinations
The Company followsapplies the guidanceprovisions of FASB ASC 740-10805 in the accounting for acquisitions. ASC 805 requires the Company to recognize separately from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which relatesmay be up to one year from the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations. Accounting for Uncertaintybusiness combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in Income Taxes, which seeks to reducepart on historical experience and information obtained from management of the diversity in practice associated withacquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accounting and reporting for uncertainty in income tax positions. This interpretation prescribes a comprehensive model for financial statement recognition, measurement, presentation and disclosureaccuracy or validity of uncertain tax positions takensuch assumptions, estimates, or expected to be taken in income tax returns.actual results.
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Contingent Consideration
The Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations” (“FASB ASC 805”). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction. FASB ASC 805 uses the fair value definition in Fair Value Measurements, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As defined in FASB ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree, if specified future events occur or conditions are met or (ii) the right of the acquirer to the return of previously transferred consideration if specified conditions are met.
Warrant Liability
The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s consolidated statements of operations. The fair value of the warrants issued by the Company has been estimated using a Black Scholes model.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the statement of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition. When the Company records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial instrumentsreporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. As of September 30, 2021, and 2020, such net operating losses were offset entirely by a valuation allowance.
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
In December 2017, the Tax Cuts and Jobs Act (TCJA or the Act) was enacted, which significantly changes U.S. tax law. In accordance with ASC 740, “Income Taxes”, the Company is required to account for the new requirements in the period that includes the date of enactment. The Act reduced the overall corporate income tax rate to 21.0%, created a territorial tax system (with a one-time mandatory transition tax on previously deferred foreign earnings), broadened the tax base and allowed for the immediate capital expensing of certain qualified property.
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In December 2020, the Company issued a significant number of new shares in its acquisition of Driven (see Note . The effect of these issuances is most likely, the Company and Driven have experienced the requisite change of control as promulgated under the US Internal Revenue Code section 382. The effect of this will be that going forward, the ability of the Company and Driven to utilize their respective U.S. Federal net operating loss carryforwards from prior to December 29, 2020, will be limited in its usage. In order to determine the specific effect, the Company must perform the computations required under the Internal Revenue Code, which have not yet been performed. The Company expects it will perform the required computations in the coming fiscal year. On December 15, 2021, pursuant to a Share Exchange Agreement, the Company sold Driven Deliveries and its subsidiaries to the shareholders of Budee, Inc. in a transaction which the Company fully divested all of its interests in Driven Deliveries and all of its subsidiaries. Included in the terms of the Share Exchange Agreement, the shareholder of Budee, Inc., and prior officer of Driven Deliveries returned approximately million shares of the Company’s common stock and assumed approximately $7.1 million of the Companies liabilities. Notwithstanding, the Company will continue to be responsible for approximately $210,000 of accounts payable assumed in the acquisition of Driven Deliveries.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.
Effective October 1, 2019, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective method. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues related to wholesale and retail revenue are recorded upon transfer of merchandise to the customer, which was the effective policy under ASC 605 previously.
The following policies reflect specific criteria for the various revenue streams of the Company:
Cannabis Dispensary, Cultivation and Production
Revenue is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance obligation is complete. Terms are generally between cash on delivery to 30 days for the Company’s wholesale customers.
The Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale) there are essentially no returns allowed or warranty available to the customer under the various state laws.
Delivery
| 1) | Identify the contract with a customer |
The Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.
| 2) | Identify the performance obligations in the contract |
The Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any necessary deliveries of those products.
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| 3) | Determine the transaction price |
The sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost that those goods are being sold for plus any additional delivery costs.
| 4) | Allocate the transaction price to performance obligations in the contract |
For the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery fees that may be incurred to deliver to the customer.
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
For the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.
Leases
The Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably assured.
The Company makes estimates of the collectability of its tenant receivables related to base rents, straight-line rent, and other revenues. In the current fiscal year, the Company began significant rental operations. The Company considers such things as historical bad debts, tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments relevant to a tenant’s business, and changes in tenants’ payment patterns in its analysis of accounts receivable and its evaluation of the adequacy of the allowance for doubtful accounts. Specifically, for straight-line rent receivables, the Company’s assessment includes an estimation of a tenant’s ability to fulfill its rental obligations over the remaining lease term.
On October 1, 2020, the Company adopted ASC 842 and elected to apply the new standard at the adoption date and recognize a cumulative effect as an adjustment to retained earnings. Upon calculation the effect on retained earnings was immaterial and no adjustment was deemed necessary. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use (“ROU”) assets.
Our lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing rate on March 31, 2022, for all leases that commenced prior to that date. In determining this rate, which is used to determine the present value of future lease payments, we estimate the rate of interest we would pay on a collateralized basis, with similar payment terms as the lease and in a similar economic environment.
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Lease costs were approximately $202,000 and $529,000, respectively for the three and six months ended March 31, 2022 and approximately $257,000 and $426,000, respectively for the three and six months ended March 31, 2021.The Company has nine operating leases consisting with remaining lease terms ranging from 10 months to 170 months.
Lease Costs
Schedule of Lease Costs
| Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 | |||||||
| Components of total lease costs: | ||||||||
| Operating lease expense | $ | 529 | $ | 426 | ||||
| Total lease costs | $ | 529 | $ | 426 |
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Lease positions as of March 31, 2022
ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:
Schedule of ROU Lease Assets and Lease Liabilities
| March 31, 2022 | ||||
| Assets | ||||
| Right of use asset | $ | 3,981 | ||
| Total assets | $ | 3,981 | ||
| Liabilities | ||||
| Operating lease liabilities – short term | $ | 499 | ||
| Operating lease liabilities – long term | 3,601 | |||
| Total lease liability | $ | 4,100 | ||
Lease Terms and Discount Rate
Schedule of Lease Terms and Discount Rate
| Weighted average remaining lease term (in years) – operating lease | 9.8 | |||
| Weighted average discount rate – operating lease | 12.61 | % |
Cash Flows
Schedule of Cash Flow Related to Lease
| Six Months Ended March 31, 2022 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| ROU amortization | $ | 529 | ||
| Cash paydowns of operating liability | $ | (529 | ) | |
Schedule of Future Minimum Lease Payments
| The future remaining minimum lease payments under the leases are as follows for the years ended September 30: | ||||
| 2022 | $ | 499 | ||
| 2023 | 985 | |||
| 2024 | 788 | |||
| 2025 | 687 | |||
| 2026 | 659 | |||
| Thereafter | 4,670 | |||
| Total future minimum lease payments | 8,288 | |||
| Less: Lease imputed interest | (4,188 | ) | ||
| Total | $ | 4,100 | ||
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Disaggregation of Revenue
For the period ended March 31, 2022, revenue reported was primarily from the sale of cannabis and related products accounted for under ASC 606.
The following table illustrates our revenue by type related to the three months ended March 31, 2022, and 2021 respectively:
Schedule of Disaggregation of Revenue
| Three Months Ended March 31, | 2022 | 2021 | ||||||
| Revenue | ||||||||
| Wholesale | $ | 1,576 | $ | 1,204 | ||||
| Retail | 3,221 | 5,970 | ||||||
| Rental | - | 5 | ||||||
| Other | 19 | 140 | ||||||
| Total revenue | 4,815 | 7,319 | ||||||
| Discounts and returns | (679 | ) | (1,830 | ) | ||||
| Net Revenue | $ | 4,136 | $ | 5,489 | ||||
The following table illustrates our revenue by type related to the six months ended March 31, 2022, and 2021 respectively:
| Six Months Ended March 31, | 2022 | 2021 | ||||||
| Revenue | ||||||||
| Wholesale | $ | 2,130 | $ | 2,324 | ||||
| Retail | 7,587 | 10,697 | ||||||
| Rental | - | 9 | ||||||
| Product Sales | - | 229 | ||||||
| Other | 40 | 258 | ||||||
| Total revenue | 9,757 | 13,517 | ||||||
| Discounts and returns | (1,411 | ) | (2,759 | ) | ||||
| Net Revenue | $ | 8,346 | $ | 10,758 | ||||
Geographical Concentrations
As of March 31, 2022, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational use in 15 states and D.C., with lesser legalization, such as for medical use in an additional 21 states and D.C., as of the time of these consolidated financial statements. In addition, the United States Congress has passed legislation, specifically the Agriculture Improvement Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of hemp and associated products from Schedule 1 of the Controlled Substances Act.
Cost of Goods Sold
Cost of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The Company recognizes the cost of sales as the associated revenues are recognized.
Fair Value of Financial Instruments
As defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
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To estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements) and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy are as follows:
Level 1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Other inputs that are observable, directly, or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Earnings per shareStock-based Compensation
The Company presentsaccounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest on the grant date or over a one-year period.
The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
Effective January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update (“ASU”) 2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making this election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have a significant history of forfeitures.
ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share amounts (“EPS”) data for its common shares.with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
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Basic net loss per share of common stock excludes dilution and is calculatedcomputed by dividing the profit ornet loss attributable to common shareholders of the Company by the weighted average number of shares of common sharesstock outstanding during the period. Diluted net loss per share is calculated based onof common stock reflects the weighted-average numberpotential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of outstanding common stock that then shared in the earnings of the entity unless inclusion of such shares pluswould be anti-dilutive. Since the effect of dilutive potential common shares, using the treasury stock method. The Company’s calculation ofCompany has only incurred losses, basic and diluted net loss per share excludes potential common sharesis the same. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share as of DecemberMarch 31, 20172022, and September 30, 2021, are as the effect would be anti-dilutive (i.e. would reduce the loss per share). Asfollows:
Schedule of December 31, 2017, the Company had issued 841,666 options and warrants exercisable into the common stockComputation of the Company outstanding (see Note 6).Diluted Loss
| Potentially dilutive share-based instruments: | March 31, | September 30, | ||||||
| 2022 | 2021 | |||||||
| Convertible notes | 3,220,828 | 3,696,311 | ||||||
| Options to purchase common stock | 4,881,101 | 7,140,447 | ||||||
| Unvested restricted stock awards | - | - | ||||||
| Warrants to purchase common stock | 65,167,328 | 62,965,833 | ||||||
| Anti-dilutive Securities | 73,269,257 | 73,802,591 | ||||||
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was approximately $ 9,380 48,000 and $32,000 three months ended March 31, 2022, and 2021, respectively. Advertising expense was approximately $170 thousand and $86,000 for the quartersix months ended DecemberMarch 31, 20172022, and nil for 2016.2021, respectively.
Emerging Growth Company
The Company has elected to be an emerging growth company as defined under the Jumpstart Our Business Startups Act of 2012 (“Jobs Act”). Included with this election, the Company has also elected to use the provisions within the Jobs Act that allow companies that go public to continue to use the private company adoption date rules for new accounting policies. Should the Company obtain revenues in excess of $1 billion on an annual basis, have its non-affiliated market capitalization increase to over $700 million as of the last day of its second quarter, or raise in excess of $1 billion in public offerings of its equity or instruments directly convertible into its equity, it will forfeit its status under the Jobs Act as an emerging growth company.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and is depreciated using the straight-line method over the assets’ estimated useful life as follows:
Normal maintenance and repairs for equipment are charged to expense as incurred, while significant improvements are capitalized.
Because the Company completed the acquisition of the Mulino Farm property (see Note 11) in January 2018, the Company has treated the improvements made to the property through December 31, 2017 as if they were building improvements.
Related parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Segment reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision–maker is its chief executive officer. The Company currently operates in 1 segment.
Recent Accounting Guidance
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods beginning January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
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In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition relief. Full retrospective application is prohibited. The standard was adopted as of October 1, 2020. As of March 31, 2022, the Company recognized additional operating liabilities of approximately $4.1 million, with corresponding ROU assets of approximately $4 million.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 provides guidance for recognizing credit losses on financial instruments based on an estimate of current expected credit losses model. The amendments are effective for fiscal years beginning after December 15, 2019. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar year 2023. The Company is currently assessing the impact of the adoption of this ASU on its financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
In August 2020, the FASB issued ASU 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods beginning after December 15, 2021 and interim periods within those annual periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
3. Discontinued Operations, Assets and Liabilities Held for Sale
Discontinued Operations
On December 15, 2021, pursuant to a Share Exchange Agreement, the Company sold Driven Deliveries and its subsidiaries to the shareholders of Budee, Inc. in a transaction which the Company fully divested all of its interests in Driven Deliveries and all of its subsidiaries. Included in the terms of the Share Exchange Agreement, the shareholder of Budee, Inc., and prior officer of Driven Deliveries returned approximately million shares of the Company’s common stock and assumed approximately $7.1 million of the Companies liabilities. Notwithstanding, the Company will continue to be responsible for approximately $210,000 of accounts payable assumed in the acquisition of Driven Deliveries.
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The following table presents the assets and liabilities associated with the divestiture of Driven Deliveries; Inc. as follows (in thousands):
Schedule of Discontinued Operations of Assets and Liabilities
| December 15, | September 30, | |||||||
| 2021 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 47 | $ | 106 | ||||
| Inventory | 509 | 382 | ||||||
| Prepaid expenses and other current assets | 242 | 887 | ||||||
| Total current assets | 798 | 1,375 | ||||||
| Property and equipment, net | 4 | 12 | ||||||
| Right of use asset | 327 | 328 | ||||||
| Intangible assets, net | 7,049 | 7,609 | ||||||
| Total assets | $ | 8,178 | $ | 9,324 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | 7,551 | 5,967 | ||||||
| Short term notes and advances | 3 | 7 | ||||||
| Settlement payable | - | 92 | ||||||
| Acquisition notes payable | - | 409 | ||||||
| Lease liability | 218 | 218 | ||||||
| Total current liabilities | 7,772 | 6,693 | ||||||
| Lease liability - long term | 108 | 108 | ||||||
| Total liabilities | $ | 7,880 | $ | 6,801 | ||||
The total assets and total liabilities in the above table for the year ended September 30, 2021, are presented in the balance sheet as of September 30, 2021, as Assets held for sale and Liabilities held for sale.
The following table presents the operating results related to the divestiture of Driven Deliveries; Inc. (in thousands):
| 2022 | 2021 | |||||||
| Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | 3,805 | $ | 5,229 | ||||
| Cost of goods sold | 3,772 | 4,235 | ||||||
| Gross Profit | 33 | 994 | ||||||
| Operating expenses: | ||||||||
| Consulting fees | 4 | 102 | ||||||
| Professional fees | 24 | 123 | ||||||
| General and administration | 1,749 | 1,809 | ||||||
| Total operating expenses | 1,777 | 2,034 | ||||||
| Loss from operations | (1,744 | ) | (1,040 | ) | ||||
| Other income (expenses) | ||||||||
| Interest expense | (1 | ) | (1 | ) | ||||
| Other income | - | 177 | ||||||
| Total other income (expense) | (1 | ) | 176 | |||||
| Net loss | $ | (1,745 | ) | $ | (864 | ) | ||
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4. Property, Plant & Equipment
Property and equipment consist of the following (in thousands):
Schedule of Property, Plant and Equipment
| March 31, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Land | $ | 1,451 | $ | 1,451 | ||||
| Automobiles | 93 | 74 | ||||||
| Signage | 19 | 19 | ||||||
| Furniture and equipment | 3,148 | 3,033 | ||||||
| Leasehold improvements | 3,531 | 3,474 | ||||||
| Buildings and property improvements | 10,127 | 10,126 | ||||||
| Computer software | 59 | 56 | ||||||
| Property and equipment, gross | 18,428 | 18,233 | ||||||
| Accumulated depreciation | (6,511 | ) | (5,635 | ) | ||||
| Property and equipment, net | $ | 11,917 | $ | 12,598 | ||||
Depreciation expense was approximately $442,000and $500,000 for the three months ended March 31, 2022, and 2021, respectively. Depreciation expense was approximately $851,000 and $1 million for the six months ended March 31, 2022, and 2021, respectively. Depreciation expense is included in general and administrative expense.
5. Inventory
Inventory consists of the following (in thousands):
Schedule of Inventory
| March 31, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | 670 | $ | 866 | ||||
| Work-in-progress | 787 | 543 | ||||||
| Finished goods | 1,727 | 1,717 | ||||||
| Total Inventory | $ | 3,184 | $ | 3,126 | ||||
Raw materials and work-in-progress include the costs incurred for cultivation materials and live plants. Finished goods consists of cannabis products sent to retail locations or ready to be sold. NaN inventory reserve was recorded for the periods ended March 31, 2022, and September 30, 2021, due to management’s assessment of the inventory on hand.
At December
6. Prepaid expenses and other current assets
Prepaid expenses and other current assets are assets and payments previously made, that benefit future periods. The balance as of March 31, 2017 property2022, includes the Employee Retention Tax Credit (“ERTC”) program from the U.S Treasury, as part of the COVID-19 stimulus package. During the fiscal year ended September 30, 2021, the Company applied for certain ERTC credits in the approximate amount of $5.1 million, which is reflected within the Statement of Operations as a reduction to general and equipment consistedadministration expense. The remaining balance of the ERTC receivable was approximately $201,000as of March 31, 2022.
Prepaid and other current assets comprised of the following:
Schedule of Prepaid Expenses and Other Current Assets
| Automobile | $ | 18,275 | ||
| Signage | 19,118 | |||
| Furniture and equipment | 207,278 | |||
| Leasehold improvements | 866,190 | |||
| Buildings and property improvements | 2,867,438 | |||
| Software and related | 52,190 | |||
| Subtotal | 4,030,489 | |||
| Accumulated depreciation and amortization | (204,904 | ) | ||
| Property, plant and equipment, net | 3,825,585 |
| March 31, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Prepaid expenses | $ | 685 | $ | 732 | ||||
| ERTC credits | 201 | 605 | ||||||
| Deposits and other current assets | 209 | 850 | ||||||
| Total prepaid expenses and other current assets | $ | 1,095 | $ | 2,187 | ||||
(1) Because7. Equity method investments
Tilstar Medical, LLC
In April 2019, the Company closed on the acquisitionentered into an agreement to acquire 48% of the Mulino property (see Note 9)membership interest of Tilstar Medical, LLC (“TIL”). TIL is a startup operation located in January 2018,Laurel, Maryland and owns a project management company which assists in procuring licenses for the production and sale of cannabis. The purchase price for the 48% interest was $550,000 to capitalize TIL which under the operating agreement occurs upon the execution of the agreement. As of September 30, 2019, the Company has treatedhad funded the costs to improve$550,000 and accounted for its investment using the property as building improvementsequity method of accounting. The Company was not made aware at time of its investment in the type and not as project costs asmagnitude of Decemberexpenses that would be funded with its investment capital and is currently in the process of renegotiating the terms of the operating agreement. During the year ended September 30, 2019, Tilstar Medical along with its partner, Stem Holdings, Inc. received a letter from the Maryland Medical Cannabis commission with notification that we received stage one pre-approval for a processor license. The Companies application ranked amongst the top nine highest scoring applications for a medical cannabis processor license. Final awards will be issued during calendar year 2021. During the three and six months ended March 31, 2017.
On November 1, 2016,2021, the Company acquired certain real property located at 1027 Willamette Street, Eugene, OR 97401 (the “Property”) fordid not recognize a total cash purchase price plus closing costsloss on investment related to TIL. During the three and six months ended March 31, 2021 the Company recognized a minimal loss on investment related to TIL. During the six months ended March 31, 2022, the Company recorded impairment expense of approximately $918,000.$288,000 related to its investment in TIL.
Community Growth Partners, Inc
On FebruaryJanuary 6, 2017, the Company acquired certain real property located at 7827 SE Powell Blvd, Portland, OR 97206 (the “Property”) for a total purchase price plus closing costs of approximately $656,498. As part of the consideration for closing on the property, 2020, the Company issued a short termconvertible promissory note payableto Community Growth Partners Holdings, Inc., (“CGS”) which will act as a line of credit. Subject to the sellerterms and conditions of the note, CGS promises to pay the Company all of the outstanding principal together with interest on the unpaid principal balance upon the date that is twelve months after the effective date and shall be payable as follows: (a)The Company agrees to make several loans to CGS from time to time upon request of CGS in amounts not to exceed the Amountprincipal sum of $2,000,000, (b) Payment of principal and interest shall be immediately available funds, (c) This note may be prepaid in whole or in part at any time without premium or penalty. Any partial prepayment shall be applied against the principal amount outstanding, (d) The unpaid principal amount outstanding under this note shall bear interest commencing upon the first advance at the rate of 10% per annum through the maturity date, calculated on the basis of a 365-day, until the entire indebtedness is fully paid, (e) Upon the closing of a $2,000,000 financing by the Company, all of the principal and interest shall automatically convert into equity shares of CGS at the price obtained by the qualified financing. As of September 30, 2020, a portion of the note was converted into 7% equity. In March 2021, the balance of a note receivable was converted into an additional 6% equity leaving an equity investment of 13%. As of March 31, 2022, and September 30, 2021, the Company recorded an investment of $0.7 million. Subsequent to March 31, 2022, pursuant to a secondary stock purchase agreement, the Company sold its equity investment in CGS in consideration for $1.65 million in cash.
8. Note Receivable
On January 4, 2020, the Company issued a $355,000 promissory note to Community Growth Partners Holdings, Inc., (“CGS”). CGS is a cannabis license holder in Massachusetts. Subject to the terms and conditions of the note, CGS promises to pay the Company all of the outstanding balance together with interest the date that is six months after the opening of the Great Barrington Dispensary which was opened September 2020. As of March 31, 2022, the note is in default and the Company is negotiating modification terms. As of March 31, 2022, and September 30, 2021, the principal and interest balance of the note is $442,744 and $422,204, respectively.
On January 6, 2020, the Company issued a convertible non-negotiable revolving credit promissory note up to $2,500,000 with a four-year term to CGS. Subject to the terms and conditions of the note, CGS promises to pay the Company the lesser of $2,500,000 or the aggregate unpaid principal amount of the loan. In the period of January 2020 through August 2020 the Company advanced $899,700 related to the note. In September 2020, the Company converted $480,182 of the balance into approximately $304,000.7% ownership in CGS. In March 2021, the Company converted the remaining balance plus accrued interest of $30,000 into an additional 6% ownership interest in CGS. As of March 31, 2022, and September 30, 2021, the principal and interest balance of the note was $0.
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In September 2020 a former employee received funds on behalf of the Company. On October 1, 2020, the Company executed a $14,382 promissory note to memorialize and structure a plan to receive the funds from the individual. The note is non-interest bearing and requires fouris to be paid in equal monthly paymentsinstallments of $75,000 plus$799 over an eighteen-month term with a final payment formaturity date of March 1, 2022. As of March 31, 2022, and September 30, 2021, the remaining amount due immediately thereafter plus fees. Due to the short-term natureprincipal balance of the note was $3,995 and $7,990, respectively.
9. Consolidated Asset Acquisitions
YMY Ventures LLC
In September 2018, the Company has not imputed any interest as it would be immaterial to the results for the period. The Company and note holder have come toentered into an agreement to reduce by $75,000acquire 50% of the balancemembership interest of YMY Ventures LLC (“YMY”). YMY is a startup operation located near Las Vegas, Nevada and owns licenses for the production and sale of cannabis. The purchase price for the 50% interest was $750,000, with the first $375,000 paid into escrow upon signing, with the final $375,000 due upon closing, which under the note,agreement occurs when the license is transferred by the Nevada Department of Taxation and receipt of approval in transfer of ownership by the Division of Public and Behavioral Health of the City of North Las Vegas. As of June 30, 2019, the Company had funded the $375,000 into escrow and had provided the joint venture with additional funds primarily in the form of payments for work performed to acquire four licenses from the Nevada Department of Taxation in the amount of approximately $690,238. As of February 28, 2019, the Nevada Department of Taxation approved the change of ownership for four medical and recreational cultivation and production licenses held by YMY Ventures now owned by Stem Holdings, Inc. Pursuant to the agreement, the escrowed amount of $375,000 was released and an additional payment of $67,500 was issued in August 2019. The balance of $307,500 was being held and negotiated with the partners due to the Seller breaching certain sectionsadditional funds over and above the original obligation to provide tenant improvements of $650,000. As of March 31, 2022, the balance has been paid in full including interest and attorney’s fees.
NVD RE Corp.
In April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment to contribute $1.275 million to NVD, which included the purchase price of $600,000 and an additional commitment to pay tenant improvement costs of $675,000. As of September 30, 2019, the Company paid $600,000 in cash for the real estate and not only fully funded its commitment but invested an additional $377,000 in capital over and above its original obligation. NVD used the funds provided to date by the Company to construct a cannabis indoor grow building and processing plant located near Las Vegas, Nevada and to continue the buildout of the Purchase and Sale Agreement dated November 15, 2016.property. The Company has no further commitment to fund the entity beyond its initial equity purchase commitment. NVD leases its facilities to YMY Ventures, LLC.
In the fiscal year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this mortgage were advanced to the Company. As of DecemberMarch 31, 2017,2022, this obligation was paid in its entirety, and $400,000 in additional proceeds were received on new mortgage.
In May 2020, the balance owedCompany acquired an additional 26.25% interest in NVD by issuing common shares at par value of $ which resulted in a total investment of 63.75%.
Michigan RE 1
On January 4, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with Michigan RE 1, Inc. (“MRE1”) pursuant to a private placement offering of up to an aggregate amount of $ comprising up to shares of MRE1’s common stock which represents 51% ownership by the Company. On January 5, 2021, the Company was party to an Asset Purchase Agreement between Leoni Wellness, LLC (“Seller”) and Organic Guyz, LLC (“Purchaser”) whereas the Seller is engaged in the recreational cannabis business and the Purchaser desires to purchase the local municipal license to operate an adult use retailer in the City of Kalamazoo, Michigan. The purchase price to be paid by the Purchaser is $400,000. A non-refundable deposit of $250,000, except in the event of a material breach of the SPA, is due within three days of the executed SPA. The deposit will be acknowledged by an execution of a joint escrow agreement. At closing the Purchaser will pay $250,000 to the Seller by cashiers check or wire transfer. The remaining $150,000 shall be paid by the Purchaser to the Seller in accordance with a promissory note to be executed at closing. The promissory note shall be paid in full on the earlier of the date the Purchaser purchases the real property located at 3928 Portage Street, Kalamazoo, Michigan or eighteen months from the closing date. The promissory note was approximately $4,000shall be secured by an escrow agent whereby three hundred thousand () shares (“Shares”) of Stem Holdings shall be held in the benefit of Seller and a Collateral Assignment of Licenses and Permits whereby upon default on the promissory note, the Purchaser shall assign the marijuana business permit back to the Seller. Upon the maturity date of the promissory note, in the event that the borrower has not paid the principal balance of the note in full, Seller shall have the option to receive the Shares as payment or $150,000 by wire transfer. As of September 30, 2021, the buildout of the Michigan retail dispensary has begun, however the project has been delayed due to Department of Zoning and Planning coding issues. Subsequent to further investigation, due to related religious reasons, the Department of Zoning and Planning will not issue a license, therefore, impairing this investment.
Depreciation and amortization expense was $75,688 for the three months ended December 31, 2017 and $8,134 for 2016.
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Kaya Holdings, Corp.
On April 13, 2021, the Company executed an Investors’ Rights Agreement in conjunction with a Subscription Agreement with Kaya Holdings, Corp. The Company purchased shares of Class B common stock of Kaya Holdings, Corp for a total investment of $230,000. In addition to the purchased Class B shares, the Company received founder Class B shares resulting in a total of Class B shares. The Company, pursuant to a securities purchase agreement sold all of these shares to a third party for $200,000, recognizing a loss of $30,000.
10. Non-Controlling Interests
Non-controlling interests in consolidated entities are as follows (in thousands):
Schedule of Non-Controlling Interests in Consolidated Entities
| As of September 30, 2021 | ||||||||||||||||
| NCI Equity Share | Net Loss Attributable to NCI | NCI in Consolidated Entities | Non-Controlling Ownership % | |||||||||||||
| NVD RE Corp. | $ | 587 | $ | (34 | ) | $ | 553 | 36.2 | % | |||||||
| Western Coast Ventures, Inc. | 1,052 | (210 | ) | 842 | 49.0 | % | ||||||||||
| YMY Ventures, Inc. | 243 | 56 | 299 | 50.0 | % | |||||||||||
| Michigan RE 1, Inc. | - | (54 | ) | (54 | ) | 49.0 | % | |||||||||
| $ | 1,882 | $ | (242 | ) | $ | 1,640 | ||||||||||
| As of March 31, 2022 | ||||||||||||||||
| NCI Equity Share | Net Loss Attributable to NCI | NCI in Consolidated Entities | Non-Controlling Ownership % | |||||||||||||
| NVD RE Corp. | $ | 553 | $ | (19 | ) | $ | 534 | 36.2 | % | |||||||
| Western Coast Ventures, Inc. | 842 | $ | (3 | ) | 839 | 49.0 | % | |||||||||
| YMY Ventures, Inc. | 299 | $ | 62 | 361 | 50.0 | % | ||||||||||
| Michigan RE 1, Inc. | (54 | ) | $ | (152 | ) | (206 | ) | 49.0 | % | |||||||
| $ | 1,640 | $ | (112 | ) | $ | 1,528 | ||||||||||
11. Business Combination
Artifact
On September 17, 2021, pursuant to an Agreement and Plan of Reorganization (“Agreement”) the Company acquired a marijuana processor business and a marijuana retailer business located in Eugene, Oregon; a marijuana retailer business located in Salem, Oregon; and certain intellectual property assets, including but not limited to the “ARTIFACT EXTRACTS” trademark that is used by the retail businesses acquired in connection with the Agreement. In connection with the Agreement, the Company acquired fixed assets and intangible assets in exchange for common shares of the Company valued at $2,380,661 or $ per share.
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Purchase Price Allocation
As of September 17, 2021, the Company allocated the purchase consideration to the fair value of the assets acquired and liabilities assumed as summarized in the table below (in thousands):
Schedule of Purchase Consideration to Fair value of assets Acquired and Liabilities Assumed
| Purchase Consideration | ||||
| Stock Consideration | $ | 2,381 | ||
| Total Purchase Consideration | $ | 2,381 | ||
| Allocation of Purchase Consideration | ||||
| Working Capital | $ | 189 | ||
| Fixed Assets | 14 | |||
| Customer Relationships | 3 | |||
| License | 1,762 | |||
| Tradename | 206 | |||
| Goodwill | 207 | |||
| Total Purchase Consideration | $ | 2,381 | ||
The goodwill of $207,000 is not expected to be deductible for income tax expenses.
The following unaudited proforma condensed consolidated results of operations have been prepared as if the acquisition above occurred October 1, 2020.
Schedule of Unaudited proforma Information
| Three Months Ended | Six Months Ended | |||||||
| March 31, 2021 | March 31, 2021 | |||||||
| Revenue | $ | 6,174 | $ | 12,128 | ||||
| Net loss | $ | (8,700 | ) | $ | (12,050 | ) | ||
The unaudited proforma condensed consolidated results of operations are not necessarily indicative of results that would have occurred had the acquisitions occurred as of October 1, 2020, nor are they necessarily indicative of the results that may occur in the future.
12. Intangible Assets, net
Intangible assets as of March 2022, and September 2021 (in thousands):
Schedule of Intangible Assets
| Estimated Useful Life | Cannabis Licenses | Tradename | Customer Relationship | Non-compete | Technology | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
| Balance as September 30, 2021 | $ | 20,092 | $ | 951 | $ | 645 | $ | 220 | $ | 418 | $ | (3,861 | ) | $ | 18,465 | |||||||||||||||
| YMY Ventures | 15 | - | - | - | - | - | (25 | ) | (25 | ) | ||||||||||||||||||||
| Western Coast Ventures, Inc. | 15 | - | - | - | - | - | - | - | ||||||||||||||||||||||
| Yerba Buena | 3-15 years | - | - | - | - | - | (86 | ) | (86 | ) | ||||||||||||||||||||
| Foothill (7LV) | 15 | - | - | - | - | - | (261 | ) | (261 | ) | ||||||||||||||||||||
| Driven Deliveries | 10-15 years | (9,315 | ) | (413 | ) | - | - | (413 | ) | 2,533 | (7,608 | ) | ||||||||||||||||||
| JV Retail 3 | 3-15 years | - | - | - | - | - | (18 | ) | (18 | ) | ||||||||||||||||||||
| JV Retail 4 | 3-15 years | - | - | - | - | - | (17 | ) | (17 | ) | ||||||||||||||||||||
| JV Extraction | 10-15 years | - | - | - | - | - | (29 | ) | (29 | ) | ||||||||||||||||||||
| Other | 5 | - | - | - | - | - | - | - | ||||||||||||||||||||||
| Balance as March 31, 2022 | $ | 10,777 | $ | 538 | $ | 645 | $ | 220 | $ | 5 | $ | (1,764 | ) | $ | 10,421 | |||||||||||||||
Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors or changes. Amortization expense for the three and six months ended March 31, 2022, was $221 and $439, respectively. Amortization expense for the three and six months ended March 31, 2021, was $1,049 and $1,294, respectively.
The following table is the future remaining expected amortization for the fiscal years ended September 30:
Schedule of Expected Amortization
| 2022 | $ | 403 | ||
| 2023 | 829 | |||
| 2024 | 829 | |||
| 2025 | 829 | |||
| 2026 | 829 | |||
| Thereafter | 6,702 | |||
| Finite-Lived Intangible Assets, Net | $ | 10,421 |
13. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following (in thousands):
Schedule of Accounts Payable and Accrued Expenses
| March 31, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | 2,247 | $ | 1,105 | |||||
| Accrued credit cards | 38 | 25 | ||||||
| Accrued interest | 59 | 87 | ||||||
| Accrued payroll | 325 | 713 | ||||||
| Accrued sales tax liability | 46 | 148 | ||||||
| Other | 112 | 469 | ||||||
| Total Accounts Payable and Accrued Expenses | $ | 2,827 | $ | 2,547 | ||||
14. Notes Payable and Advances
The following table summarizes the Company’s short-term notes and advances, acquisition note payable, due to related party loans, and long-term debt, mortgages as of March 31, 2022, and September 30, 2021:
Schedule of Short-term Notes and Advances
| March 31, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Equipment financing | $ | 25 | $ | 30 | ||||
| Insurance financing | 370 | 261 | ||||||
| Promissory note | 194 | 359 | ||||||
| Total notes payable and advances | $ | 589 | $ | 650 | ||||
| Long-term mortgages | 2,100 | 2,100 | ||||||
| Total long-term debt | $ | 2,100 | $ | 2,100 | ||||
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Equipment financing
Effective April 29, 2018, the Company entered into a 36-month premium finance agreement in consideration for a John Deere Gator Tractor in the principal amount of $15,710. The note bears no annual interest rate and requires the Company to make thirty-six monthly payments of $442 over the term of the note. As of March 31, 2022, and 2021, the obligation outstanding is $0 and $442, respectively. No amount was recorded for the premium for the non-interest-bearing feature of the note as it was immaterial. The note was secured by the equipment financed.
Pursuant to the Company’s acquisition of Yerba Buena the Company assumed a note payable obligation dated July 2017 related to a tractor which had a 60-month premium finance agreement. The principal amount was $28,905. The note bears no annual interest rate and requires the Company to make sixty monthly payments of $482 over the term of the note. No amount was recorded for the premium for the non-interest-bearing feature of the note as it was immaterial. The note is secured by the equipment financed. As of March 31, 2022, the obligation outstanding is $1,903.
January 2021, the Company entered into a promissory note in the amount of $27,880 for the acquisition of a truck. The promissory note bears an interest rate of 13.29% per annum and is secured by the financed vehicle. The note has a sixty-month term with monthly payment of $642. As of March 31, 2022, the balance outstanding is $22,864.
Insurance financing
Effective February 17, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal amount of $243,284. The note bears an annual interest rate of 7.46%. The Company paid $47,100 as a down payment on February 17, 2021, the note requires the Company to make 10 monthly payments of $17,835 over the remaining term of the note. In February 2022, the total outstanding obligation was paid.
Effective December 4, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy in the principal amount of $9,920. The note bears an annual interest rate of 12.8%. The Company paid $2,383 as a down payment on December 4, 2020, the note requires the Company to make 10 monthly payments of $754 over the remaining term of the note. As of March 31, 2022, the obligation has been paid.
Effective February 24, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal amount of $13,694. The note bears an annual interest rate of 7.369%. The Company paid $3,424 as a down payment on April 19, 2021, the note requires the Company to make 9 monthly payments of $1,199 over the remaining term of the note. As of March 31, 2022, the obligation has been paid.
Effective April 10, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $78,750. The note bears an annual interest rate of 8.35%. The Company paid $15,750 as a down payment on May 10, 2021, the note requires the Company to make 9 monthly payments of $7,271 over the remaining term of the note. As of March 31, 2022, the obligation has been paid.
Effective April 17, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $23,014. The note bears an annual interest rate of 11.98%. The Company paid $4,871 as a down payment on March 16, 2021, the note requires the Company to make 10 monthly payments of $1,814 over the remaining term of the note. As of March 31, 2022, the obligation outstanding has been paid.
Effective May 31, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $8,906. The note bears an annual interest rate of 10.25%. The Company paid $2,537 as a down payment on May 28, 2021, the note requires the Company to make 9 monthly payments of $741 over the remaining term of the note. As of March 31, 2022, the obligation has been paid.
Effective July 16, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $11,830. The note bears an annual interest rate of 1.06%. The Company paid $4,113 as a down payment in June 2021, the note requires the Company to make 9 monthly payments of $771 over the remaining term of the note. As of March 31, 2022, the obligation outstanding is $1,543.
Effective July 17, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $16,850. The note bears an annual interest rate of 3.96%. The note requires the Company to make 12 monthly payments of $1,351 over the term of the note. As of March 31, 2022, the obligation outstanding is $6,044.
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Effective August 30, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $58,899. The note bears an annual interest rate of 7.99%. The Company paid $17,769 as a down payment on August 1, 2021, the note requires the Company to make 9 monthly payments of $4,113 over the remaining term of the note. Additionally, effective August 30, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $94,116. The note bears an annual interest rate of 11.26%. The Company paid $27,102 as a down payment on August 27, 2021, the note requires the Company to make 9 monthly payments of $7,446 over the remaining term of the note. As of March 31, 2022, a new location was added to the policy, therefore, creating a new finance agreement requiring 7 payments of $12,188 leaving an amount outstanding of $24,377.
Effective October 26, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $10,411. The note bears an annual interest rate of 10.65%. The Company paid $1,751 as a down payment in October 2021, the note requires the Company to make 10 monthly payments of $866 over the remaining term of the note. As of March 31, 2022, the obligation outstanding is $4,330.
Effective February 9, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal amount of $430,657. The note bears an annual interest rate of 7.64%. The Company paid $86,131 as a down payment on February 14, 2022, the note requires the Company to make 10 monthly payments of $35,795 over the remaining term of the note. As of March 31, 2022, the obligation outstanding is $322,158.
Effective February 24, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal amount of $17,551. The note bears an annual interest rate of 7.37%. The Company paid $18,033 as a down payment on February 24, 2022, the note requires the Company to make 10 monthly payments of $1,327 over the remaining term of the note. As of March 31, 2022, the obligation outstanding is $11,943.
Promissory note
In January 2020, the Company issued two promissory notes with a principal balance of $500,000 to accredited investors (the “Note Holders”). The note matures in October 2020 and has an annual rate of interest of 12%. In connection with the issuance of the promissory note, the Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the issuance date, $0.85 per. As of July 2020, in consideration of the warrants being amended to $0.45 per share with an extended the term from five to a ten-year term, the maturity date has been extended to December 13, 2020. As of September 30, 2020, the obligation outstanding is $500,000 and $440,403, net of debt discount of $59,597. As of March 31, 2022, the obligation outstanding is $250,000 and the balance is $194,014, net of debt discount of $55,986. The Company was notified that the maturity dates on these notes have been extended for the near-term.
Long-term debt, mortgages
In January 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest at 15% per annum. Monthly interest only payments began February 1, 2020, payments will continue each month thereafter until paid. The entire unpaid balance was due on January 31, 2022, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of March 31, 2022, the obligation outstanding is $400,000. Subsequent to March 31, 2022, the Company paid off the existing debt and procured another mortgage in the amount of $450,000. This obligation has no personal guarantee; however, a corporate guarantee has been perfected. The new interest is 12% on a three-year term.
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In March 2020, the Company executed a $400,000 mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest at 11.55% per annum. Monthly interest only payments began May 1, 2020, payments will continue each month thereafter until paid. The entire unpaid balance was due on April 1, 2022, the maturity date of the mortgage, and is secured by the underlying property. The Company paid costs of approximately $38,000 to close on the mortgage. The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of March 31, 2022, the obligation outstanding is $400,000. Subsequently, the Company has exercised its right to extend the maturity date of the note by six months. The new maturity date of the loan is October 1, 2022.
In March 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest at 15% per annum. Monthly interest only payments began April 1, 2020, payments will continue each month thereafter until paid. The entire unpaid balance was due on March 31, 2022, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of March 31, 2022, the obligation outstanding is $700,000. Subsequent to March 31, 2022, the Company paid off the existing debt and procured another mortgage in the amount of $775,000. This obligation has no personal guarantee; however, a corporate guarantee has been perfected. The new interest is 12% on a two-year term.
In July 2020, the Company executed a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest at 14% per annum. Monthly interest only payments began August 1, 2020, payments will continue each month thereafter until paid. The entire unpaid balance is due on July 31, 2023, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of March 31, 2022, the obligation outstanding is $200,000.
In April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment to contribute $1.275 million to NVD which included the purchase price of $600,000 and an additional commitment to pay tenant improvement costs of $675,000. In the year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this mortgage were advanced to the Company. The advance is undocumented, non-interest bearing and due on demand. As of September 30, 2019, the balance due totals $300,000. In August 2020, the Company refinanced this obligation and paid the $300,000 balance. The refinanced mortgage term is 36 months and includes and interest rate of 14% and monthly interest only payments of $4,667. As of March 31, 2022, the balance due totals $400,000.
The following is a table of the 5-year runoff of our long-term debt as of March 31:
Schedule of Maturities of Long Term Debt
| 2022 | $ | 1,500 | ||
| 2023 | 600 | |||
| 2024 | - | |||
| 2025 | - | |||
| 2026 | - | |||
| Thereafter | - | |||
| Total long-term debt | $ | 2,100 |
Finance liability
In November 2020, the Company executed a mortgage payable on property located in Mulino, Oregon to acquire additional funds. The mortgage bears interest at 15% per annum. The entire unpaid balance is due November 2022, the maturity date of the mortgage, and was secured by the underlying property. The note was cross guaranteed by the former CEO and Director of the Company. On November 23, 2020, the Company executed a real estate purchase agreement related to the Mulino Property which included the sale of the property and payoff of the mortgage. Additionally, the Company entered into a lease agreement whereas the amount of $13,750 required as a rent payment through the lease is being recorded as interest expense and the Company recorded a finance liability of $1,094,989 related to the lease under the guidance of ASC 842 as a failed sale and leaseback transaction. As of March 31, 2022, the obligation outstanding is $1,092,757. Subsequent to March 31, 2022, the Company executed a sale lease back agreement with the Company’s Mulino property, and entered into a 15-year lease with an unrelated third party located in Englewood, CO. The lease requires the Company to pay a starting base rental fee of $29,167 plus additional estimated triple net charges per month including real estate taxes in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance, and utilities are included and paid monthly. This transaction resulted in net proceeds to the Company in the amount of $2.2 million.
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15. Convertible debt
Canaccord
On December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of up to convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross proceeds of up to CDN$10,000,000 (the “Offering”). The net proceeds of the Offering were used for expansion initiatives and general corporate purposes. The Company’s functional currency is U.S. dollars.
In December 2018 and January 2019, the Company issued 3,121 CD Special Warrants in the first closing of the Offering, at a price of CDN $ per CD Special Warrant, and received aggregate gross proceeds of CDN $3.1 million or $2.3 million USD. In connection with this offering, the Company issued the agents in such offering convertible debenture special warrants (the “Broker CD Special Warrants”) as partial satisfaction of a selling commission.
On March 14, 2019, the Company issued 962 CD Special Warrants in the second and final closing of the Offering, at a price of CDN $ per CD Special Warrant, and received aggregate gross proceeds of CDN $1.0 million or $0.7 million USD. In connection with this offering, the Company issued the agents in such offering convertible debenture special warrants (the “Broker CD Special Warrants”) as partial satisfaction of a selling commission.
The total aggregate proceeds of the Offering totalled $4.1 million CDN or $3.1 million USD.
Each CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration) for one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third business day after the date on which both (A) a receipt (the “Receipt”) for a (final) document (the “Qualification Document”) qualifying the distribution of the Convertible Debentures (as defined below) and Warrants (as defined below) issuable upon exercise of the CD Special Warrants has been issued by the applicable securities regulatory authorities in the Canadian jurisdictions in which purchasers of the CD Special Warrants are resident (the “Canadian Jurisdictions”), and (B) a registration statement (the “Registration Statement”) registering the resale of the common shares underlying the Convertible Debentures and Warrants has been declared effective by the U.S. Securities and Exchange Commission (the “Registration”); and (ii) the date that is six months following the closing of the Offering. The Company has also provided certain registration rights to purchasers of the CD Special Warrants. The CD Special Warrants were exchanged for Convertible Debenture Units after six months as U.S. and Canadian registrations were not effective at that time.
Each Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of CDN $ per Warrant Share for a period of 24 months following the closing of the Offering.
The Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the Offering. If the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that is 120 days following the closing of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof to receive, upon the exercise thereof and at no additional cost, 1.05 Convertible Debenture Units per CD Special Warrant (instead of 1.0 Convertible Debenture Unit per CD Special Warrant). Until the Receipt and Registration have been obtained, securities issued in connection with the Offering (including any underlying securities issued upon conversion or exercise thereof) will be subject to a six (6)-month hold period from the date of issue. Since the CD Special Warrants were exchanged for Convertible Debenture Units after six (6) months as U.S. and Canadian registrations were not effective at that time, the holders received 1.05 Convertible Debenture Units per CD Special Warrant.
The brokered portion of the Offering (CDN $2.5 million, $1.9 million USD) was completed by a syndicate of agents (collectively, the “Agents”). The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the brokered portion of the Offering. As additional consideration, the Company issued the Agents such number of non-transferable broker convertible debenture special warrants (the “Broker CD Special Warrants”) as is equal to 7.0% of the number of CD Special Warrants sold under the brokered portion of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD Special Warrants, into broker warrants of the Company (the “Broker Warrants”). Each Broker Warrant entitles the holder to acquire one Convertible Debenture Unit at an exercise price of CDN $, until the date that is 24 months from the closing date of the Offering. The distribution of the Broker Warrants issuable upon the exchange of the Broker CD Special Warrants shall also be qualified under the Qualification Document and the resale of the common shares underlying the Broker Warrants will be registered under the Registration Statement. The Company also paid the lead agent a commission noted above of CDN$157,290, corporate finance fee equal to CDN $50,000 in cash and as to $50,000 in common shares of the Company at a price per share of CDN$ plus additional expenses of CDN$20,000. In addition, the Company paid the trustees legal fees of CDN$181,365. In total the Company approx. USD $0.32 million in fees and expenses associated with the offering.
The issuance of the securities was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), for the offer and sale of securities not involving a public offering, Regulation D promulgated under the Securities Act, Regulation S, in Canada to “accredited investors” within the meaning of National Instrument 45106 and other exempt purchasers in each province of Canada, except Quebec, and/or outside Canada and the United States on a basis which does not require the qualification or registration. The securities being offered have not been registered under the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration or an applicable exemption from the registration requirements.
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The Convertible Debenture features contain the following embedded derivatives:
| ● | Conversion Option - The Convertible Debentures provide the holder the right to convert all or any portion of the outstanding principal into common shares of the Company at a conversion price of C$ such that common shares are issued for each C$1,000 of principal of Convertible Debentures converted. | |
| ● | Contingent Put - Upon an Event of Default, the Convertible Debentures settle for cash at the outstanding principal and interest amount (at discretion of the Indenture Trustee or upon request of Holders of 25% or more of principal of the Convertible Debentures). | |
| ● | Contingent Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding amount and principal and interest * 105% (where Holder accepts a Change of Control Offer). |
The conversion option, the contingent put feature upon an Event of Default, and the contingent put feature upon a Change in Control should be bifurcated and recognized collectively as a compound embedded derivative at fair value at inception and at each quarterly reporting period.
A five percent penalty assessed for failure to timely file a registration statement to register the stock underlying the CD special warrants.
The Company valued the warrants granted using the Black-Scholes pricing model and determined that the value at grant date was approximately $424,000 USD (this includes the warrants issued as part of the penalty for failure to timely file the required registration statement under the indenture agreement). The significant assumptions used in the valuation are as follows:
| Fair value of underlying common shares | $ | to $ | ||
| Exercise price (converted to USD) | $ | |||
| Dividend yield | - | |||
| Historical volatility | 85 | % | ||
| Risk free interest rate | 1.4% to 1.9 | % |
The warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not meet the scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance with the guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in fair value recognized in earnings each reporting period.
In April 2020, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the Convertible Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing, which closed on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in connection with the financing will be repriced to C$ per Common Share and the convertible debentures of the Company issued in connection with the financing will be repriced to C$ per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible debentures: (i) an extension to the maturity date of the convertible debentures to three years from the date of issuance; and (ii) an amendment to permit the Company to force the conversion of the principal amount of the then outstanding convertible debentures and any accrued and unpaid interest thereof at the new conversion price on not less than June days’ prior written notice if the closing trading price of the shares of common stock of the Company’s common shares exceeds C$ for a period of 10 consecutive trading days on the CSE. The Warrant holders have also approved the inclusion of an early acceleration feature in accordance with the policies of the Canadian Securities Exchange, permitting the Company to accelerate the expiry date of the warrants should the closing trading price of the Common Shares exceed C$ for a period of 10 consecutive trading days on the CSE. As of September 30, 2021, the convertible debt related to the above debentures is $2.9 million.
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The table below shows the warrant liability and embedded derivative liability recorded in connection with the Canaccord convertible notes and the subsequent fair value measurement for the period ended March 31, 2022, in USD, (in thousands):
Schedule of Warrant Liability and Embedded Derivative Liability
| Warrant Liability | Derivative Liability | |||||||
| Balance as of September 30, 2021 | $ | 67 | $ | 592 | ||||
| Change in fair value | (67 | ) | (592 | ) | ||||
| Balance as of March 31, 2022 | $ | - | $ | - | ||||
16. Fair Value Measurements
In accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:
Level 1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date
Level 2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level 3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of the period ended March 31, 2022 (in thousands):
Schedule of Liabilities Measured at Fair Value on a Recurring Basis
| Fair value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Fair value measured at March 31, 2022 | ||||||||||||||||
| Quoted prices in active | Significant other | Significant unobservable | ||||||||||||||
| markets | observable inputs | inputs | ||||||||||||||
| Fair value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Warrant liability | $ | 450 | $ | - | $ | - | $ | 450 | ||||||||
| Embedded derivative liability | - | - | - | - | ||||||||||||
| Total fair value | $ | 450 | $ | - | $ | - | $ | 450 | ||||||||
There were no transfers between Level 1, 2 or 3 during the period ended March 31, 2022.
The following table presents changes in Level 3 liabilities measured at fair value for the period ended March 31, 2022. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (in thousands).
Schedule of Level 3 Liabilities Measured at Fair Value
| Warrant Liability | Derivative Liability | Total | ||||||||||
| Balance – September 30, 2021 | $ | 2,277 | $ | - | $ | 2,277 | ||||||
| Change in fair value | (1,739 | ) | - | (1,739 | ) | |||||||
| Balance – December 31, 2021 | 538 | - | 538 | |||||||||
| Issuance of warrants - compensation | 104 | - | 104 | |||||||||
| Change in fair value | (192 | ) | - | (192 | ) | |||||||
| Balance – March 31, 2022 | $ | 450 | - | $ | 450 | |||||||
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A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of March 31, 2022, and September 2021 is as follows:
Summary of Weighted Average Significant Unobservable Inputs
| Warrant Liability | ||||||||
| As of March 31, 2022 | As of | |||||||
| Strike price | $ | 0.49 | $ | 0.48 | ||||
| Contractual term (years) | 1.94 | 2.57 | ||||||
| Volatility (annual) | 124 | % | 74 | % | ||||
| Risk-free rate | 2.4 | % | 1.0 | % | ||||
| Dividend yield (per share) | 0 | % | 0 | % | ||||
| Embedded Derivative Liability | ||||||||
| As of March 31, | As of | |||||||
| March 31, 2022 | September 30, 2021 | |||||||
| Strike price | $ | 0.92 | $ | 0.90 | ||||
| Contractual term (years) | 0.3 | 0.8 | ||||||
| Volatility (annual) | 166 | % | 55 | % | ||||
| Risk-free rate | 0.80 | % | 0.08 | % | ||||
| Dividend yield (per share) | 0.00 | % | 0.00 | % | ||||
| Credit spread | 14% to 16 | % | 14% to 16 | % | ||||
17. Shareholders’ Equity
In 2016, the Company adopted a plan to allow the Company to compensate prospective and current employees, directors, and consultants through the issuance of equity instruments of the Company. The plan has an effective life of 10 years. The plan is administered by the board of directors of the Company until such time as the board transfers responsibility to a committee of the board. The plan is limited to issuing common shares of the Company up to 15% of the total shares then outstanding. No limitations exist on any other instruments issuable under the plan. In the event of a change in control of the Company, all unvested instruments issued under the plan become immediately vested.
As of February 2017,
In November 2017, the Company entered into a promissory note in the amount of $21,749 from a vendor of the Company. The promissory note bears an interest rate of 18% per annum and also contains a 10% servicing fee. The note matures 24 months after issuance, and is secured by certain security electronics purchased with proceeds of the note.Preferred shares
The Company issued a $100,000 promissory note dated December 7, 2017 to accredited investor which matures March 6, 2018 and has an annual ratehad two series of interest at 24%. Both principal and interest is due at maturity. The promissory note ranks senior to all obligations notpreferred shares designated as a primary obligation by the Company. As an inducement to issue the promissory note, the Company granted the holder warrants to acquire 20,833 shares of the Company’s common stock. The warrant has an exercise price of $2.40 per underlying common share and are exercisable for 2 years from the anniversary date of issuance (see Note 6).
The Company issued a $100,000 promissory note dated December 1, 2017 to accredited investor which matures March 1, 2018 and has an annual rate of interest at 24%. Both principal and interest is due at maturity. The promissory note ranks senior to all obligations not designated as a primary obligation by the Company. As an inducement to issue the promissory note, the Company granted the holder warrants to acquire 20,833 shares of the Company’s common stock. The warrant has an exercise price of $2.40 per underlying common share and are exercisable for 2 years from the anniversary date of issuance (see Note 6).
Preferred shares
The Company haswith no preferred shares issued and outstanding as of DecemberMarch 31, 2017.2022, and September 30, 2021.
Common shares
The holders of common shares are not entitled to receive dividends at this time, however, are entitled to one vote per share at meetings of the Company.
The Company received subscriptions in private placement offerings completed for the following shares in the quarter ended December 31, 2017:
● For the quarter ended December 31, 2017, 1,057,124 common shares were issued at $2.40 per share to unaffiliated investors raising gross cash proceeds of $2,537,098. 362,458 shares of common stock were issuable as of December 31, 2017.
During the quarter ended December 31, 2017,2021, the Company began the process of registeringissued shares of its common stock related to a stock purchase agreement for trading under the securities lawscash of Canada. As part of that process, certain founders were notified that they had to contribute additional amounts for their shares. In the quarter ended December 31, 2017, two founders contributed an additional $9,933 towards their founders shares as part of the requirements of the securities regulators of Canada.$.
Subscription receivable
On September 27, 2017, the Company received a subscription for 41,667 shares in the amount of $100,000. The funds were received by the Company in October 2017.
Options
During the quarter ended December 31, 2017,2021, the Company entered into a renewed consulting agreement, and as partissued shares of that agreement for professional services, agreed to issue a total of 100,000 options to purchase theits common stock related to various consulting agreements for a fair value of the Company, with an exercise price of $2.40approximately $30,000 or $ per share and a term of 4 years. Pursuant to the agreement 50,000 shares vested immediately, options to acquire 25,000 shares will vest 6 months subsequent to the effective date, and the remaining option to acquire 25,000 shares vests 1 year after the effective date.share.
During the quarter ended December 31, 2017,2021, the Company granted options to acquire 50,000issued shares of its common stock valued at $ as stock-based compensation.
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During the quarter ended March 31, 2021, the Company issued shares of its common stock valued at $ as stock-based compensation.
During the quarter ended March 31, 2021, the Company issued shares of its common stock related to various consulting agreements for a fair value of approximately $1,097,500 or $ per share.
During the quarter ended March 31, 2021, the Company issued shares of its common stock with a fair value of $210,000 on behalf of its Michigan joint venture partner into escrow pursuant to a consultant. The grant has an exercise pricesecurity agreement related to the commercial lease.
During the quarter ended March 31, 2021, the Company converted $1,975,965 of $2.40 per share and a term of 4 years. Allprincipal balance related to convertible debt in exchange for shares of the optioncompany’s common stock. The Company also issued common shares vested onin satisfaction of interest payments owed of $121,631.
During the datequarter ended March 31, 2021, the Company issued shares of its common stock in connection with a settlement agreement for settlement liability of $5,439,855.
Pursuant to a prospectus the grant.Company has been tendered $1.0 million and will issue common shares.
The fair valuesDuring the quarter ended March 31, 2021, the Company raised $4,934,376 for the issuance of the options granted during shares of its common stock in connection with a private placement memorandum.
During the quarter ended December 31, 2017 were determined using2021, the Black-Scholes option pricing model withCompany cancelled shares of the following weighted-average assumptions:company’s common stock as part of the Share Exchange Agreement, more fully described in Note 3.
The options issued inDuring the quarter ended December 31, 2017 noted above were2021, the Company converted $67,000 of its accrued interest related to convertible debt in exchange for shares of the company’s common stock.
During the quarter ended March 31, 2022, the Company issued shares of its common stock valued at inception at $2.22 per share.$as stock-based compensation.
18. Stock Based Compensation
WarrantsStock Options
The fair valuesvalue of the warrantsCompany’s common stock was based upon the publicly quoted price on the date that the final approval of the awards was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend yield is %. The expected term for stock options granted with service conditions represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission’s Staff Accounting Bulletin for “plain vanilla” options. The expected term for stock options granted with performance and/or market conditions represents the period estimated by management by which the performance conditions will be met. The Company obtained the risk-free interest rate from publicly available data published by the Federal Reserve. The Company uses a methodology in estimating its volatility percentage from a computation that was based on a comparison of average volatility rates of similar companies to a computation based on the standard deviation of the Company’s own underlying stock price’s daily logarithmic returns.
Schedule of Fair Value of Options Granted
Options:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Exercise price | n/a | - $ | ||||||
| Expected term (years) | n/a | - | ||||||
| Expected stock price volatility | n/a | % - | % | |||||
| Risk-free rate of interest | n/a | - | % | |||||
| Expected dividend rate | n/a | 0 | % | |||||
Summary of Stock Option Activity
| Number of Shares | Weighted Average Exercise Price | Total Intrinsic Value | Weighted Average Remaining Contractual Life (in years) | |||||||||||||
| Outstanding as of October 1, 2020 | 5,572,916 | $ | 1.77 | $ | - | |||||||||||
| Granted | 1,125,000 | $ | 0.28 | $ | 54 | |||||||||||
| Outstanding as of September 30, 2021 | 6,697,916 | $ | 1.07 | $ | 54 | |||||||||||
| Expired | (717,856 | ) | $ | 1.07 | $ | - | - | |||||||||
| Outstanding as of December 31, 2021 | 5,980,060 | $ | 0.63 | $ | - | |||||||||||
| Expired and cancelled | (1,098,959 | ) | $ | 0.32 | $ | - | - | |||||||||
| Outstanding as of March 31, 2022 | 4,881,101 | $ | 0.32 | $ | - | |||||||||||
| Options vested and exercisable | 4,256,102 | $ | 0.32 | $ | - | |||||||||||
The valuation
Estimated future stock-based compensation expense relating to unvested stock options was nominal as of the warrants was $92,499 which has been recorded as a debt discountMarch 31, 2022, and is being amortized over the2021. Weighted average remaining contractual life of the loansoptions is years.
Stock-based Compensation Expense
Schedule of Stock-based Compensation Expenses
| 2022 | 2021 | |||||||
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Stock grants | $ | 68 | $ | 1,965 | ||||
| Stock options | 19 | 78 | ||||||
| Warrants | 158 | 18 | ||||||
| Total stock-based compensation | $ | 245 | $ | 2,061 | ||||
| 2022 | 2021 | |||||||
| Six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Stock grants | $ | 288 | $ | 3,116 | ||||
| Stock options | 311 | 139 | ||||||
| Warrants | 158 | 150 | ||||||
| Total stock-based compensation | $ | 757 | $ | 3,405 | ||||
19. Commitments and contingencies
As noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States Federal Government. This raises several possible issues which may impact the Company’s overall operations, not the least of which are related to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level, and most traditional banks are federally insured, those financial institutions will not service cannabis businesses. In states where medical or recreational marijuana is legal, dispensary owners, manufacturers, and anybody who “touches the plant,” continue to face a straight-line basishost of operational hurdles. While local, state-chartered banks and credit unions now accept cannabis commerce, there remains a reluctance by traditional banks to interest expense. Asdo business with them. Aside from a huge inconvenience and the need to find creative ways to manage financial flow, payroll logistics, and payment of Decembertaxes, his also poses tremendous risks to controls as a result of operating a lucrative business in cash. This lack of access to traditional banking may inhibit industry growth. For the period ended March 31, 2017, $88,645 remained unamortized.2022, the Company’s has accounts with a Florida bank and several credit unions located in Washington and California.
Despite the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these risks will have a substantive impact on its planned operations in the near term.
In July 2016, the Company entered into a 10-year10-year lease for a commercial building from an unrelated third party in Springfield, Oregon. At the time the original lease was entered into, the Company had expected to close on significant subscriptions from its private placement. However, when those did not immediately materialize, the Company entered into an agreement with the landlord to cancel the lease and in addition, paid the landlord $15,000 not to rent out the property until such time the Company could enter into a new lease. In September 2016, the Company entered into a new 10-year lease with the landlord that commenced in November 2016. The lease requires the Company to pay a starting base rental fee of $7,033 $7,033plus an additional estimated $315 $315 per month in real estate taxes in which the base rental fee escalates each year by approximately 2%2%. All taxes (including reconciling real estate taxes), maintenance and utilities are included at the end of each year as a one-time payment. In addition, the Company also remitted $14,000 $14,000for a security deposit to the landlord. No amounts have been recorded for deferred rent in these financial statements as the amount was deemed immaterial by the Company. The Company has subleased this space pursuant to a 10-year lease.On February 22, 2018, both parties executed a lease addendum that adds contiguous property for 12,322 square feet. The term commences November 1, 2017, and continues through November 31, 2026 at a starting rate of $3,525 a month that escalates after the first year. The Company subleases this property to a related party (see disclosures below under “Springfield Suites”). As of March 31, 2022, Company eliminates this rental income in consolidation.
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In August 2016, the Company and certain shareholders ofSeptember 2019, the Company entered into a “Multi Party” Agreement, in which the Company became obligated to lease or acquire three separate real estate assets, and separately, if certain events occur, additional real estate assets held by entities related to those shareholders. The Agreement also gives the Company the right of first refusal in regards to certain properties owned by the persons and entities affiliated with the parties of the Agreement so long as certain targets are met.
Should the Company obtain in excess of $10,000,000 through a combination of its private placements and its merger with Patch Holdings, Inc. (see Note 5), it is required to purchase certain real estate properties owned by entities affiliated with certain of its shareholders. In addition, if the Company obtains in excess of $13 million through a combination of private placements and its merger with Patch Holdings, Inc., the cannabis affiliates become obligated to purchase preferred stock of the Company in an amount equivalent to 50% of their post-tax net operating income.
Certain shareholders of the Company have begun organizing entities that will operate directly in the cannabis industry, and the Company leases its properties to these entities. The Multi Party Agreement also requires that in the event that the US Government amends Title 21 of the United States Code, otherwise known as the Controlled Substances Act, to remove cannabis as a Schedule I drug, and the Company raises more than $10 million in equity and merger funding, the Company is required to enter into agreements to acquire those related entities and issue such equity that the shareholders of the related entities obtain 75% of the then issued and outstanding equity of the Company, regardless of the profitability or financial condition of the related entities at the time of their acquisition.
In February 2017, the Company entered into a 1-year4-year lease for the occupancy of the Company’s new corporate office located in Boca Raton, Florida. The lease requires the Company to pay a starting base rental fee of $785.00$4,285 per month. All taxes, maintenance and utilities are included. In addition,month with yearly increases thereafter. As of November 23, 2020, the Company also remitted $785 for a security depositadded an additional 2,000 rentable square feet to its current lease under the landlord.same terms and conditions.
In February 2017, the Company entered into an advisory agreement with an unrelated third party with a term of 12 months. As part of that agreement, the third party agreed to provide assistance for the Company with respect to eligibility for becoming quoted on the OTCQB/OTCQX and advising and assisting the Company in complying with its ongoing OTCQB/OTCQX disclosure obligation under current federal and state securities laws. These services to the Company are exchanged for a $10,000 upfront payment, and $5,000 payment upon the acceptance on OTCQB/OTCQX.
In November 2017,January 2019, the Company entered into a consulting agreement with an unrelated third party with a term of 12 months. As part of that agreement, the third party agreed to provide assistance5-year lease for the Company with respect to business affairs relating to business consolidations and financing. As consideration for these services, the Company has agreed to issue to the consultant options to acquire up to 100,000 sharesoccupancy of common stock of the Company.
Property Rental Agreements
1027 Willamette
In July 2017, the Company entered into an operating lease agreement with a marijuana dispensary (the “Lessee”) to move into the Company’s acquired property located at 1027 Willamette Street in Eugene, Oregon. The lease agreement is for a base term of ten years (see note below)real estate and a monthly rent obligation of $13,800, subject to annual increases of 3% per year, plus an amount for additional rent based on final buildout costs incurred by the Company. The lease is a double net lease with maintenance and real property taxes to be paid by the Tenant and insurance costs paid by the Company. The Company provided the tenant with one month of free rent.
Upon the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for one five-year term, on the same terms as provided in the lease agreement.
Springfield Suites
In July 2017, the Company entered into a lease agreement for its property and warehouse building located at 800 N 42nd street in Springfield,Hillsboro, Oregon. The lease agreement is for a term of ten years (see note below) and a monthly rent obligation of $64,640, subject to annual increases of 3% per year plus an amount for additional rent based on final buildout costs incurred by the Company. The lease is a double net lease with maintenance and real property taxes to be paid by the Tenant and insurance costs paid by the Company. Rent payments commence on the date the growing season ends, which the Company currently estimates will occur in April 2018, and thus expects payments to begin in May 2018. The Company has treated this period as a free rental period for accounting purposes. At the time rental payments begin, the total of base rent and additional rent will not be less than $1.00 per foot for light assisted greenhouse and $.25 per usable square foot for un-light assisted greenhouse or outdoor grow space.
Upon the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same terms as provided in the lease agreement.
14336 S. Union Hall Road, Mulino
In July 2017, the Company entered into a lease agreement for its property located at 14336 South Union Hall Road in Mulino, Oregon. The lease agreement is for a term of ten years (see note below) and a monthly rent obligation of $18,750, subject to annual increases of 3% per year plus an amount for additional rent based on final buildout costs incurred by the Company. The lease is a double net lease with maintenance and real property taxes shall be paid by the Tenant and insurance costs paid by the Company. Rent payments will begin at the of the first growing season, which the Company currently estimates will occur in April 2018, and thus payments will commence in May 2018. The Company expects to treat such period as a free rental period for accounting purposes. At the time rental payments begin, the total of base rent and additional rent will not be less than $1.00 per foot for light assisted greenhouse and $.25 per usable square foot for un-light assisted greenhouse or outdoor grow space.
Upon the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same terms as provided in the lease agreement.
7827 SE Powell
In July 2017, the Company entered into a lease agreement for its acquired property located at 7827 SE Powell Blvd. in Portland, Oregon. The lease agreement is for a term of ten years and a monthly rent obligation of $6,523, subject to annual increases of 3% per year. Maintenance and real property taxes shall be paid by the Tenant and insurance paid by the Company. Additional rents will be added to pay landlord back for tenant improvements by the end of the first term of the lease, payments will include annual interest at 12% compounded monthly. Rent payments commence on the date the growing season ends, which the Company currently estimates will occur in April 2018, and thus expects payments to begin in May 2018. The Company has treated this period as a free rental period for accounting purposes.
Upon the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same terms as provided in the lease agreement.
During the three months ended December 31, 2017, the Company incurred total rent expense of $77,717. As of December 31, 2017, the Company has recorded a long-term asset for the straight lining of rent under the rental leases to the cannabis operators of approximately $580,670.
Subsequent to December 31, 2017, and up to the date of this filing, we have raised $1,525,980 as part of our continuing private placement at $2.40 per share. As of the date of this filing, we have issued 91,710 shares on account of these sales and are committed to issue an additional 544,115 shares.
The Company entered into a “Contract for Sale” for a Farm Property in Mulino OR (the “Mulino Property”), pursuant to which the seller will sell the premises to the Company upon the completion of the Company’s due diligence investigations and completion of the closing conditions precedent to each party’s obligations under the Contract for Sale. The purchase price is $1,700,000 which will be reduced by a rental credit of approximately $135,000, which is equivalent to nine months’ rent at $15,000 a month. In addition, the Seller has granted the Company a credit to be reflected upon closing in the amount $9,500 for improvements made by the Company to the property. In connection with the purchase of the property, the Company will make a cash payment in the amount of $362,254 and will issue a promissory note in the amount of $1,200,000 with a maturity of January 2020. The Company will pay monthly installments of principal and interest (at a rate of 2% per annum) in the amount of $13,500, commencing in July 2018 through the maturity date (January 2020), at which time the entire unpaid principal balance and any remaining accrued interest shall be due and payable in full. In April 2017, in order for the Company to make use of the premises pending closing of the purchase of the property, the Company agreed to lease the premises from the seller for a term commencing April 5, 2017 and expiring on the earlier of: (i) the termination of the Contract for Sale by either party thereto in accordance with its terms; and (ii) October 5, 2017. The lease requires the Company to pay a starting base rental fee of $15,000$9,696 per month with yearly increases thereafter.
Pursuant to the execution of a sale lease back agreement with the Company’s Wallis property, a/k/a Never Again, the Company in May 2021, entered into a 15-year lease for the first nine months with noWallis commercial building from an unrelated third party located in New York, NY. The lease deposit required. All taxes accruing duringrequires the lease term (includingCompany to pay a starting base rental fee of $31,500 plus an additional estimated triple net charges per month including real estate taxes in which the base rental fee escalates each year by approximately 2.5%. All taxes (including reconciling real estate taxes), maintenance and personal property taxes)utilities are included and paid monthly and reserved until payments are due. In addition, the responsibilityCompany also remitted $60,000 for a security deposit to the landlord.
The Company executed an Agency Agreement and in consideration of the Company. In January 2018,services rendered by the Agent and in connection with the Offering, the Company closedhas agreed to pay the Agent, on the purchase.Closing Date a commission equal to % of the gross proceeds of the Offering (including in respect of any exercise of the Over-Allotment Option, if any) payable in cash (the “Agent’s Commission”), subject to a reduced fee equal to 1% for Units sold to certain purchasers designated by the Company on a president’s list (the “President’s List”). In addition the Agent will receive a number of share purchase warrants (the “Broker Warrants”) to purchase up to that number of shares of common stock of the Company (each, a “Broker Share”) that is equal to % of the aggregate number of Units issued under the Offering (including any Additional Units (as hereinafter defined) issued upon exercise of the Over-Allotment Option, if any), subject to a reduced number of Broker Warrants equal to 3.5% of the Units sold to purchasers on the President’s List, at an exercise price of $CAD per Broker Share, exercisable for a period of 24 months following the Closing Date. Pursuant to the Agency Agreement, the Company also agreed to pay to the Agent a corporate finance fee of $100,000 CAD (the “Corporate Finance Fee”), such Corporate Finance Fee to be payable as to $50,000 CAD in cash and as to $50,000 CAD by the issuance of shares of common stock of the Company (the “Corporate Finance Fee Shares”) at the Offering Price. After deducting the Agent’s Commission (assuming no President’s List purchasers), the estimated expenses of the Offering of $350,000 CAD and the cash portion of the Corporate Finance Fee, which will be paid out of the general funds of the Company. The Company has also granted to the Agent an over-allotment option (the “Over-Allotment Option”), exercisable in whole or in part, at the Agent’s sole discretion, to purchase up to an additional % of the number of Units sold pursuant to the Offering, being up to an additional Units in the case of the Maximum Offering (the “Additional Units”), each Additional Unit to be comprised of one Unit Share and one Warrant, at the Offering Price to cover the Agent’s over-allocation position, if any, and for market stabilization purposes. The Over-Allotment Option is exercisable, in whole or in part, at any time or times until the date that is 30 days immediately following the Closing Date. A purchaser who acquires Additional Units forming part of the Agent’s over-allocation position acquires such Additional Units under this Prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. If the Over-Allotment Option is exercised in full, the total Price to the Public, Agent’s Commission and Net Proceeds to the Company (before deducting expenses of the Offering and assuming no President’s List purchasers) will be $9,200,000 CAD, $644,000 CAD and $8,556,000 CAD, respectively, in the case of the Minimum Offering and, $10,925,000 CAD, $764,750 CAD and $10,160,250 CAD, respectively, in the case of the Maximum Offering. Pursuant to the terms of the Agency Agreement, all subscription funds received from subscribers will be retained in trust by the Agent until the Minimum Offering is obtained. Once the Minimum Offering has been obtained, the sale of the Units shall be completed in accordance with the Agency Agreement. To date, all funds have been subscribed and will be held in escrow for final approval. Additionally, the Company entered into an offering led by Canaccord Genuity Corp. (the “Agent”) on a ‘commercially reasonable efforts’ basis and consisted of the sale of Units (including Units pursuant to the partial exercise of the over-allotment option by the Agent) at a price of C$per Unit for aggregate gross proceeds of C$10,309,210 (including C$809,210.05 pursuant to the partial exercise of the over-allotment option by the Agent). Each Unit is comprised of one share in the common stock of the Company (each a “Unit Share”) and one share purchase warrant of the Company (each, a “Warrant”). Each Warrant is exercisable to acquire one share in the common stock of the Company (each, a “Warrant Share”) until April 23, 2023, at a price per Warrant Share of C$, subject to adjustment in certain events. The net proceeds raised under the Offering will be used for working capital and in furtherance of some or all of the business objectives described in the final short form prospectus of the Company dated April 19, 2021 (the “Final Prospectus”). The Company has given notice to list the Unit Shares and the Warrant Shares on the Canadian Securities Exchange (the “Exchange”). Listing will be subject to the Company fulfilling all of the requirements of the Exchange. Concurrent with the Offering, the Company also conducted a non-brokered offering in the United States of units of the Company at a price of US$per unit for aggregate gross proceeds of approximately US$420,000 under the terms of a registration statement on Form S-1, as amended, filed with the United States Securities and Exchange Commission under the U.S. Securities Act on January 5, 2021.
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D.H. Flamingo, Inc. v. Department of Taxation, et. al.
On February 27, 2020, a subsidiary of the Company (YMY Ventures, LLC) was served with a Summons and Second Amended Complaint in a matter pending in the District Court of Clark County Nevada (Case # A-19-787004-B) which is styled “D.H. Flamingo, Inc. v. Department of Taxation, et. al.” (the DOT Litigation”). In this matter, the Plaintiff is alleging that certain parties (including YMY Ventures, LLC) received Conditional Recreational Marijuana Establishment Licenses, while certain other parties (including Plaintiff) were denied licenses. In the matter, Plaintiff seeks declaratory relief, injunctive relief, relief from violation of procedural and substantive due process, violation of equal protection, unjust enrichment, judicial review of the entire matter, together with a Petition for Writ of Mandamus. The Plaintiff seeks damages in an unspecified amount. Thereafter, on April 20, 2020, YMY Ventures, LLC filed a Notice of Non-Participation and Request for Dismissal. The Company believes it will ultimately be dismissed from the action without any liability exposure. Notwithstanding, there is no guarantee at this time that this will occur, and the ultimate result of the matter could potentially be the loss of YMY Ventures, LLC’s Conditional Recreational Marijuana Establishment License. This matter has now been fully resolved without any financial exposure on the part of the Company.
Herbalcure vs Driven Deliveries, Inc.
On May 6, 2021, Herbalcure Corporation (“Herbalcure”) filed a Complaint for preliminary and permanent injunction in the Superior Court of California Central District County of Los Angeles (Case # 21STCV17099) alleging that Driven Deliveries, Inc. owes Herbalcure Corporation approximately $1,700,000 on account of allegedly unpaid fees for services, gross receipts tax and sales tax. The Company has previously settled the gross receipts and sales tax liability that it believed was owed in connection with this matter. The Company disputes the alleged liability claimed by Herbalcure in excess of amounts already paid and believes that this is a liability of Driven Deliveries, Inc. and not the Company. The matter is currently in arbitration, and the Company cannot predict the final outcome.
Additionally, the Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business.
20. Subsequent events
The Company has completed a private placement of a $500,000 unsecured promissory note and 500,000 common share purchase warrants to an arm’s length lender. The Note becomes due and payable in three months, subject to extension by the Company for an additional three months upon payment of a $5,000 extension fee to the lender. The Note bears interest at rate of 10% per annum payable at maturity. The Company may prepay the outstanding principal amount of the obligation together with all accrued and unpaid interest, without penalty, at any time prior to the maturity date of the note. Each warrant entitles the holder thereof to purchase one common share at a price of 0.07 for a period of thirty-six (36) months after closing.
In April 2022, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage amount is $450,000 and bears interest at 12% per annum. Monthly interest only payments began May 1, 2022, payments will continue each month thereafter until paid. The entire unpaid balance is due on May 1, 2025, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project. The note has been corporately guaranteed.
In March 2020, the Company executed a $400,000 mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest at 11.55% per annum. Monthly interest only payments began May 1, 2020, payments continued each month thereafter. The entire unpaid balance was due on April 1, 2022, the maturity date of the mortgage, and is secured by the underlying property. Subsequently, the Company has exercised its right to extend the maturity date of the note by six months. The new maturity date of the loan is October 1, 2022.
In April 2022, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage amount is $775,000 and bears interest at 12% per annum. Monthly interest only payments began May 1, 2022, payments will continue each month thereafter until paid. The entire unpaid balance is due on March 31, 2024, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project. The note has been corporately guaranteed.
The Company closed on a stock purchase and note purchase agreement to sell its minority equity ownership interest in its Massachusetts cannabis license for a total of $1.65 million in cash on April 13, 2022.
In May 2022, the Company executed a sale lease back agreement with the Company’s Mulino property, and entered into a 15-year lease with an unrelated third party located in Englewood, CO. The lease requires the Company to pay a starting base rental fee of $29,167 plus additional estimated triple net charges per month including real estate taxes in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance, and utilities are included and paid monthly. This transaction resulted in net proceeds to the Company in the amount of $2.2 million.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
This Interim Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PLSRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding Stem Holdings, Inc. (the “Company” or “Stem”, also referred to as “us”, “we” or “our”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” detailed in the Company’s Form 10 and S-1 registration statementstatements and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as the result of new information, future events, or otherwise. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA.
For the yearthree and six months ended September 30, 2017,March 31, 2022, the financial statements have been prepared by management in accordance with accounting principles generally accepted in the standards of the Public Company Accounting Oversight Board (United States).United States. For the three and six months ended DecemberMarch 31, 2017,2022, the unaudited interim financial statements have been prepared by management in accordance with the condensing rules of the United States Securities and Exchange Commission.
OVERVIEW
Results of Operations
Stem Holdings, Inc. (the “Company” or “Stem”) is a Nevada corporation incorporated on June 7, 2016. The Company was formed to purchase, improve, and lease properties and finance assets which are operated by third parties and are used for the cultivation and retail sale of marijuana. During the year ended September 30, 2017, the Company was an early stage company which was only engaged in initial capital formation, initial property purchases, leasing activities and general and administrative activities related to the formation and early operation of the company. Given that the Company was only formed on June 7, 2016, the comparative results for the prior year are not relevant.
| For the Three Months Ended March 31, | Change | |||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Gross Revenue | $ | 4,817 | $ | 7,363 | (2,546 | ) | (35 | )% | ||||||||
| Discounts and returns | (681 | ) | (1,874 | ) | (1,193 | ) | (64 | )% | ||||||||
| Cost of goods sold | 3,796 | 3,562 | 234 | 7 | % | |||||||||||
| Consulting fees | 342 | 1,420 | (1,078 | ) | (76 | )% | ||||||||||
| Professional fees | 716 | 872 | (156 | ) | (18 | )% | ||||||||||
| General and administration | 2,749 | 1,834 | 915 | 50 | % | |||||||||||
| Other income (expenses), net | 6 | (5,698 | ) | 5,704 | 100 | % | ||||||||||
| Loss from discontinued operations | - | (730 | ) | 730 | (100 | )% | ||||||||||
| Net income (loss) | $ | (3,461 | ) | $ | (8,627 | ) | ||||||||||
Summary of Results
| Three Months Ended December 31, 2017 | Three Months Ended December 31, 2016 | |||||||
| Revenues | $ | 309,829 | $ | 0.00 | ||||
| Net (loss) | $ | (687,843 | ) | $ | (546,933 | ) | ||
| Basic and diluted earnings (loss) per share | $ | (0.10 | ) | $ | (0.11 | ) | ||
Comparison of the results of operations for the three months ended DecemberMarch 31, 20172022, compared to the three months ended DecemberMarch 31, 20162021
Because we were in the early stages of development in 2016, our operations were concentrated in startup and raising funds to commence operations and we had not yet received any revenues, there is not a meaningful comparison between the periods.
The Company had net revenues during the three months ended DecemberMarch 31, 20172022, of $309,829$4,136 compared with $0.00$5,489 for the comparable period of 2016, which2021, the decrease in revenue was primarily comprised straight liningrelated to a decrease in flower sales related to general market conditions.
Cost of goods for the rent we expect from our four leases. Under US GAAP, our rental income fromthree months ended March 31, 2022, amounted to $3,796 compared to $3,562 in the properties is earned on a straight-line basis over the entire expected lifecomparable period of the rent agreement, includingprior year. These costs include both the free rent period we have provided until each lessor ends its cannabis growing season. Ascost of December 31, 2017, onlyfinished product purchased for retail and the Willamette Property lessor had begun cash payments undercost of cultivation and processing for the lease. We expectgrow facilities and sold at the remaining three lessors to commence cash payments under their three leases in May 2018.wholesale level.
In the three months ended DecemberMarch 31, 2017,2022, we incurred consulting costs of $55,450$342 compared to $6,250$1,420 in the comparable period of the prior year. The decrease in consulting fees was attributed to a decrease in stock-based consulting expenses.
In the three months ended March 31, 2022, we incurred professional fees of $716 compared to $872 in the comparable period of the prior year. Those fees are primarily for legal, accounting, and related services that pertains to our being a public company in both the United States and Canada.
In the three months ended March 31, 2022, we incurred general and administrative costs of $2,749 compared to $1,834. This increase relates primarily to an increase in costs related to insurance, office expenses, and salaries due to the acquisition of entities coupled with the growth of the Company.
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| For the Six Months Ended March 31, | Change | |||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Gross Revenue | $ | 9,755 | $ | 13,517 | (3,762 | ) | (28 | )% | ||||||||
| Discounts and returns | (1,409 | ) | (2,759 | ) | (1,349 | ) | (49 | )% | ||||||||
| Cost of goods sold | 7,191 | 7,021 | 170 | 2 | % | |||||||||||
| Consulting fees | 529 | 2,062 | (1,533 | ) | (74 | )% | ||||||||||
| Professional fees | 1,992 | 1,786 | 206 | 12 | % | |||||||||||
| General and administration | 6,189 | 4,896 | 1,293 | 26 | % | |||||||||||
| Impairment of intangibles | 795 | - | 795 | 100 | % | |||||||||||
| Other income (expenses), net | 2,447 | (6,034 | ) | 8,481 | 141 | % | ||||||||||
| Loss from discontinued operations | (1,745 | ) | (864 | ) | (881 | ) | (102 | )% | ||||||||
| Net loss | $ | (7,648 | ) | $ | (11,905 | ) | ||||||||||
Comparison of the results of operations for the six months ended March 31, 2022, compared to the six months ended March 31, 2021
The Company had net revenues during the six months ended March 31, 2022, of $8,346 compared with $10,758 for the comparable period of 2021, the decrease in revenue was primarily related to a decrease in flower sales related to general market conditions.
Cost of goods for the six months ended March 31, 2022, amounted to $7,191 compared to $7,021 in the comparable period of the prior year. These costs include both the cost of finished product purchased for retail and the cost of cultivation and processing for the grow facilities and sold at the wholesale level.
In the six months ended March 31, 2022, we incurred consulting costs of $529 compared to $2,062 in the comparable period of the prior year. We expended those fees as we have yet to build up a significant employee base and currently outsource certain tasks to consultants. We expect in the upcoming year to increasemitigated our consulting fees as we continue to grow, even though we do expect to increase staffing, as we do not expect that growth will be commensurate with our growth from operations inexpenses which were stock based the near term.prior year.
In the threesix months ended DecemberMarch 31, 2017,2022, we incurred professional fees of approximately $140,598$1,992 compared to $0.00$1,786 in the comparable period of the prior year. Those fees are primarily for legal, accounting and related services relating to our being a public company in both the United States and Canada. We expect as we grow our operations these costs will continue to grow.
In threesix months ended DecemberMarch 31, 2017,2022, we incurred general and administrative costs of approximately $432,000$6,189 compared to $72,718 in the comparable period of the prior year. Those$4,896, these costs include payroll, depreciation and amortization, insurance, rent expense and other general costs. We expect that these costs will increase as we increase our operations.
In
LIQUIDITY AND FINANCIAL CONDITION
Liquidity and Capital Resources
The Company had cash of $1,260 as of March 31, 2022. On April 13, 2022, the Company closed on a stock purchase and note purchase agreement to sell its minority equity ownership interest in its Massachusetts cannabis license for a total of $1.65 million in cash.
Subsequent to March 31, 2022, the Company completed a private placement of a $500,000 unsecured promissory note and 500,000 common share purchase warrants to an arm’s length lender. The Note becomes due and payable in three months, ended December 31, 2017, we incurred stock-based compensationsubject to extension by the Company for an additional three months upon payment of approximately $360,000 compareda $5,000 extension fee to approximately 468,000 in the comparablelender. The Note bears interest at rate of 10% per annum payable at maturity. The Company may prepay the outstanding principal amount of the obligation together with all accrued and unpaid interest, without penalty, at any time prior to the maturity date of the note. Each warrant entitles the holder thereof to purchase one common share at a price of 0.07 for a period of the prior year, primarily the result of grants of stock and options to officers, directors and consultants. We expect that we will continue to use equity in the form of our common stock and options or warrants to compensate our employees and to reduce the cash compensation we will need to outlay to consultants in the upcoming year as we continue to grow our operations and devote our cash resources to acquiring new and improving our existing properties.thirty-six (36) months after closing.
Properties
In September 2016, the Company entered into a 10-year lease with respect to certain property located in Springfield, OR (the “42nd Street Property”) with the landlord that commenced in November 2016. The lease requires the Company to pay a base rental fee of $7,033 plus an additional estimated $315 per month in real estate taxes in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance and utilities are included at the end of each year as a one-time payment. In addition, the Company also remitted $14,000 for a security deposit to the landlord. The Company has subleased this space effective July 1, 2017. The 42nd Street Property is a 16,000-sq. ft. indoor cannabis growing facility.
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On November 1, 2016,Cash Flow
For the Company acquired certain property locatedsix months ended March 31, 2022, and 2021
Net cash flows used in Eugene, OR (the “Willamette Property”)operating activities was $3,995 for the six months ended March 31,2022 as compared net cash flow used in operating activities to $4,825 for the six months ended March 31, 2021, a totalchange of $830.
● Net cash purchase price plus closing costsflow used in operating activities for the six months ended March 31, 2022 primarily reflected a net loss of $7,648 adjusted for the add-back of non-cash items consisting of loss from discontinued operations of $1,745, depreciation and amortization of approximately $918,000. The Willamette Property is$876, stock-based compensation and consulting expense of approximately $892, amortization of debt discount of $10, amortization of intangible assets of $435, impairment of investments of $288, offset by a decrease in warrant liability of $1,931, foreign currency translation adjustment of $27, a gain from disposal of a subsidiary of $831, change operating assets and liabilities consisting of an increase in accounts receivable of $50, an increase in inventory of $58, an increase in accounts payable and accrued expenses of $348, and a decrease in prepaids of $217, a decrease in other assets of $61, and a decrease in other assets of $1,284. Net cash flow used in operating cannabis dispensary.activities for the six months ended March 31, 2021 primarily reflected a net loss of $11,905 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $918, stock-based compensation expense of $3,406, non-cash rent and interest $331, amortization of debt discount of $608, and a change in foreign currency translation of $20, offset by a gain in sale of equity method investments of $200, a change in the fair value of derivative and warrant liabilities of $5,946, an increase in accounts receivable of $96, an increase of inventory of $630, a change in operating assets and liabilities consisting of an increase in accounts payable and accrued expenses of $2,197, an increase in prepaid expenses and other operating assets of $2,336.
On February 6, 2017,● Net cash flow used in investing activities for the Company acquired certain realsix months ended March 31, 2022, amounted to $4 and consisted of $195 used in the purchase of property located at 7827 SE Powell Blvd, Portland, OR 97206 (the “Powell Property”)and equipment. Additionally, a net of $200 was provided by investments, and $1 related to repayment of a related party. Net cash flow used in investing activities for the six months ended March 31, 2021, amounted to $332 and consisted of $279 used in the purchase of property and equipment. Additionally, a total purchase price plus closing costsnet of approximately $656,498. As part$250 was used in investments, and $197 provided by an investment in equity method investees.
● Net cash provided by financing activities was $213 for the six months ended March 31, 2022, as compared to $7,633 for the six months ended March 31, 2021. During the six months ended March 31, 2022, we received proceeds of $285 for the issuance of common shares, offset by repayments of $498 of notes payable. During the six months ended March 31, 2021, we received proceeds from notes payable and advances of $22 and proceeds of $9,804 for the issuance of common shares. Additionally, an offset of $1,242 of payment on notes payable was incurred and $951 for the forgiveness of debt.
CRITICAL ACCOUNTING POLICIES
Principles of Consolidation
The Company’s policy is to consolidate all entities that it controls by ownership of a majority of the consideration for closing on the property, the Company issued a short term note payable to the seller in the Amount of approximately $304,000. The Powell Property is a cannabis dispensary.
The note is non-interest bearing requires four monthly payments of $75,000 plus a final payment for the remaining amount due immediately thereafter plus fees. Due to the short-term nature of the note, the Company has not imputed any interest as it would be immaterial to the results for the period. The Company and note holder have come to an agreement subsequent to September 30, 2017 to reduce by $75,000 the balance due under the note, due to the Seller breaching certain sections of the Purchase and Sale Agreement dated November 15, 2016. As of December 31, 2017, the balance owed on the note was approximately $4,000.
On April 15, 2017, the Company entered into a “Contract for Sale” for a Farm Property in Mulino OR (the “Mulino Property”), pursuant to which the seller will sell the premises to the Company upon the completion of the Company’s due diligence investigations and completion of the closing conditions precedent to each party’s obligations under the Contract for Sale. The purchase price is $1,700,000 which will be reduced by a rental credit of approximately $135,000, which is equivalent to nine months’ rent at $15,000 a month.outstanding voting stock. In addition, the SellerCompany consolidates entities that meet the definition of a variable interest entity (“VIE”) for which it is the primary beneficiary. The primary beneficiary is the party who has granted the Companypower to direct the activities of a creditVIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be reflected upon closingsignificant to the entity. For consolidated entities that are less than wholly owned, the third party’s holding of equity interest is presented as noncontrolling interests in the amount $9,500 for improvementsCompany’s Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity. The portion of net loss attributable to the property made by the Company. The Company expects that the closing of the property purchase will take place in January 2018. In connection with the purchase of the property, the Company will make a cash paymentnoncontrolling interests is presented as net loss attributable to noncontrolling interests in the amountCompany’s Consolidated Statements of $362,254 and will issue a promissory note in the amount of $1,200,000 with a maturity of January 2020. The Company will pay monthly installments of principal and interest (at a rate of 2% per annum) in the amount of $13,500, commencing in July 2018 through the maturity date (January 2020), at which time the entire unpaid principal balance and any remaining accrued interest shall be due and payable in full. In April 2017, in order for the Company to make use of the premises pending closing of the purchase of the property, the Company agreed to lease the premises from the seller for a term commencing April 5, 2017 and expiring on the earlier of: (i) the termination of the Contract for Sale by either party thereto in accordance with its terms; and (ii) October 5, 2017. The lease requires the Company to pay a base rental fee of $15,000 for the first nine months with no lease deposit required. All taxes accruing during the lease term (including real estate taxes and personal property taxes) are the responsibility of the Company. In October 2017, both parties agreed to extend the lease through January 2018. The Company closed on the purchase of the property in January 2018.Operations.
In addition, in the event that the Company deploys more than $10 million in investment in real estate assets, the Company is required to acquire certain real estate properties from certain of the Company’s shareholders and their affiliated entities. Each of these properties will be leased on a double net basis to qualified tenants. The Company will not be involved in the operation of these properties or in the growing or sale of cannabis.
The leases noted above all contain provisions in which the 10-year timetable for rent payments the individual renters incur under the leases do not begin until such time as the first cannabis growing season for the renters is completed. For the Willamette Property, that period ended at the end of July 2017, and rent payments commenced in August 2017. For the other three properties, the Company currently estimates that the growing season will end at the end of April 2018 and rent payments will commence in May 2018.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity and Capital Resources
The Company had cash of $2,179,017 as of December 31, 2017. Our primary uses of cash have been for salaries, fees paid to third parties for professional services, property operating expenses, general and administrative expenses, and the acquisition and development of rental properties. All funds received have been expended in the furtherance of growing the business. We have received funds from financing activities such as from the sale of our common stock. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
Subsequent to December 31, 2017, we have raised an additional approximately $1,525,980 in our private placements. Our efforts to raise additional capital are ongoing.
We currently have committed that we would need to spend approximately $2.7 million on capital expenditures for the expansion and buildout of our Powell and Springfield properties, and in addition, approximately $1.525 million to purchase the Mulino Property. These capital expenditures are contingent upon several factors including the Company obtaining financing for the development of the properties and the construction of the tenant improvements in such amount and on such terms and provisions as are acceptable to the Company.
We have used our available funds to fund our operating expenses, pay our obligations, acquire and develop rental properties, and grow our company. We need to raise significant additional capital or debt financing to acquire new properties, to develop existing properties, and to assure we have sufficient working capital for our ongoing operations and debt obligations. There is no guarantee that such funding will be available to the Company at a viable cost, if at all.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably assured.
The Company makes estimates of the collectability of its tenant receivables related to base rents, straight-line rent and other revenues. In the current fiscal year, the Company began significant rental operations. The Company expects its analysis of any accounts receivable and evaluates the adequacy of the allowance for doubtful accounts, it considers such things as historical bad debts, tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments relevant to a tenant’s business, and changes in tenants’ payment patterns. Specifically, for straight-line rent receivables, the Company’s assessment includes an estimation of a tenant’s ability to fulfill its rental obligations over the remaining lease term.
Use of estimatesEstimates
The preparation of our financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. EstimatesThe most significant estimates included in these consolidated financial statements are those associated with the assumptions used to value equity instruments, valuation of its long live assets for impairment testing, valuation of intangible assets, and judgments usedthe valuation of inventory. These estimates and assumptions are based on management’scurrent facts, historical experience and the assumptions used arevarious other factors believed to be reasonable given the circumstances that exist at the time the financial statements are prepared. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
CapitalizationImpairment of Project CostsLong-Lived Assets
The Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s policyoverall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to capitalize all costs thatan amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are directly identifiable with a specific property, woulddetermined to be capitalized ifrecoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.
An impairment expense of approximately $795,000 was recorded for the six months ended March 31, 2022. During the six months ended March 31, 2021, the Company had already acquireddetermined that no impairment was required.
Goodwill and Intangible Assets
Goodwill. Goodwill represents the property,excess acquisition cost over the fair value of net tangible and whenintangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the property, or an option to acquire the property, is being actively sought after, and either funds are available or will likely become available. All amounts shown capitalized prior to acquisitionfair value of a property are included under the caption of Project Costs in the balance sheet.
Emerging Growth Company
The Company has elected to be an emerging growth company as defined under the Jumpstart Our Business Startups Act of 2012 (“Jobs Act”). Included with this election,reporting unit below its carrying value. In testing for goodwill impairment, the Company has also electedthe option to usefirst assess qualitative factors to determine whether the provisions withinexistence of events or circumstances lead to a determination that it is more likely than not that the Jobs Act that allow companies that go public to continue to usefair value of a reporting unit is less than its carrying amount. If, after assessing the private company adoption date rules for new accounting policies. Shouldtotality of events and circumstances, the Company obtain revenues in excessconcludes that it is not more likely than not that the fair value of $1 billion on an annual basis, havea reporting unit is less than its non-affiliated market capitalization increasecarrying amount, then performing the two-step impairment test is not required. If the Company concludes otherwise, the Company is required to over $700 million asperform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than the carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing the implied fair value of the last dayreporting unit’s goodwill to the carrying value of its second quarter, or raise in excess of $1 billion in public offerings of its equity or instruments directly convertible into its equity, it will forfeit its status under the Jobs Act as an emerging growth company.reporting unit’s goodwill.
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CONTRACTUAL OBLIGATIONS AND COMMITMENTSIntangible Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life is evaluated.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In July 2016,testing for impairment, the Company entered intohas the option to first perform a 10-year lease forqualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a commercial building from an unrelated third party in Springfield, Oregon. At the time, the original lease was entered into,quantitative impairment test is not necessary. If the Company had expectedconcludes otherwise, it is required to close on significant subscriptions from its private placement. However, when those didperform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losses is not immediately materialize,permitted.
During the six months ended March 31, 2022, and 2021, the Company entered into an agreement withdetermined that there were $0 and $0 losses related to the landlord to cancelimpairment of goodwill and intangible assets, respectively.
Business Combinations
The Company applies the lease andprovisions of ASC 805 in addition, paid the landlord $15,000 not to rent out the property until such time the Company could enter into a new lease. In September 2016, the Company entered into a new 10-year lease with the landlord that commenced in November 2016. The leaseaccounting for acquisitions. ASC 805 requires the Company to payrecognize separately from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a base rental feeresult, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of $7,033 plusthe measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an additional estimated $315 per month in real estate taxes inamount that reflects the consideration which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes)entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), maintenancethe entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and utilities are included at(v) recognize revenue when (or as) the endentity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of each year as a one-time payment. In addition,Topic 606, the Company also remitted $14,000 for a security deposit toassesses the landlord.
In August 2016, the Companygoods or services promised within each contract and certain shareholders of the Company entered into a “Multi Party” Agreement, in which the Company became obligated to leasedetermines those that are performance obligations and assesses whether each promised good or acquire three separate real estate assets, and separately, if certain events occur (see below), additional real estate assets held by entities related to those shareholders. In September 2016, the Company entered into the lease as more fully described above, and in November 2016, acquired a property after the shareholder that owned the purchase agreement transferred that purchase agreement to the Company, in accordance with the Multi Party agreement.
On April 15, 2017, the Company entered into a “Contract for Sale” for a Farm Property in Mulino OR (the “Mulino Property”), pursuant to which the seller will sell the premises to the Company upon the completion of the Company’s due diligence investigations and completion of the closing conditions precedent to each party’s obligations under the Contract for Sale. The purchase priceservice is $1,700,000 which will be reduced by a rental credit of approximately $135,000, which is equivalent to nine months’ rent at $15,000 a month. In addition, the Seller has granted the Company a credit to be reflected upon closing in the amount $9,500 for improvements made by the Company to the property.distinct. The Company expects that the closing of the property purchase will take place in January 2018. In connection with the purchase of the property, the Company will make a cash payment inthen recognizes as revenue the amount of $362,254 and will issue a promissory note in the amount of $1,200,000 with a maturity of January 2020. The Company will pay monthly installments of principal and interest (at a rate of 2% per annum) in the amount of $13,500, commencing in July 2018 through the maturity date (January 2020), at which time the entire unpaid principal balance and any remaining accrued interest shall be due and payable in full. In April 2017, in order for the Company to make use of the premises pending closing of the purchase of the property, the Company agreed to lease the premises from the seller for a term commencing April 5, 2017 and expiring on the earlier of: (i) the termination of the Contract for Sale by either party thereto in accordance with its terms; and (ii) October 5, 2017. The lease requires the Company to pay a base rental fee of $15,000 for the first nine months with no lease deposit required. All taxes accruing during the lease term (including real estate taxes and personal property taxes) are the responsibility of the Company. In October 2017, both parties agreed to extend the lease through January 2018.
In addition, in the eventtransaction price that the Company deploys more than $10 million in investment in real estate assets, the Company is required to acquire certain real estate properties from certain of the Company’s shareholders and their affiliated entities.
Should the Company obtain in excess of $10,000,000 through a combination of its private placements and its merger with Patch Holdings, Inc. (see Note 5), it is required to purchase certain real estate properties owned by entities affiliated with certain of its shareholders.
In addition, certain shareholders of the Company have begun organizing entities that will operate directly in the cannabis industry, and the Company intends to offer leases of its properties to these entities in the near future. The Multi Party Agreement also requires that in the event that the US Government amends Title 21 of the United States Code, otherwise known as the Controlled Substances Act, to remove cannabis as a Schedule I drug, and the Company raises more than $10 million in equity and merger funding, the Company is required to enter into agreements to acquire those related entities and issue such equity that the shareholders of the related entities obtain 75% of the then issued and outstanding equity of the Company, regardless of the profitability or financial condition of the related entities at the time of their acquisition.
In February 2017, the Company entered into a 1-year lease for the occupancy of the Company’s corporate office located in Boca Raton, Florida. The lease requires the Company to pay a base rental fee of $785.00 per month. All taxes, maintenance and utilities are included. In addition, the Company also remitted $785 for a security depositallocated to the landlord.respective performance obligation when (or as) the performance obligation is satisfied.
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In February 2017,Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company entered intoexpects, at contract inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.
Effective October 1, 2019, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective method. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues related to wholesale and retail revenue are recorded upon transfer of merchandise to the customer, which was the effective policy under ASC 605 previously.
The following policies reflect specific criteria for the various revenue streams of the Company:
Cannabis Dispensary, Cultivation and Production
Revenue is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance obligation is complete. Terms are generally between cash on delivery to 30 days for the Company’s wholesale customers.
The Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale) there are essentially no returns allowed or warranty available to the customer under the various state laws.
Delivery
| 1) | Identify the contract with a customer |
The Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.
| 2) | Identify the performance obligations in the contract |
The Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any necessary deliveries of those products.
| 3) | Determine the transaction price |
The sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost that those goods are being sold for plus any additional delivery costs.
| 4) | Allocate the transaction price to performance obligations in the contract |
For the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery fees that may be incurred to deliver to the customer.
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
For the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As noted earlier in Note 1, the Company, engages in a business that constitutes an advisory agreementillegal act under the laws of the United States Federal Government. This raises several possible issues which may impact the Company’s overall operations, not the least of which are related to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level, and most traditional banks are federally insured, those financial institutions will not service cannabis businesses. In states where medical or recreational marijuana is legal, dispensary owners, manufacturers, and anybody who “touches the plant,” continue to face a host of operational hurdles. While local, state-chartered banks and credit unions now accept cannabis commerce, there remains a reluctance by traditional banks to do business with an unrelated third party withthem. Aside from a termhuge inconvenience and the need to find creative ways to manage financial flow, payroll logistics, and payment of 12 months.taxes, this also poses tremendous risks to controls as a result of operating a lucrative business in cash. This lack of access to traditional banking may inhibit industry growth.
Despite the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these risks will have a substantive impact on its planned operations in the near term.
As of March 31, 2022, the Company has acquired interests in several entities. As part of that agreement,those interests, the third party agreedCompany has commitments to provide assistancefund the acquisition of licenses and permits to allow for the cultivation and sale of cannabis and related products in the United States. As of March 31, 2022, Company with respectestimates that its investees will need up to eligibility for becoming quoted onapproximately $500,000 to complete the OTCQB/OTCQXacquisition of licenses and advising and assistingpermits, to fund the Companybuildout or expansion of facilities to fully operate in complying with its ongoing OTCQB/OTCQX disclosure obligation under current federal and state securities laws. These services to the Company are exchanged for a $10,000 upfront payment, and $5,000 payment upon the acceptance on OTCQB/OTCQX.their respective cannabis markets, which will encompass several years of development.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
OurWe are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (also our principal executive officer) and our chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief Financial Officer after evaluating(“CFO”) (the Company’s principal financial and accounting officer), has evaluated the effectiveness of ourthe Company’s disclosure controls and procedures (as defined in Securitiesunder Rule 13a-15(e) under the Exchange Act Rule 13a-15(e))Act) as of the end of the quarterly period covered by this report, havereport. Based upon that evaluation the Company’s CEO and CFO concluded that ourthe Company’s disclosure controls and procedures arewere not effective as of March 31, 2022 to reasonably ensure that material information required to be disclosed by usthe Company in the reports that we filethe Company files or submitsubmits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified byin the Securities and Exchange Commission’s RulesSEC’s rules and forms, and that such information is accumulated and communicated to ourthe Company’s management, including our Chief Executive Officerthe Company’s CEO and Chief Financial Officer,CFO, as appropriate, to allow timely decisions regarding required disclosure. The principal basis for this conclusion is the lack of segregation of duties within our financial function and the lack of an operating Audit Committee.
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(b) Changes inManagement’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
We carried out an assessment, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our internal controls over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of March 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on that assessment and on those criteria, our CEO and CFO concluded that our internal control over financial reporting was not effective as of March 31, 2022. The principal basis for this conclusion is (i) failure to engage sufficient resources regarding our accounting and reporting obligations during our startup and (ii) failure to fully document our internal control policies and procedures.
This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only the management’s report in this quarterly report.
The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
(c) Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
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None.The Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business. To the best of our knowledge, as of May 10, 2022, the Company was not a party to any other material litigation, claim or suit whose outcome could have a material effect on the Company’s financial statements.
Smaller reporting companies are not required to provide the information required by this item. Notwithstanding, in addition to risk factors highlighted in previous reports, the Company adds the following additional risk factor:
We could be substantially affected by the Coronavirus (COVID-19) pandemic
In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to a number of other countries, including the United States. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, as of the time of the filing of this quarterly report on Form 10-Q, several states in the United States have declared states of emergency, and several countries around the world, including the United States, have taken steps to restrict travel. The existence of a worldwide pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments in response to COVID-19, or any, pandemic, to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business operations disruptions to our retail operations and our ability to collect rent from the properties which we own, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects throughout our business. If we need to close any of our facilities or a critical number of our employees become too ill to work, our production ability could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse consequences due to COVID-19, or any other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the markets in which we operate. Any of these uncertainties could have a material adverse effect on our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth all securities issued by Stem since between OctoberJanuary 1, 20172022 and February 12, 2018:March 31, 2022:
| Security | No. Shares | |||||
| Compensation | Common Stock | 1,000,000 | ||||
All of the aforementioned shares were issued by the Company pursuant to an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
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| Date | Number of Shares | Security | Price US$ | |||||||||||
| Investors in $2.40/share Offering | 10//2017-2/12/2018 | 450,634 | Common Stock | $ | 2.40 | |||||||||
| Shares issued to Consultants | 1/29/2018 | 100,000 | Common Stock | $ | 2.40 | |||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| Exhibit No. | Description | |
| 31.1/31.2 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule15d- 14(a) of the Securities Exchange Act of 1934, as amended | |
| 32.1/32.2 | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STEM HOLDINGS, INC. | ||
| May 16, 2022 | By: | /s/ Matthew Cohen |
| Matthew Cohen, President, Chief Executive Officer and Chief Financial Officer | ||
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