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 endedDecember 31, 2017June 30, 2023
☐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) 237-2931948-5410
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 | OTCQB |
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.August 21, 2023.
Transitional Small Business Disclosure Format (check one): Yes [ ]☐ No [X]☒
TABLE OF CONTENTS
| 2 |
STEM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
| June 30, 2023 | September 30, 2022* | |||||||
| (unaudited) | * | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,704 | $ | 1,524 | ||||
| Accounts receivable, net of allowance for doubtful accounts | 267 | 313 | ||||||
| Note receivable | 182 | - | ||||||
| Inventory | 1,303 | 2,675 | ||||||
| Prepaid expenses and other current assets | 596 | 929 | ||||||
| Assets held for sale | - | - | ||||||
| Total current assets | 4,052 | 5,441 | ||||||
| Property and equipment, net | 5,449 | 9,089 | ||||||
| Deposits and other assets | 13 | 13 | ||||||
| Right of use asset | 7,819 | 6,874 | ||||||
| Intangible assets, net | 6,801 | 8,014 | ||||||
| Goodwill | 1,522 | 1,522 | ||||||
| Due from related party | 28 | 28 | ||||||
| Total assets | $ | 25,684 | $ | 30,981 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | 2,739 | 2,310 | ||||||
| Convertible notes, net | 2,258 | 1,477 | ||||||
| Current maturities of long-term debt | 400 | 1,000 | ||||||
| Short term notes and advances | 223 | 451 | ||||||
| Derivative liability | 31 | 370 | ||||||
| Lease liability | 442 | 580 | ||||||
| Warrant liability | 71 | 55 | ||||||
| Total current liabilities | 6,164 | 6,243 | ||||||
| Lease liability - long term | 7,626 | 6,476 | ||||||
| Long-term debt, mortgages | 675 | 1,225 | ||||||
| Total liabilities | 14,465 | 13,944 | ||||||
| Commitments and contingencies (Note 17) | - | - | ||||||
| Shareholders’ equity | ||||||||
| Preferred stock, Series A; $par value; shares authorized, outstanding as of June 30, 2023, and September 30, 2022 | - | - | ||||||
| Preferred stock, Series B; $ par value; shares authorized, outstanding as of June 30, 2023, and September 30, 2022 | - | - | ||||||
| Preferred stock value | - | - | ||||||
| Common stock, $ par value; shares authorized; and shares issued, issuable and outstanding as of June 30, 2023, and September 30, 2022, respectively | 271 | 227 | ||||||
| Additional paid-in capital | 150,009 | 148,450 | ||||||
| Distribution | (32 | ) | - | |||||
| Accumulated deficit | (140,527 | ) | (133,118 | ) | ||||
| Total Stem Holdings stockholder’s equity | 9,721 | 15,559 | ||||||
| Noncontrolling interest | 1,498 | 1,478 | ||||||
| Total shareholders’ equity | 11,219 | 17,037 | ||||||
| Total liabilities and shareholders’ equity | $ | 25,684 | $ | 30,981 | ||||
| * | Derived from audited information |
Stem Holdings, Inc.
Condensed Consolidated Statements of Financial Position
| 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 condensed consolidated financial statementsstatements.
*Derived from audited information
| 3 |
Stem Holdings, Inc.STEM HOLDINGS, INC.
Condensed Consolidated Statement of OperationsCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(UNAUDITED)
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 | ||||||
(in thousands, except share and per share amounts)
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | 3,830 | $ | 4,171 | $ | 11,783 | $ | 12,517 | ||||||||
| Cost of goods sold | 2,787 | 3,500 | 10,103 | 10,691 | ||||||||||||
| Gross Profit | 1,043 | 671 | 1,680 | 1,826 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Consulting fees | 123 | 104 | 231 | 633 | ||||||||||||
| Professional fees | 258 | 551 | 743 | 2,543 | ||||||||||||
| General and administration | 2,094 | 2,555 | 6,602 | 8,745 | ||||||||||||
| Impairment of intangible assets | 471 | - | 471 | 795 | ||||||||||||
| Total operating expenses | 2,946 | 3,210 | 8,047 | 12,716 | ||||||||||||
| Loss from operations | (1,903 | ) | (2,539 | ) | (6,367 | ) | (10,890 | ) | ||||||||
| Other income (expenses), net | ||||||||||||||||
| Interest expense | (253 | ) | (247 | ) | (1,132 | ) | (605 | ) | ||||||||
| Change in fair value of derivative liability | 131 | - | 340 | - | ||||||||||||
| Change in fair value of warrant liability | (28 | ) | 357 | (16 | ) | 2,287 | ||||||||||
| Foreign currency exchange gain (loss) | 188 | 89 | (54 | ) | 62 | |||||||||||
| Other income | 2 | 2,009 | 18 | 2,110 | ||||||||||||
| Gain on extinguishment of debt | - | 803 | - | 803 | ||||||||||||
| Other gain (loss) | - | - | - | (30 | ) | |||||||||||
| Gain from disposal of subsidiary | - | - | - | 831 | ||||||||||||
| Loss from sale of long-lived assets | 786 | - | (178 | ) | - | |||||||||||
| Total other income | 826 | 3,011 | (1,022 | ) | 5,458 | |||||||||||
| Loss from continuing operations | (1,077 | ) | 472 | (7,389 | ) | (5,432 | ) | |||||||||
| Loss from discontinued operations, net of tax and gain on disposal of $831 | - | - | - | (1,745 | ) | |||||||||||
| Net income (loss) | $ | (1,077 | ) | $ | 472 | $ | (7,389 | ) | $ | (7,177 | ) | |||||
| Net income (loss) attributable to non-controlling interest | 33 | (68 | ) | 20 | (180 | ) | ||||||||||
| Net income loss attributable to Stem Holdings | $ | (1,110 | ) | $ | 540 | $ | (7,409 | ) | $ | (6,997 | ) | |||||
| Net income (loss) per share: | ||||||||||||||||
| Basic and diluted net income (loss) from continuing operations, per share | $ | ) | $ | $ | ) | $ | ) | |||||||||
| Basic net income (loss) from continuing operations, per share | $ | (0.00 | ) | $ | 0.00 | $ | (0.03 | ) | $ | (0.02 | ) | |||||
| Basic and diluted net income (loss) from discontinued operations, per share | $ | ) | $ | $ | ) | $ | ) | |||||||||
| Basic net income (loss) from discontinued operations, per share | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.01 | ) | |||||
| Basic and diluted net income (loss), per share | $ | ) | $ | $ | ) | $ | ) | |||||||||
| Weighted-average shares outstanding | ||||||||||||||||
| Basic | 260,338,380 | 224,607,322 | 244,212,631 | 226,199,289 | ||||||||||||
| Diluted | 260,338,380 | 224,607,322 | 244,212,631 | 226,199,289 | ||||||||||||
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 FlowsCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)(UNAUDITED)
| 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 | ||||
(in thousands, except share amounts)
| Total Stem | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Holdings Shareholders’ | Non-Controlling | Total Shareholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Distribution | Deficit | Equity | Interest | Equity | |||||||||||||||||||||||||
| Balance as of September 30, 2022 | 227,013,967 | $ | 227 | $ | 148,450 | $ | - | $ | (133,118 | ) | $ | 15,559 | $ | 1,478 | $ | 17,037 | ||||||||||||||||
| Issuance of common stock in connection with consulting agreement | 350,000 | - | 9 | - | - | 9 | - | 9 | ||||||||||||||||||||||||
| Stock based compensation | 1,137,500 | 1 | 22 | - | - | 23 | - | 23 | ||||||||||||||||||||||||
| Issuance of common stock in connection with convertible debt | 7,352,941 | 7 | 117 | - | - | 124 | - | 125 | ||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | - | 87 | - | - | 87 | - | 87 | ||||||||||||||||||||||||
| Distribution related to YMY | - | - | - | (24 | ) | - | (24 | ) | - | (24 | ) | |||||||||||||||||||||
| Net loss | - | - | - | - | (3,066 | ) | (3,066 | ) | (13 | ) | (3,079 | ) | ||||||||||||||||||||
| Balance as of December 31, 2022 | 235,854,408 | 235 | 148,685 | (24 | ) | (136,184 | ) | 12,712 | 1,465 | 14,177 | ||||||||||||||||||||||
| Issuance of common stock in connection with convertible debt | 5,434,782 | 6 | 120 | - | - | 126 | - | 126 | ||||||||||||||||||||||||
| Issuance of common stock related to interest expense and rent expense | 6,895,344 | 7 | 138 | - | - | 145 | - | 145 | ||||||||||||||||||||||||
| Issuance of options in connection with consulting agreement | - | - | 18 | - | - | 18 | - | 18 | ||||||||||||||||||||||||
| Issuance of warrants stock in connection with convertible debt | - | - | 9 | - | - | 9 | - | 9 | ||||||||||||||||||||||||
| Distribution related to YMY | - | - | - | (4 | ) | - | (4 | ) | - | (4 | ) | |||||||||||||||||||||
| Beneficial conversion for debt discount | - | - | 400 | - | - | 400 | - | 400 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | (3,233 | ) | (3,233 | ) | - | (3,233 | ) | |||||||||||||||||||||
| Balance as of March 31, 2023 | 248,184,534 | $ | 248 | $ | 149,370 | $ | (28 | ) | $ | (139,417 | ) | $ | 10,173 | $ | 1,465 | $ | 11,638 | |||||||||||||||
| Issuance of common stock in connection with employment agreement | 10,000,000 | 10 | 90 | - | - | 100 | - | 100 | ||||||||||||||||||||||||
| Debt discount related convertible debt | - | - | 416 | - | - | 416 | 416 | |||||||||||||||||||||||||
| Issuance of shares in connection with advisory agreement and finder’s fee | 3,000,000 | 3 | 27 | - | - | 30 | - | 30 | ||||||||||||||||||||||||
| Issuance of common stock in connection with board member agreement | 10,000,000 | 10 | 90 | - | - | 100 | - | 100 | ||||||||||||||||||||||||
| Issuance of options in connection with consulting agreement | - | - | 16 | - | - | 16 | - | 16 | ||||||||||||||||||||||||
| Distribution related to YMY | - | - | - | (4 | ) | - | (4 | ) | - | (4 | ) | |||||||||||||||||||||
| Net loss | - | - | - | - | (1,110 | ) | (1,110 | ) | 33 | (1,077 | ) | |||||||||||||||||||||
| Balance as of June 30, 2023 | 271,184,534 | $ | 271 | $ | 150,009 | $ | (32 | ) | $ | (140,527 | ) | $ | 9,721 | $ | 1,498 | $ | 11,219 | |||||||||||||||
| 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 | ||||||||||||||||
| Issuance of common stock in connection with employment agreement | 1,000,000 | 1 | 67 | - | - | 68 | - | 68 | ||||||||||||||||||||||||
| 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 | 224,391,484 | $ | 224 | $ | 148,213 | $ | - | $ | (123,286 | ) | $ | 25,151 | $ | 1,528 | $ | 26,679 | ||||||||||||||||
| Issuance of common stock related to interest expense | 15,372 | - | 1 | - | - | 1 | - | 1 | ||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | - | 94 | - | - | 94 | - | 94 | ||||||||||||||||||||||||
| Issuance of warrants in connection with extension of debenture maturity | - | - | 12 | - | - | 12 | - | 12 | ||||||||||||||||||||||||
| Net gain (loss) | - | - | - | - | 540 | 540 | (68 | ) | 472 | |||||||||||||||||||||||
| Net income (loss) | - | - | - | - | 540 | 540 | (68 | ) | 472 | |||||||||||||||||||||||
| Balance as of June 30, 2022 | 224,406,856 | $ | 224 | $ | 148,320 | $ | - | $ | (122,746 | ) | $ | 25,798 | $ | 1,460 | $ | 27,258 | ||||||||||||||||
| Balance | 224,406,856 | $ | 224 | $ | 148,320 | $ | - | $ | (122,746 | ) | $ | 25,798 | $ | 1,460 | $ | 27,258 | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Stem Holdings, Inc.STEM HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial StatementsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| 2023 | 2022 | |||||||
| For the Nine Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (7,389 | ) | $ | (7,177 | ) | ||
| Loss from discontinued operations, net of tax | - | 1,745 | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | 349 | 691 | ||||||
| Issuance of common stock in connection with consulting agreements | 33 | 188 | ||||||
| Issuance of common stock related to rent and interest expense | 146 | 1 | ||||||
| Impairment of investments | - | 288 | ||||||
| Depreciation and amortization | 821 | 1,247 | ||||||
| Amortization of intangible assets | 529 | 655 | ||||||
| Amortization of debt discount | 1,007 | 13 | ||||||
| Impairment of intangible assets | 471 | - | ||||||
| Gain on extinguishment of debt | - | (803 | ) | |||||
| Change in fair value of warrant liability and derivative liability | (322 | ) | (2,183 | ) | ||||
| Foreign currency adjustment | 53 | (62 | ) | |||||
| Loss from sale of long-lived assets | 178 | - | ||||||
| Gain on disposal of subsidiary | - | (831 | ) | |||||
| Gain on sale of property | - | (1,155 | ) | |||||
| Other | 367 | 103 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net of allowance for doubtful accounts | 46 | - | ||||||
| Prepaid expenses and other current assets | 333 | 217 | ||||||
| Inventory | 1,372 | 21 | ||||||
| Other assets | - | 1,402 | ||||||
| Accounts payable and accrued expenses | 426 | (124 | ) | |||||
| Net cash used in continuing operating activities | (1,580 | ) | (5,764 | ) | ||||
| Net cash provided by discontinued operating activities | - | 340 | ||||||
| Net cash used in operating activities | (1,580 | ) | (5,424 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | (24 | ) | (206 | ) | ||||
| Sale of property | 973 | 2,173 | ||||||
| Investments | - | (288 | ) | |||||
| Cash received related to sale of equity method investment | - | 1,651 | ||||||
| Related party payments | - | (1 | ) | |||||
| Net cash provided by investing activities | 949 | 3,329 | ||||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of common stock | - | 285 | ||||||
| Notes payable and advanced proceeds | 1,470 | 625 | ||||||
| Distribution | (32 | ) | - | |||||
| Repayments of notes payable | (627 | ) | (879 | ) | ||||
| Net cash provided by financing activities from continuing operations | 811 | 31 | ||||||
| Net increase (decrease) in cash and cash equivalents | 180 | (2,064 | ) | |||||
| Cash and cash equivalents at the beginning of the period | 1,524 | 5,464 | ||||||
| Cash and cash equivalents at the end of the period | $ | 1,704 | $ | 3,400 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 220 | $ | 308 | ||||
| Cash paid for taxes | $ | - | $ | - | ||||
| Supplemental disclosure of noncash activities: | ||||||||
| Non-cash repayment of finance liability | $ | - | $ | 1,092 | ||||
| Non-cash repayment of mortgages | $ | 1,150 | - | |||||
| Financed Insurance | $ | - | $ | 449 | ||||
| Interest paid in the form of common stock | $ | - | $ | 67 | ||||
| Beneficial conversion of debt discount | $ | 817 | $ | - | ||||
| Conversion of debt to equity | $ | 249 | $ | - | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STEM HOLDINGS, INC.
NOTES TO 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,leases and leaseoperates in properties for use in the cannabis production, distribution and sales industry beginning inof cannabis and cannabis-infused products licensed under 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 leases for these properties (see Note 7).
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 purchaselaws of the farm propertystates of Oregon, Nevada, and California. As of June 30, 2023, Stem had ownership interests in Mulino, Oregon (see Note 8), which will require the Company to invest approximately $1.525 million in its purchase in the coming years. 21 state issued cannabis licenses including nine (9) licenses for cannabis cultivation, two (2) licenses for cannabis processing, one (1) license for cannabis wholesale distribution, three (3) licenses for hemp production and (6) cannabis dispensary licenses.
The Company has entered into four leases with tenants in which it has committed the Company to improve those properties which will require additional fundingeight wholly-owned subsidiaries, including Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Oregon Acquisitions 1, Corp., Stem Oregon Acquisitions 2, Corp., Stem Oregon Acquisitions 3, Corp., Stem 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,seeking to be acquired by entities directly in the Company continues to work towards acquiring additional properties to lease to cannabis operators to grow its business.
To date, 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 OTCQB 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 June 30, 2023, the Company had approximate balances of cash and cash equivalents of $1.7 million, negative working capital of approximately $2.1 million, and an accumulated deficit of $140.5 million.
These unaudited condensed 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, 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 cultivate, sell or otherwise possess in the 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 their 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 the 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 time 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 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 continuedaccess to raise funds in itscapital resources through potential public or private placements, raising in excessissuances of $1.525 million as of the date of these financial statements. In addition,debt or equity securities. However, if the Company is currentlyunable to raise 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 in initial discussions with potential investorsamounts sufficient to investsustain operations and meet its obligations. The Company is also in the Company at significantly higher amounts. The Company also expects that its cash outflow from operation will decrease significantly in fiscal year 2018 as threeprocess of its four subleases to cannabis operators begin generating cash flowseeking business combinations by entities directly in the third quarterproduction and sale of cannabis. These matters raise substantial doubt about 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 consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated during the consolidation process. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions.
The accompanying interim condensed consolidated financial statements included herein are unaudited. Such financial statements, inIn the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all the normal recurring 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. Thesepresented. The interim results are not necessarily indicative of the results to be expected for the fiscalfull year ending September 30, 2018 or for any otherfuture period.
Certain information and footnote disclosures normally included in the consolidated 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.(“SEC”). The Company believes that the disclosures are adequate to make the interim information presented not misleading.
Principals of Consolidation
The accompanying These consolidated financial statements includeshould be read in conjunction with the accountsCompany’s audited consolidated financial statements and the notes thereto included in the Company’s Report on Form 10-K filed on January 13, 2023, for the year ended September 30, 2022.
Use of Stem Holdings, Inc.Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and its wholly-owned subsidiary, Patch International, Inc. All material intercompany accounts, transactions,assumptions that affect the application of accounting policies and profits have been eliminatedthe reported amounts of assets, liabilities, income, and expenses. The most significant estimates included in consolidation.
Revenue Recognition
The Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases attributablethese consolidated financial statements are those associated with the assumptions used 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 collectabilityvalue 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.
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UsePrinciples of estimatesConsolidation
The preparationCompany’s policy is to consolidate all entities that it controls by ownership of thesea 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.
The accompanying 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 Oregon Acquisitions 2 Corp., Stem Oregon Acquisitions 3 Corp., Stem Oregon Acquisitions 4 Corp., 7LV USA Corporation, and Stem Oregon Acquisitions 1 Corp., 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 December 31, 2017,June 30, 2023, and September 30, 2022, the Company had no cash equivalents or short-term investments. In accordance with certain secured debentures received this quarter in the amount of $545,000, the Company set up and deposited this amount into a IOLTA trust account held in escrow to securitize these instruments (see Note 12). The Company has not experienced any losses on deposits in a major financial institution in excessof cash and cash equivalents to date.
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 June 30, 2023, and September 30, 2022, the reserve for doubtful accounts was $79 for both periods.
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.
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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.
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 |
| * | Unless the relevant lease is classified as a sales-type lease, under which the assets are depreciated over the estimated useful life. |
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 December 31, 2017The 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.
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Equity Method Investments
Investments in unconsolidated affiliates are accounted 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 Company’s share of the investee’s income or loss, and dividends paid.
During the nine months ended June 30, 2023, 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 should 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 definition of a business combination and were deemed asset acquisitions, and the Company 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 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 fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company has not experienced impairment losses on its long-lived assets.
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 acquirefirst assess qualitative factors to determine whether the property, is being actively sought after, and either funds are availableexistence of events or will likely become available in ordercircumstances lead to exercise their option. All amounts shown capitalized prior to acquisition of a property are included under the caption of Project Costs in the balance sheet.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of currently due plus deferred taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting carrying amounts and the respective tax bases of assets and liabilities and are measured using tax rates and lawsdetermination that are expected to be in effect when the differences are expected to be recovered or settled. Valuation allowances are provided against deferred tax assets if it is more likely than not that the fair 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. No goodwill impairment expense was incurred for the nine months ended June 30, 2023, and 2022, respectively.
Intangible 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. During the nine months ended June 30, 2023, the Company entered into an asset purchase agreement which included the sale of intangible assets of approximately $222,000. Intangible assets of $471,000 and 0 were impaired for the nine months ended June 30, 2023, and 2022, respectively.
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 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.
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Business Combinations
The Company applies the provisions of ASC 805 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 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 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 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.
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 reporting 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 will notto the amount expected to be realized.
The Company follows the guidancehas incurred net operating losses for financial-reporting and tax-reporting purposes. As of FASB ASC 740-10 which relates to the Accounting for Uncertainty in Income Taxes, which seeks to reduce the diversity in practice associated with the accountingJune 30, 2023, and reporting for uncertainty in income tax positions. This interpretation prescribesSeptember 30, 2022, such net operating losses were offset entirely by a comprehensive model for financial statement recognition, measurement, presentation and disclosure ofvaluation allowance.
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The Company recognizes uncertain tax positions takenbased 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 expectedthe 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.
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 takenwithin 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 income tax returns.cost of product sales.
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.
FairDelivery
| 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.
Leases
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 June 30, 2023, 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 $323,000 and $1,010,000, respectively for the three and nine months ended June 30, 2023, and approximately $331,000 and $763,000, respectively for the three and nine months ended June 30, 2022. The Company has nine operating leases consisting with remaining lease terms ranging from 7 months to 167 months.
Lease Costs
Schedule of Lease Costs
| Nine Months Ended | Nine Months Ended | |||||||
| June 30, 2023 | June 30, 2022 | |||||||
| Components of total lease costs: | ||||||||
| Operating lease expense | $ | 1,010 | $ | 763 | ||||
| Total lease costs | $ | 1,010 | $ | 763 | ||||
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Lease positions as of June 30, 2023
ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:
Schedule of Right-of-Use Assets and Liabilities
| June 30, 2023 | ||||
| Assets | ||||
| Right of use asset | $ | 7,819 | ||
| Total assets | $ | 7,819 | ||
| Liabilities | ||||
| Operating lease liabilities – short term | $ | 442 | ||
| Operating lease liabilities – long term | 7,626 | |||
| Total lease liability | $ | 8,068 | ||
Lease Terms and Discount Rate
Schedule of Lease Terms and Discount Rate
| Weighted average remaining lease term (in years) – operating lease | 11.80 | |||
| Weighted average discount rate – operating lease | 10.74 | % |
Cash Flows
Schedule of Cash Flow Related to Lease
| Nine Months Ended | ||||
| June 30, 2023 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| ROU amortization | $ | 1,010 | ||
| Cash paydowns of operating liability | $ | (1,010 | ) | |
The future minimum lease payments under the leases are as follows:
Schedule of Future Minimum Lease Payments
| 2023 | $ | 331 | ||
| 2024 | 1,272 | |||
| 2025 | 1,252 | |||
| 2026 | 1,271 | |||
| 2027 | 1,080 | |||
| Thereafter | 9,828 | |||
| Total future minimum lease payments | 15,034 | |||
| Less: Lease imputed interest | (6,966 | ) | ||
| Total | $ | 8,068 |
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Disaggregation of Revenue
In the nine months ended June 30, 2023, 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 June 30, 2023, and 2022 respectively:
Schedule of Disaggregation of Revenue
| Three Months Ended June 30, | 2023 | 2022 | ||||||
| Revenue | ||||||||
| Wholesale | $ | 841 | $ | 1,126 | ||||
| Retail | 3,774 | 3,630 | ||||||
| Rental | - | - | ||||||
| Other | 13 | 66 | ||||||
| Total revenue | 4,628 | 4,822 | ||||||
| Discounts and returns | (798 | ) | (651 | ) | ||||
| Net Revenue | $ | 3,830 | $ | 4,171 | ||||
The following table illustrates our revenue by type related to the nine months ended June 30, 2023, and 2022 respectively:
| Nine Months Ended June 30, | 2023 | 2022 | ||||||
| Revenue | ||||||||
| Wholesale | $ | 2,639 | $ | 3,256 | ||||
| Retail | 11,431 | 11,217 | ||||||
| Other | 47 | 106 | ||||||
| Total revenue | 14,117 | 14,579 | ||||||
| Discounts and returns | (2,334 | ) | (2,062 | ) | ||||
| Net Revenue | $ | 11,783 | $ | 12,517 | ||||
Geographical Concentrations
As of June 30, 2023, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational use in 19 states and D.C., with lesser legalization, such as for medical use in an additional 18, as of the time of these consolidated financial instrumentsstatements. 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.
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.
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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 December 31, 2017June 30, 2023, and September 30, 2022, are as follows:
| Potentially dilutive share-based instruments: | June 30, 2023 | September 30, 2022 | ||||||
| Convertible notes | 124,237,230 | 34,736,220 | ||||||
| Options to purchase common stock | 9,030,685 | 5,518,185 | ||||||
| Unvested restricted stock awards | - | - | ||||||
| Warrants to purchase common stock | 20,818,536 | 65,783,059 | ||||||
| Anti-dilutive Securities | 154,086,451 | 106,037,464 | ||||||
The company has determined that the effectamount of interest expense and gains and losses for the derivative liabilities associated with the Company’s convertible notes is immaterial and inclusion would be anti-dilutive (i.e. would reduceand has therefore not included an Earnings Per Share table recording the loss per share). As of December 31, 2017, the Company had issued 841,666 options and warrants exercisable into the common stock of the Company outstanding (see Note 6).diluted earnings.
Advertising Costs
The Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was approximately $ 9,38025,000 and $47,000 three months ended June 30, 2023, and 2022, respectively. Advertising expense was approximately $95,000 thousand and $217,000 for the quarternine months ended December 31, 2017June 30, 2023, and nil for 2016.2022, 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 one segment.
AtRecent Accounting Guidance
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 31, 201715, 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. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
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 smaller reporting companies for annual reporting periods beginning after December 15, 2022, 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. Property, Plant & Equipment
Property and equipment consist of the following (in thousands):
Schedule of Property, Plant and Equipment
| June 30, 2023 | September 30, 2022 | |||||||
| Land | $ | - | $ | 1,151 | ||||
| Automobiles | - | 93 | ||||||
| Signage | - | 19 | ||||||
| Furniture and equipment | 1,541 | 2,590 | ||||||
| Leasehold improvements | 3,342 | 3,532 | ||||||
| Buildings and property improvements | 5,062 | 7,460 | ||||||
| Computer software | 57 | 59 | ||||||
| Property and equipment, gross | 10,002 | 14,904 | ||||||
| Accumulated depreciation | (4,553 | ) | (5,815 | ) | ||||
| Property and equipment, net | $ | 5,449 | $ | 9,089 | ||||
Depreciation expense was approximately $256,000 and $400,000 for the three months ended June 30, 2023, and 2022, respectively. Depreciation expense was approximately $917,000 and $1.3 million for the nine months ended June 30, 2023, and 2022, respectively. Depreciation expense is included in general and administrative expense.
4. Inventory
Inventory consists of the following (in thousands):
Schedule of Inventory
| June 30, 2023 | September 30, 2022 | |||||||
| Raw materials | $ | 198 | $ | 569 | ||||
| Work-in-progress | 151 | 450 | ||||||
| Finished goods | 954 | 1,656 | ||||||
| Total Inventory | $ | 1,303 | $ | 2,675 | ||||
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. No inventory reserve was recorded for the nine months ended June 30, 2023, and the year ended September 30, 2022, due to management’s assessment of the inventory on hand.
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5. 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 June 30, 2023, 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 administration expense. The remaining balance of the ERTC receivable was $201 thousand as of June 30, 2023.
Prepaid and other current assets comprised of the following:
Schedule of Prepaid Expenses and Other Current Assets
| June 30, 2023 | September 30, 2022 | |||||||
| Prepaid expenses | $ | 213 | $ | 538 | ||||
| ERTC credits | 201 | 201 | ||||||
| Deposits and other current assets | 182 | 190 | ||||||
| Total prepaid expenses and other current assets | $ | 596 | $ | 929 | ||||
6. 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, 2022 | ||||||||||||||||
| NCI Equity Share | Net Loss Attributable to NCI | NCI in Consolidated Entities | Non-Controlling Ownership % | |||||||||||||
| NVD RE Corp. | $ | 553 | $ | (37 | ) | $ | 516 | 36.2 | % | |||||||
| Western Coast Ventures, Inc. | 842 | $ | (3 | ) | 839 | 49.0 | % | |||||||||
| YMY Ventures, Inc. | 299 | $ | 30 | 329 | 50.0 | % | ||||||||||
| Michigan RE 1, Inc. | (54 | ) | $ | (152 | ) | (206 | ) | 49.0 | % | |||||||
| $ | 1,640 | $ | (162 | ) | $ | 1,478 | ||||||||||
| As of June 30, 2023 | ||||||||||||||||
| NCI Equity Share | Net Loss Attributable to NCI | NCI in Consolidated Entities | Non-Controlling Ownership % | |||||||||||||
| NVD RE Corp. | $ | 516 | $ | (28 | ) | $ | 488 | 36.2 | % | |||||||
| Western Coast Ventures, Inc. | 839 | $ | - | 839 | 49.0 | % | ||||||||||
| YMY Ventures, Inc. | 329 | $ | 48 | 377 | 50.0 | % | ||||||||||
| Michigan RE 1, Inc. | (206 | ) | $ | - | (206 | ) | 49.0 | % | ||||||||
| $ | 1,478 | $ | 20 | $ | 1,498 | |||||||||||
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7. 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 $7.9 million of the Companies liabilities. Notwithstanding, the Company will continue to be responsible for $210 thousand of accounts payable assumed in the acquisition of Driven Deliveries.
The following table presents the assets and liabilities associated with the divestiture of Driven Deliveries, Inc. as of December 15, 2021, the date Driven was divested (in thousands):
Schedule of Discontinued Operations of Assets and Liabilities
| December 15, 2021 | ||||
| ASSETS | ||||
| Current assets | ||||
| Cash and cash equivalents | $ | 47 | ||
| Inventory | 509 | |||
| Prepaid expenses and other current assets | 242 | |||
| Total current assets | 798 | |||
| Property and equipment, net | 4 | |||
| Right of use asset | 327 | |||
| Intangible assets, net | 7,049 | |||
| Total assets | $ | 8,178 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
| Current liabilities | ||||
| Accounts payable and accrued expenses | 7,551 | |||
| Short term notes and advances | 3 | |||
| Lease liability | 218 | |||
| Total current liabilities | 7,772 | |||
| Lease liability - long term | 108 | |||
| Total liabilities | $ | 7,880 | ||
The following table presents the operating results related to the divestiture of Driven Deliveries; Inc. (in thousands):
Three Months Ended December 31, 2021 | ||||
| Revenues | $ | 3,805 | ||
| Cost of goods sold | 3,772 | |||
| Gross Profit | 33 | |||
| Operating expenses: | ||||
| Consulting fees | 4 | |||
| Professional fees | 24 | |||
| General and administration | 1,749 | |||
| Total operating expenses | 1,777 | |||
| Loss from operations | (1,744 | ) | ||
| Other expenses | ||||
| Interest expense | 1 | |||
| Total other expense | 1 | |||
| Loss from discontinued operations | $ | (1,745 | ) | |
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In April 2023, the Company entered into a mutual settlement and release agreement with the landlord of one its indoor grow facilities in Oregon. The mutual consideration between the parties was to sell and transfer certain property and equipment consistedto the landlord in exchange for complete termination of the following:existing lease and all of its obligations.
| 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 |
(1) Because8. Assets Sale
On January 3, 2023, pursuant to an Oregon Real Estate Agreement, the Company closedsold its ownership interest in Never Again 2, LLC. The purchase price for this land and its leasehold improvements was $275,000 and excluding the cultivation license. At the closing the Company received $56,055 net of a $200,000 mortgage that was paid off along with broker fees. The Company recorded a loss on sale of approximately $1 million.
On March 15, 2023, the Company executed as Asset Purchase Agreement in which certain assets were sold for $200,000. In the terms of the agreement the buyer purchased one Marijuana Processor License, one Marijuana Wholesaler license, assumed certain liabilities. The licenses had a recorded value of $222,427 and accumulated amortization of $9,270. The purchase price for the assets was $200,000 with $10,000 payable immediately at closing and the balance of $190,000 payable in thirty-six monthly installments commencing the first business day of the first calendar month after the closing date. The first 35 installments will be $5,278 and the last payment will be $5,278.The Company realized a loss on sale of approximately $18,000.
9. Intangible Assets, net
Intangible assets as of September 30, 2022, and June 30, 2023 (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, 2022 | $ | 8,365 | $ | 280 | $ | 645 | $ | 220 | $ | 5 | $ | (1,501 | ) | $ | 8,014 | |||||||||||||||
| YMY Ventures | 15 | - | - | - | - | - | (38 | ) | (38 | ) | ||||||||||||||||||||
| Yerba Buena | 3-15 years | (537 | ) | - | - | - | - | - | (537 | ) | ||||||||||||||||||||
| Foothill (7LV) | 15 | - | - | - | - | - | (392 | ) | (392 | ) | ||||||||||||||||||||
| JV Retail 3 | 3-15 years | - | - | - | - | - | (12 | ) | (12 | ) | ||||||||||||||||||||
| JV Retail 4 | 3-15 years | - | - | - | - | - | (12 | ) | (12 | ) | ||||||||||||||||||||
| JV Extraction | 10-15 years | (222 | ) | - | - | - | - | - | (222 | ) | ||||||||||||||||||||
| Other | 5 | - | - | - | - | - | - | - | ||||||||||||||||||||||
| Balance as June 30, 2023 | $ | 7,606 | $ | 280 | $ | 645 | $ | 220 | $ | 5 | $ | (1,955 | ) | $ | 6,801 | |||||||||||||||
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. On March 15, 2023, the Company executed as Asset Purchase Agreement in which included the sale of $222,427 of intangible assets. Amortization expense for the three and nine months ended June 30, 2023, was $175 and $533 respectively. Amortization expense for the three and nine months ended June 30, 2022, was $220 and $659, respectively.
Definite-lived intangible assets of $471 and $0 were impaired for the nine months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, goodwill in the amount of $1,522 was not impaired due to the reporting unit, to which the goodwill is allocated, having a negative equity balance.
The following table is a runoff of expected amortization in the following 5-year period as of June:
Schedule of Expected Amortization
| 2023 | $ | 334 | ||
| 2024 | 675 | |||
| 2025 | 675 | |||
| 2026 | 675 | |||
| 2027 | 675 | |||
| Thereafter | 4,238 | |||
| Intangible assets, net | $ | 7,272 |
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10. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following (in thousands):
Schedule of Accounts Payable and Accrued Expenses
| June 30, 2023 | September 30, 2022 | |||||||
| Accounts payable | 2,040 | $ | 1,790 | |||||
| Accrued credit cards | 16 | 14 | ||||||
| Accrued interest | 177 | 111 | ||||||
| Accrued payroll | 138 | 109 | ||||||
| Accrued sales tax liability | 90 | 120 | ||||||
| Other | 278 | 166 | ||||||
| Total Accounts Payable and Accrued Expenses | $ | 2,739 | $ | 2,310 | ||||
11. Notes Payable and Advances
The following table summarizes the Company’s short-term notes and long-term debt, mortgages as of June 30, 2023, and September 30, 2022:
Schedule of Short-term Notes and Advances
| June 30, 2023 | September 30, 2022 | |||||||
| Equipment financing | $ | 17 | $ | 20 | ||||
| Insurance financing | 31 | 230 | ||||||
| Promissory note | 175 | 201 | ||||||
| Total notes payable and advances | $ | 223 | $ | 451 | ||||
| Current portion of long-term debt | $ | 400 | $ | 1,000 | ||||
| Long-term mortgages, net of current portion | 675 | 1,225 | ||||||
| Total debt | $ | 1,075 | $ | 2,225 | ||||
Equipment financing
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 Mulino property (see Note 9) in January 2018,financed vehicle. The note has a sixty-month term with monthly payment of $642. As of June 30, 2023, the balance outstanding is $16,557.
Insurance financing
Effective February 9, 2022, the Company has treatedentered into a 12-month premium finance agreement in partial consideration for an insurance policy in the costs to improveprincipal 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 property as building improvements and not as project costs as of December 31, 2017.
On November 1, 2016,note requires the Company acquired certain real property located at 1027 Willamette Street, Eugene, OR 97401 (the “Property”) for a total cash purchase price plus closing coststo make 10 monthly payments of approximately $918,000.$35,795 over the remaining term of the note. As of June 30, 2023, the obligation has been paid.
OnEffective February 6, 2017,24, 2022, the Company acquired certain real property located at 7827 SE Powell Blvd, Portland, OR 97206 (the “Property”)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 total purchase price plus closing costsdown payment on February 24, 2022, the note requires the Company to make 10 monthly payments of approximately $656,498. As part$1,327 over the remaining term of the note. As of June 30, 2023, the obligation outstanding is $0.
Effective April 6, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for closingan insurance policy in the principal amount of $29,060. The note bears an annual interest rate of 9.65%. The Company paid $5,812 as a down payment on April 6, 2022, the property,note requires the Company to make 9 monthly payments of $2,697.47 over the remaining term of the note. As of June 30, 2023, the obligation outstanding is $0.
Effective May 23, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal amount of $7,599. The note bears an annual interest rate of 11.50%. The Company paid $2,121 as a down payment on May 23, 2022, the note requires the Company to make 9 monthly payments of $640.41 over the remaining term of the note. As of June 30, 2023, the obligation outstanding is $0.
Effective April 5, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal amount of $20,931. The note bears an annual interest rate of 10.50%. The Company paid $5,347 as a down payment on April 5, 2022, the note requires the Company to make 9 monthly payments of $1,808.22 over the remaining term of the note. As of June 30, 2023, the obligation outstanding is $0.
Effective July 7, 2022, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $10,150. The note bears an annual interest rate of 11%. The Company paid $3,950 as a down payment in July 2022, the note requires the Company to make 9 monthly payments of $837 over the remaining term of the note. As of June 30, 2023, the obligation has been paid.
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Effective July 31, 2022, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $144,500. The note bears an annual interest rate of 9.49%. The Company paid $35,803 as a down payment in August 2022, the note requires the Company to make 10 monthly payments of $11,348 over the remaining term of the note. As of June 30, 2023, the obligation has been satisfied.
Effective November 26, 2022, the Company entered into a 10-month premium finance agreement for an insurance policy in the principal amount of $11,089. The note bears an annual interest rate of 12.90 %. The Company paid $1,961 as a down payment in November 2022, the note requires the Company to make 10 monthly payments of $971 over the remaining term of the note. As of June 30, 2023, the obligation outstanding is $1,943.
Effective April 2023, the Company entered into a 10-month premium finance agreement for an insurance policy in the principal amount of $21000. The note bears an annual interest rate of 12.12%. The Company paid $8,392 as a down payment in April 2023, the note requires the Company to make 10 monthly payments of $1,696 over the remaining term of the note. As of June 30, 2023, the obligation outstanding is $13,569.
Effective May 2023, the Company entered into a 10-month premium finance agreement for an insurance policy in the principal amount of $5,892. The note bears an annual interest rate of 14.50 %. The Company paid $1,265 as a down payment in May 2023, the note requires the Company to make 10 monthly payments of $ 462.73 over the remaining term of the note. As of June 30, 2023, the obligation outstanding is $4,627.
Promissory note
In January 2020, the Company issued two promissory notes with a short term note payableprincipal balance of $500,000 to the seller in the Amount of approximately $304,000.
accredited investors (the “Note Holders”). The note is non-interest bearingmatures in October 2020 and requires four monthly paymentshas an annual rate of $75,000 plus a final payment forinterest of 12%. In connection with the remaining amount due immediately thereafter plus fees. Due toissuance of the short-term nature of thepromissory note, the Company has not imputed any interest as it would be immaterial toissued the results forNote Holders 100,000 common stock purchase warrants with a five-year term from the period. The Company and note holder have come to an agreement to reduce by $75,000 the balance due under the note, due to the Seller breaching certain sectionsissuance date, $0.85 per. As of July 2020, in consideration of the Purchase and Sale Agreement dated November 15, 2016.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 December 31, 2017,September 30, 2022, the balance owed on the noteobligation outstanding was approximately $4,000
Depreciation and amortization expense was $75,688 for$200,548, which consisted of remaining principal of $250,000 net of a debt discount of $49,452. During the three months ended December 31, 20172022, the Company converted $124,000 of the principal and $8,134issued common shares. The remaining principal balance was $125,000, and the balance, $80,016, was net of debt discount of $44,984 as of December 31, 2022. In January 2023, the remaining balance was converted through the issuance of shares of common stock.
In November 2022, the Company completed a private placement of a $250,000 unsecured promissory note and 250,000 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 2016.an additional three months upon payment of a $5,000 extension fee to the lender. The Note bears an interest 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 $0.05 for a period of thirty-six (36) months after closing. The balance of the promissory note as of June 30, 2023, was $175,000.
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 June 30, 2023, the Company executed a sale lease back agreement with the Company’s Powell property and entered into a 10-year lease with an unrelated third party located in Wichita, KS. The lease requires the Company to pay a starting base rental fee of $7,714 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 $354,000 and a loss on sale of $249,000, recorded in other expense.
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 June 30, 2023, the obligation outstanding is $400,000. Subsequently, the Company has exercised its right to extend the maturity by incurring an additional fee.
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, 2023, the Company paid off the existing debt of $700,000 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. As of June 30, 2023, the Company executed a sale lease back agreement with the Company’s Willamette property and entered into a 10-year lease with an unrelated third party located in Santa Cruz, CA. The lease requires the Company to pay a starting base rental fee of $11,667 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 $556,000 and a loss on sale of $482,000, recorded in other expense.
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 June 30, 2023, the pursuant to a sales agreement, the property was sold for $275,000. This transaction resulted in net proceeds to the Company in the amount of $56,000 and a loss on sale of $894,000 recorded loss on sale.
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 June 30, 2023, the Company refinanced this obligation in the amount of $675,000 and paid off the principal balance of $400,000. The refinanced mortgage term is 24 months and includes and interest rate of 15% and monthly interest only payments of $8,437.
The following is a table of the 5-year runoff of our long-term debt as of June 30:
Schedule of Maturities of Long Term Debt
| 2023 | $ | 400 | ||
| 2024 | - | |||
| 2025 | 675 | |||
| 2026 | - | |||
| 2027 | - | |||
| Thereafter | - | |||
| Total long-term debt | 1,075 | |||
| Less current portion of long-term debt: | (400 | ) | ||
| Long term debt | $ | 675 |
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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. During the fiscal year ended September 30, 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 $1.8 million and a gain on sale of $1.4 million, recorded in other income.
12. Convertible debt
In December 2022, the Company partially converted a $250,000 unsecured convertible promissory note and issued common shares to convert 50% of the note. In January 2023, the balance of $125,000 was converted through the issuance of shares of common stock. As of June 30, 2023, the balance on the convertible debenture is $0.
In January 2023, the Company executed a $250,000 unsecured convertible promissory note and 500,000 common share purchase warrants to an arm’s length lender. The Note becomes due and payable on March 31, 2023, and is subject to a voluntary conversion by the Holder at the conversion rate of $ a share. The Note bears an interest rate of 12% per annum payable at maturity. Each warrant entitles the holder thereof to purchase one common share at a price of $0.005 for a period of thirty-six (36) months after closing. As of June 30, 2023, the note balance was $150,000, and has subsequently been satisfied.
During March 2023, the Company executed a $100,000 unsecured convertible promissory note. The Note bears an interest rate of 7.5% per annum payable quarterly either in cash or in kind. The Note becomes due and payable on March 7, 2024, and is subject to a voluntary conversion by the Holder at the conversion rate of $a share. Additionally, upon this conversion, the noteholder is entitled to 100 percent cashless warrant coverage entitling the holder to purchase one common share at a price of $0.02 for a period of five years, (60) months after conversion. If the noteholder elects to redeem the note, the holder would be entitled to accrued interest along with three times cashless warrant coverage based on the initial investment entitling the holder to purchase one common share at a price of $for a period of five years, (60) months after redemption.
During March 2023, the Company executed a $50,000 unsecured convertible promissory note. The Note bears an interest rate of 7.5% per annum payable quarterly either in cash or in kind. The Note becomes due and payable on March 7, 2024, and is subject to a voluntary conversion by the Holder at the conversion rate of $ a share. Additionally, upon this conversion, the noteholder is entitled to 100 percent cashless warrant coverage entitling the holder to purchase one common share at a price of $0.02 for a period of five years, (60) months after conversion. If the noteholder elects to redeem the note, the holder would be entitled to accrued interest along with three times cashless warrant coverage based on the initial investment entitling the holder to purchase one common share at a price of $ for a period of five years, (60) months after redemption.
During April 2023, the Company executed a $50,000 unsecured convertible promissory note. The Note bears an interest rate of 7.5% per annum payable quarterly either in cash or in kind. The Note becomes due and payable on March 7, 2024, and is subject to a voluntary conversion by the Holder at the conversion rate of $ a share. Additionally, upon this conversion, the noteholder is entitled to 100 percent cashless warrant coverage entitling the holder to purchase one common share at a price of $0.02 for a period of five years, (60) months after conversion. If the noteholder elects to redeem the note, the holder would be entitled to accrued interest along with three times cashless warrant coverage based on the initial investment entitling the holder to purchase one common share at a price of $ for a period of five years, (60) months after redemption.
During April 2023, the Company executed a series of secured promissory notes totaling $545,000. The Notes bears an interest rate of 7.5% per annum payable quarterly either in cash or in kind. The Note becomes due and payable on March 7, 2024, and is subject to a voluntary conversion by the Holder at the conversion rate of $ a share. Additionally, upon this conversion, the noteholder is entitled to 100 percent cashless warrant coverage entitling the holder to purchase one common share at a price of $0.02 for a period of five years, (60) months after conversion. If the noteholder elects to redeem the note, the holder would be entitled to accrued interest along with three times cashless warrant coverage based on the initial investment entitling the holder to purchase one common share at a price of $ for a period of five years, (60) months after redemption. These debentures are collateralized pursuant to a security and escrow agreement whereas the funds are set aside to fund the debentures upon the holder’s decision to either convert or redeem the note.
The total remaining balance of the convertible notes listed above was $0.3 million, which is net of a discount of $0.6 million as of June 30, 2023, and is reflected on the balance sheet within convertible notes, net.
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 52,430 convertible debenture special warrants (the “Broker CD Special Warrants”) as partial satisfaction of a selling commission.
On March 14, 2019, the Company issued 962CD 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 $1.0million or $0.7 million USD. In connection with this offering, the Company issued the agents in such offering 5,600 convertible debenture special warrants (the “Broker CD Special Warrants”) as partial satisfaction of a selling commission.
The total aggregate proceeds of the Offering totaled $4.1 million CDN or $3.1 million USD.
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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 were as follows:
Schedule of Assumptions Used Valuations of Warrants
| 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.
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In June 2022, 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 initially 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 ; 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 30 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, (iii) the payment of 5% of the principle amount. Share purchase warrants of the Company were issued in connection this repricing at 167 common share warrants for each $1,000 debenture unit held. A debt discount of $1.2 million was recorded and will be amortized over the remaining life of the convertible debt, and as part of the modification of convertible debt. This transaction was accounted for as extinguishment of debt which resulted in a gain of $803 thousand. As of June 30, 2023, and September 30, 2022, the convertible debt related to the above debentures was $2.0 million and $1.5 million, net of a debt discount of $600 thousand and $1.1 million, respectively.
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 nine months ended June 30, 2023, in USD, (in thousands):
Schedule of Warrant Liability and Embedded Derivative Liability
| Warrant Liability | Derivative Liability | |||||||
| Balance as of September 30, 2022 | $ | - | $ | 370 | ||||
| Change in fair value | - | (339 | ) | |||||
| Balance as of June 30, 2023 | $ | - | $ | 31 | ||||
13. 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 June 30, 2023 (in thousands):
Schedule of Liabilities Measured at Fair Value on a Recurring Basis
| Fair value measured at June 30, 2023 | ||||||||||||||||
| Quoted prices | Significant other | Significant | ||||||||||||||
in active markets | observable inputs | unobservable inputs | ||||||||||||||
| Fair value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Warrant liability | $ | 71 | $ | - | $ | - | $ | 71 | ||||||||
| Embedded derivative liability | 31 | - | - | 31 | ||||||||||||
| Total fair value | $ | 102 | $ | - | $ | - | $ | 102 | ||||||||
There were no transfers between Level 1, 2 or 3 during the nine months ended June 30, 2023.
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The following table presents changes in Level 3 liabilities measured at fair value for the nine months ended June 30, 2023. 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
| Embedded | ||||||||||||
| Warrant Liability | Derivative Liability | Total | ||||||||||
| Balance – September 30, 2022 | $ | 55 | $ | 370 | $ | 425 | ||||||
| Warrants granted for services | - | - | - | |||||||||
| Change in fair value | 44 | (215 | ) | (171 | ) | |||||||
| Balance – December 31, 2022 | 99 | 155 | 254 | |||||||||
| Change in fair value | (56 | ) | 6 | (50 | ) | |||||||
| Balance – March 31, 2023 | $ | 43 | $ | 161 | $ | 204 | ||||||
| Change in fair value | 28 | (130 | ) | (102 | ) | |||||||
| Balance – June 30, 2023 | $ | 71 | $ | 31 | $ | 102 | ||||||
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of June 30, 2023, and September 2022 is as follows:
Summary of Weighted Average Significant Unobservable Inputs
| Embedded Derivative Liability | ||||||||
| As of | As of | |||||||
| June 30, 2023 | September 30, 2022 | |||||||
| Strike price | $ | 0.01 | $ | 0.10 | ||||
| Contractual term (years) | 2.1 | 2.8 | ||||||
| Volatility (annual) | 164 | % | 141 | % | ||||
| Risk-free rate | 4.50 | % | 4.00 | % | ||||
| Dividend yield (per share) | 0.00 | % | 0.00 | % | ||||
| Credit spread | 14% to 16 | % | 14% to 16 | % | ||||
The Company used a lattice based trinomial model developed by Tsiveriotis, K. and Fernades in which the three lattices incorporate (1) the Company’s underlying common stock price; (2) the value of the debt components of the convertible notes; and (3) the value of the equity component of the convertible notes. The main drivers of sensitivity for the model are volatility and the credit spread. The model used will vary by approximately 1.5% for a 4% change in volatility and will vary by less than 1% for each 1% change in credit spread.
14. 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,Pursuant to the shareholders meeting on June 25, 2021, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy inhas amended its certificate of incorporation to increase the principal amountnumber of $212,500. The note bears an annual interest rate of 5.81% and requires theauthorized Company Common Shares from to make monthly payments of $21,820 over the term of the note. As of December 31, 2017, the obligation was fully repaid..
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 December 31, 2017.June 30, 2023, and September 30, 2022.
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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 to a consultant. The grant has an exercise price of $2.40 per share and a term of 4 years. All of the option shares vested on the date of the grant.valued at $ as stock-based compensation.
The fair values of the options granted duringDuring 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 December 31, 2022, the Company issued shares of its common stock related to various consulting agreements for a fair value of approximately $9,000.
During the quarter ended December 31, 2022, the Company issued shares of its common stock valued at inception$ as stock-based compensation.
During the quarter ended December 31, 2022, the Company converted $124,000 of its 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 $2.22 per share.$ as stock-based compensation.
During the quarter ended March 31, 2023, the Company converted $125,000 of its convertible debt in exchange for shares of the company’s common stock.
During the quarter ended March 31, 2023, the Company issued shares of the company’s common stock in payment of $144,573 of interest and rent expense.
During the quarter ended June 30, 2022, the Company issued shares of its common stock valued at $ as stock-based compensation in connection with employment and board agreements.
During the quarter ended June 30, 2022, the Company issued shares of its common stock valued at $ as stock-based compensation in connection with advisory and finder’s agreements.
15. 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.
Options:
Schedule of the agreement in connection with promissory notes issued (see Note 5) were determined using the Black-Scholes option pricing model with the following weighted-average assumptions:Fair Value of Options Granted
| For the Three Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Exercise price | 0.05 | 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 | ||||||
Schedule 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, 2021 | 6,697,916 | $ | 1.07 | $ | 54 | |||||||||||
| Granted | 1,500,000 | 0.07 | - | |||||||||||||
| Expired | (2,242,231 | ) | (0.67 | ) | - | - | ||||||||||
| Outstanding as of September 30, 2022 | 5,955,685 | $ | 1.07 | $ | - | |||||||||||
| Granted | 3,425,000 | $ | 0.05 | $ | - | |||||||||||
| Outstanding as of March 31, 2023 | 9,380,685 | $ | 0.27 | $ | - | |||||||||||
| Expired | (100,000 | ) | $ | 5.56 | $ | - | - | |||||||||
| Outstanding as of June 30, 2023 | 9,280,685 | $ | 0.49 | $ | - | |||||||||||
| Options vested and exercisable | 9,030,685 | $ | 0.49 | $ | - | |||||||||||
Estimated future stock-based compensation expense relating to unvested stock options was $92,499 which has been recordednominal as a debt discountof June 30, 2023, and is being amortized over the2022. Weighted average remaining contractual life of the loansoptions is years.
Stock-based Compensation Expense
Schedule of Stock-based Compensation Expenses
| Three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock grants | $ | 231 | $ | - | ||||
| Stock options | 14 | 94 | ||||||
| Warrants | - | - | ||||||
| Total stock-based compensation | $ | 245 | $ | 94 | ||||
| Nine months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock grants | $ | 263 | $ | 288 | ||||
| Stock options | 119 | 405 | ||||||
| Warrants | - | 158 | ||||||
| Total stock-based compensation | $ | 382 | $ | 851 | ||||
16. 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 December 31, 2017, $88,645 remained unamortized.taxes, 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 June 30, 2023, 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$7,033 plus 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$14,000 for 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 June 30, 2023, 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.services rendered by the Agent and in connection with the Offering, the Company has agreed to pay the Agent, on the 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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Legal Proceedings
Chris Hass, et al. vs Brian Hayek, et al.
Plaintiffs filed their initial complaint in the instant action on May 22, 2020. Plaintiffs filed the operative first amended complaint on August 18, 2020. On March 28, 2022, Plaintiffs obtained a stipulated judgment in this action in the amount of $349,876.69 against Defendants Driven Deliveries, Brian Hayek (“Hayek”), and Christian Schenk (“Schenk”) (collectively, “Defendants”). (3/28/22 Judgment.) Plaintiffs declare that during the litigation of the instant action, Baumgartner negotiated the essential terms of a settlement with Driven Deliveries’ President, Salvador Villanueva(“Villanueva”), and Villanueva represented to Baumgartner that he was in charge of the litigation and a deal could be worked out between the two of them to resolve the case. Plaintiffs declare the basic terms of a settlement were reached between Villanueva and Baumgartner, and Plaintiffs signed a settlement agreement (“Settlement Agreement”) on November 24, 2020. Defendants, including Hayek, signed the Agreement on November 30, 2020. Plaintiffs declare they signed the Settlement Agreement because they knew Driven Deliveries was merging with Stem. Plaintiffs declare that for this reason, they made sure to state in the Settlement Agreement that in the event of a merger between Driven Deliveries and Stem, Stem would be bound by the Settlement Agreement and would be named on the Judgment. Plaintiffs also declare that when they signed the Settlement Agreement, they relied on the fact Hayek, Stem’s new Agreement to bind his new company. Plaintiffs declare Defendants made payments on the Settlement Agreement until November 2021, when payments stopped. Plaintiffs declare the settlement checks were mostly written by Villanueva. Plaintiffs declare that shortly after they signed the Settlement Agreement, Driven Deliveries officially completed its merger with Stem, and all of Plaintiffs’ shares in Driven Deliveries were converted to shares of Stem. In January 2018,2022, Villanueva listed himself as President, Secretary, and Treasurer of Driven Deliveries. Plaintiffs filed the instant motion on September 8, 2022. On October 3, 2022, Defendant Driven Deliveries filed its notice of bankruptcy proceedings, and the Court ordered a stay as to Driven Deliveries. On October 20, 2022, nonparty Stem filed its opposition. On October 26, 2022, Plaintiffs filed their reply. At the November 2, 2022, hearing on the instant motion, the Court requested Plaintiffs and Stem submit supplemental briefs on which state law to apply regarding successor liability.
Under California law, Stem, as Driven Deliveries’ prior parent company was legally required to assume Driven Deliveries’ debt to Plaintiffs. If a domestic corporation owns all the outstanding shares, or owns less than all the outstanding shares but at least 90 percent of the outstanding shares of each class, of a corporation or corporations, domestic or foreign, the merger of the subsidiary corporation or corporations into the parent corporation or the merger into the subsidiary corporation of the parent corporation and any other subsidiary corporation or corporations, may be effected by a resolution or plan of merger adopted and approved by the board of the parent corporation and the filing of a certificate of ownership as provided in subdivision . The resolution or plan of merger shall provide for the merger and shall provide that the surviving corporation assumes all the liabilities of each disappearing corporation and shall include any other provisions required by this section. Stem stated in a Form S-4 Statement filed with the SEC on [date], “Driven is surviving the merger as a wholly owned subsidiary of Stem (the ‘Merger’). Stem, together with Driven following the Merger, is referred to herein as the combined company. Following the completion of the Merger, Stem will also assume Driven’s outstanding net indebtedness.” Plaintiffs argue that while the merger with Stem was pending, Driven and Stem’s COO, Brian Hayek agreed to be bound by California law in executing the Settlement Agreement. Accordingly, applying California law, Stem assumed Driven’s liability to Plaintiffs. Accordingly, the Court in California granted the Plaintiffs’ motion to amend the judgment to add nonparty Stem Holdings Inc. as an additional defendant. At this time, it is unclear whether Stem will be required to pay Plaintiff any amount on account of this matter.
Additionally, the Company closed onis subject from time to time to litigation, claims and suits arising in the purchase.ordinary course of business.
17. Subsequent events
On July 10, 2023, the Company executed as Stock Purchase Agreement in which the Company sold its ownership interest in 7LV USA Corporation. The purchase price for the entity and for all its stock was $2.5 million which included the cannabis retail license. At closing, the Company received $1.0 million dollars in exchange for 49% of the shares and the remaining 51% of the shares will be tendered upon receipt of the balance of $1.5 million consisting of 15 $100,000 monthly payments.
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 nine months ended SeptemberJune 30, 2017,2023, 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 nine months ended December 31, 2017,June 30, 2023, 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
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.
Summary
Results of ResultsOperations
| 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 | ) | ||
| For the Three Months Ended June 30, | Change | |||||||||||||||
| ($ in thousands) | 2023 | 2022 | $ | % | ||||||||||||
| Gross Revenue | $ | 5,389 | $ | 4,823 | 566 | 12 | % | |||||||||
| Discounts and returns | (1,559 | ) | (652 | ) | 907 | 139 | % | |||||||||
| Cost of goods sold | 2,787 | 3,500 | (713 | ) | (20 | %) | ||||||||||
| Consulting fees | 123 | 104 | 19 | 18 | % | |||||||||||
| Professional fees | 258 | 551 | (293 | ) | (53 | %) | ||||||||||
| General and administration | 2,094 | 2,555 | (461 | ) | (18 | %) | ||||||||||
| Impairment expense | 471 | - | 471 | 100 | % | |||||||||||
| Other income, net | 826 | 3,011 | (2,185 | ) | 73 | % | ||||||||||
| Net loss | $ | (1,077 | ) | $ | 472 | |||||||||||
Comparison of the results of operations for the three months ended December 31, 2017June 30, 2023, compared to the three months ended December 31, 2016June 30, 2022
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 December 31, 2017June 30, 2023, of $309,829$ 3,830 compared with $0.00$4,171 for the comparable period of 2016, which2022, 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 June 30, 2023, amounted to approximately $2,787 compared to $3,500 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 December 31, 2017,June 30, 2023, we incurred consulting costs of $55,450approximately $123 compared to $6,250approximately $104 in the comparable period of the prior year. The increase in consulting fees was attributed to an increase in stock-based consulting expenses.
In the three months ended June 30, 2023, we incurred professional fees of approximately $258 compared to approximately $551 in the comparable period of the prior year. The 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 June 30, 2023, we incurred general and administrative costs of approximately $2,094 compared to approximately $2,555 in the comparable period of the prior year. The decrease relates primarily to a decrease in costs related to insurance, office expenses, and salaries.
The Company recognized other income of $826 during the three months ended June 30, 2023, compared to other income during the three months ended June 30, 2022, of $3,011. The other income was primarily related to the sale of a subsidiary.
| For the Nine Months Ended June 30, | Change | |||||||||||||||
| ($ in thousands) | 2023 | 2022 | $ | % | ||||||||||||
| Gross Revenue | $ | 14,117 | $ | 14,578 | (461 | ) | (3 | %) | ||||||||
| Discounts and returns | (2,334 | ) | (2,061 | ) | 273 | 13 | % | |||||||||
| Cost of goods sold | 10,103 | 10,691 | (588 | ) | (6 | %) | ||||||||||
| Consulting fees | 231 | 633 | (402 | ) | (64 | %) | ||||||||||
| Professional fees | 743 | 2,543 | (1,800 | ) | (71 | %) | ||||||||||
| General and administration | 6,602 | 8,744 | (2,142 | ) | (24 | %) | ||||||||||
| Impairment of intangibles | 471 | 795 | (324 | ) | (41 | %) | ||||||||||
| Other income (expenses), net | (1,022 | ) | 5,457 | (6,479 | ) | 119 | % | |||||||||
| Loss from discontinued operations | - | (1,745 | ) | 1,745 | 100 | % | ||||||||||
| Net loss | $ | (7,389 | ) | $ | (7,177 | ) | ||||||||||
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The Company had net revenues during the nine months ended June 30, 2023, of $11,783 compared with $12,517 for the comparable period of 2022, the decrease in revenue was primarily related to a decrease in flower sales related to general market conditions.
Cost of goods for the nine months ended June 30, 2023, amounted to $10,103 compared to $10,691 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 nine months ended June 30, 2023, we incurred consulting costs of $231 compared to $633 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 threenine months ended December 31, 2017,June 30, 2023, we incurred professional fees of approximately $140,598$743 compared to $0.00$2,543 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 threenine months ended December 31, 2017,June 30, 2023, we incurred general and administrative costs of approximately $432,000$6,602 compared to $72,718 in the comparable period of the prior year. Those$8,744, 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 the threenine months ended December 31, 2017,June 30, 2023, we incurred stock-based compensationdid recognize impairment expense of approximately $360,000$471 compared to approximately 468,000$795 in the comparable period of the prior year,year. This expense relates to the impairment of investments and non-refundable deposits.
The Company recognized other expenses of $1,022 during the nine months ended June 30, 2023, compared to other income during the nine months ended June 30, 2022, of $5,457. The other expenses were primarily related to the resultloss on a sale of grantsa subsidiary for the nine months ended June 30, 2023. The other income for the nine months ended June 30, 2022, primarily related to the change in fair value of stockwarrants offset slightly by impairment expense.
In the nine months ended June 30, 2023, we did not recognize any loss from discontinued operations. In the nine months ended June 30, 2022, we had recognized a loss of discontinued operations of $1,745 related to the divesture of Driven.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity and options to officers, directorsCapital Resources
On June 30, 2023, we had working capital deficit of approximately $2.1 million, which included cash and consultants.cash equivalents of $1.7 million. We expect that we will continue to use equityreported a net loss of approximately $7.4 million and our net cash used 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 devoteoperating expenses totaled $1.3 million, our cash resourcesprovided by investing activities was $0.9 million, and cash flows provided by financing activities totaled $0.5 million.
Cash Flow
Net cash flows used in continuing operating activities was approximately $1,580 for the nine months ended June 30, 2023, as compared net cash flow used in operating activities of approximately $5,764 for the nine months ended June 30, 2022, a change of approximately $4,184.
| ● | Net cash flow used in operating activities for the nine months ended June 30, 2023 primarily reflected a net loss of $7,389 adjusted for the add-back of non-cash items consisting of depreciation and amortization of approximately $821, stock-based compensation and consulting expense of approximately $382, amortization of debt discount of $1,007, impairment of intangible assets of $471, amortization of intangible assets of $529, non-cash rent and interest expense of $146, foreign currency translation adjustment of $53, loss on sale of long-lived assets of $178, offset by a decrease in warrant and derivative liability of $322, changes in operating assets and liabilities consisting of a decrease in accounts receivable of $46, a decrease in inventory of $1,372, an increase in accounts payable and accrued expenses of $427, and a decrease in prepaids of $333, and an increase in other assets of $367. Net cash flow used in operating activities for the nine months ended June 30, 2022 primarily reflected a net loss of $7,177 adjusted for the add-back of non-cash items consisting of loss from discontinued operations of $1,745, depreciation and amortization of approximately $1,247, stock-based compensation and consulting expense of approximately $880, amortization of debt discount of $13, amortization of intangible assets of $655, impairment of investments of $288, issuance of common stock in connection with consulting agreements and interest payments of $189, recognition of derivative liability of $340, offset by a decrease in warrant liability of $2,183, gain on extinguishment of debt of $803, foreign currency translation adjustment of $62, a gain from disposal of a subsidiary of $831, gain on sale of property of $1,155, change operating assets and liabilities consisting of a decrease in inventory of $21, a decrease in accounts payable and accrued expenses of $124, a decrease in prepaids of $217, an increase in other of $103, and a decrease in other assets of $1,402. |
| ● | Net cash flow provided by investing activities for the nine months ended June 30, 2023, amounted to $949 and consisted of the sale of investments of $973, and the purchase of property and equipment of $24. Net cash flow provided by investing activities for the nine months ended June 30, 2022, amounted to $3,329 and consisted of $206 used in the purchase of property and equipment, $1,651 provided from the sale of an equity method investment, and $2,173 provided from the sale of a property. Additionally, a net of $288 was provided by investments, and $1 related to repayment of a related party. |
| ● | Net cash provided by financing activities was $811 for the nine months ended June 30, 2023, as compared to net cash provided by financing activities of $31 for the nine months ended June 30, 2022. During the nine months ended June 30, 2023, we received proceeds from notes payable and advances of $1,470, offset by repayments of $627 of notes payable, and distributions of $32. Net cash provided by financing activities was $31 for the nine months ended June 30, 2022. During the nine months ended June 30, 2022, we received proceeds of $285 for the issuance of common shares, $625 related to note payables offset by repayments of $879 of notes payable. |
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CRITICAL ACCOUNTING POLICIES
Principles of Consolidation
The Company’s policy is to acquiring new and improving our existing properties.
Properties
In September 2016,consolidate all entities that it controls by ownership of a majority of 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.outstanding voting stock. In addition, the Company also remitted $14,000consolidates 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 security depositVIE 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 landlord.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 Company has subleased this space effective July 1, 2017. The 42nd Street Property is a 16,000-sq. ft. indoor cannabis growing facility.
On November 1, 2016, the Company acquired certain property located in Eugene, OR (the “Willamette Property”) for a total cash purchase price plus closing costsportion of approximately $918,000. The Willamette Property is an operating cannabis dispensary.
On February 6, 2017, the Company acquired certain real property located at 7827 SE Powell Blvd, Portland, OR 97206 (the “Powell Property”) for a total purchase price plus closing costs of approximately $656,498. As part of the consideration for closing on the property, the Company issued a short term note payablenet loss attributable to the sellernoncontrolling interests is presented as net loss attributable to noncontrolling interests in the AmountCompany’s Consolidated Statements of approximately $304,000. The Powell Property is a cannabis dispensary.Operations.
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. In addition, the Seller has granted the Company a credit to be reflected upon closing in the amount $9,500 for improvements 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 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 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.
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’s policy is to capitalize all costs that are directly identifiable with a specific property, would be capitalized ifCompany reviews the Company had already acquired thecarrying value of its long-lived assets, which include property and whenequipment, for indicators of impairment whenever events or changes in circumstances indicate that the property,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 optionimpairment review: (i) significant under-performance or losses of assets relative to acquireexpected historical or projected future operating results; (ii) significant changes in the property, is being actively sought after,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 either funds are available or will likely become available. All amounts shown capitalized prior to(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 a propertyproperties, as long as those properties are included under the caption of Project Costs in the balance sheet.acquired from unrelated third parties.
Emerging Growth Company
The Company has electedassesses 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.
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 is subject to annual impairment testing on or between annual tests if an emerging growth company as defined underevent or change in circumstance occurs that would more likely than not reduce the Jumpstart Our Business Startups Actfair value of 2012 (“Jobs Act”). Included with this election,a 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 increase to over $700 million as ofcarrying amount, then performing 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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
In July 2016,two-step impairment test is not required. If the Company entered into a 10-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 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.
In August 2016, the Company and certain shareholders of 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 (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 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. 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 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 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 event that the Company deploys more than $10 million in investment in real estate assets,concludes otherwise, the Company is required to acquire certain real estate properties from certainperform 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 Company’s shareholders andreporting unit’s goodwill to the carrying value of the reporting unit’s goodwill.
Intangible Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their affiliated entities.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.
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ShouldAn 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 testing for impairment, the Company obtain in excess of $10,000,000 throughhas the option to first perform a combination of its private placements and its merger with Patch Holdings, Inc. (see Note 5),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 purchase certain real estate properties owned by entities affiliated with certain of its shareholders.
In addition, certain shareholdersperform 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 nine months ended June 30, 2023, and 2022, the Company have begun organizing entitiesdetermined that will operate directlythere were $471 and $795 losses related to the impairment of goodwill and intangible assets, respectively.
Business Combinations
The Company applies the provisions of ASC 805 in the cannabis industry,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 intendsuses its best estimates and assumptions to offer leases of its propertiesaccurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these entitiesestimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments in the near future. The Multi Party Agreement also requires thatcurrent 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 eventconsolidated 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 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 US Government amends Title 21entity 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.
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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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States Code, otherwise known asFederal Government. This raises several possible issues which may impact the Controlled Substances Act,Company’s overall operations, not the least of which are related to removetraditional 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 them. Aside from a huge inconvenience and the need to find creative ways to manage financial flow, payroll logistics, and payment of taxes, this also poses tremendous risks to controls as a Schedule I drug, andresult 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 raises more than $10 milliondoes not believe these risks will have a substantive impact on its planned operations 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.near term.
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 deposit to the landlord.
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
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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 June 30, 2023 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.
(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. |
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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 June 30, 2023. 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 June 30, 2023. 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.
None.Chris Hass, et al. vs Brian Hayek, et al. Plaintiffs filed their initial complaint in the instant action on May 22, 2020. Plaintiffs filed the operative first amended complaint on August 18, 2020. On March 28, 2022, Plaintiffs obtained a stipulated judgment in this action in the amount of $349,876.69 against Defendants Driven Deliveries, Brian Hayek (“Hayek”), and Christian Schenk (“Schenk”) (collectively, “Defendants”). (3/28/22 Judgment.) Plaintiffs declare that during the litigation of the instant action, Baumgartner negotiated the essential terms of a settlement with Driven Deliveries’ President, Salvador Villanueva(“Villanueva”), and Villanueva represented to Baumgartner that he was in charge of the litigation and a deal could be worked out between the two of them to resolve the case. Plaintiffs declare the basic terms of a settlement were reached between Villanueva and Baumgartner, and Plaintiffs signed a settlement agreement (“Settlement Agreement”) on November 24, 2020. Defendants, including Hayek, signed the Agreement on November 30, 2020. Plaintiffs declare they signed the Settlement Agreement because they knew Driven Deliveries was merging with Stem. Plaintiffs declare that for this reason, they made sure to state in the Settlement Agreement that in the event of a merger between Driven Deliveries and Stem, Stem would be bound by the Settlement Agreement and would be named on the Judgment. Plaintiffs also declare that when they signed the Settlement Agreement, they relied on the fact Hayek, Stem’s new Agreement to bind his new company. Plaintiffs declare Defendants made payments on the Settlement Agreement until November 2021, when payments stopped. Plaintiffs declare the settlement checks were mostly written by Villanueva. Plaintiffs declare that shortly after they signed the Settlement Agreement, Driven Deliveries officially completed its merger with Stem, and all of Plaintiffs’ shares in Driven Deliveries were converted to shares of Stem. In January 2022, Villanueva listed himself as President, Secretary, and Treasurer of Driven Deliveries. Plaintiffs filed the instant motion on September 8, 2022. On October 3, 2022, Defendant Driven Deliveries filed its notice of bankruptcy proceedings, and the Court ordered a stay as to Driven Deliveries. On October 20, 2022, nonparty Stem filed its opposition. On October 26, 2022, Plaintiffs filed their reply. At the November 2, 2022, hearing on the instant motion, the Court requested Plaintiffs and Stem submit supplemental briefs on which state law to apply regarding successor liability.
Under California law, Stem, as Driven Deliveries’ prior parent company was legally required to assume Driven Deliveries’ debt to Plaintiffs. If a domestic corporation owns all the outstanding shares, or owns less than all the outstanding shares but at least 90 percent of the outstanding shares of each class, of a corporation or corporations, domestic or foreign, the merger of the subsidiary corporation or corporations into the parent corporation or the merger into the subsidiary corporation of the parent corporation and any other subsidiary corporation or corporations, may be effected by a resolution or plan of merger adopted and approved by the board of the parent corporation and the filing of a certificate of ownership as provided in subdivision . The resolution or plan of merger shall provide for the merger and shall provide that the surviving corporation assumes all the liabilities of each disappearing corporation and shall include any other provisions required by this section. Stem stated in a Form S-4 Statement filed with the SEC on [date], “Driven is surviving the merger as a wholly owned subsidiary of Stem (the ‘Merger’). Stem, together with Driven following the Merger, is referred to herein as the combined company. Following the completion of the Merger, Stem will also assume Driven’s outstanding net indebtedness.” Plaintiffs argue that while the merger with Stem was pending, Driven and Stem’s COO, Brian Hayek agreed to be bound by California law in executing the Settlement Agreement. Accordingly, applying California law, Stem assumed Driven’s liability to Plaintiffs. Accordingly, the Court in California granted the Plaintiffs’ motion to amend the judgment to add nonparty Stem Holdings Inc. as an additional defendant. At this time, it is unclear whether Stem will be required to pay Plaintiff any amount on account of this matter.
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 August 14, 2023, 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.
ITEM 1A. RISK FACTORS
Smaller reporting companies are not required to provide the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth all securities issued by Stem since between October 1, 20172022, and February 12, 2018:June 30, 2023:
| 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 | |||||||||
| Security | No. Shares | |||||
| Services | Common Stock | 350,000 | ||||
| Compensation | Common Stock | 24,137,500 | ||||
| Issuance of common stock related to debt conversions | Common Stock | 12,787,723 | ||||
| Issuance of common stock related to rent and interest payments | Common Stock | 6,895,344 | ||||
| Total | 44,170,567 | |||||
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.
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) |
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. | ||
| By: | /s/ | |