UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ~~ended~~ ~~June 30~~ended, December 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-54730

ITEM 9 LABS CORP.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

96-0665018

(I.R.S. Employer Identification No.)

2727 North 3rd Street, Suite 201 Phoenix, Arizona 85004

(Address of principal executive offices and zip code)

1-833-867-6337

(~~Registrant's~~Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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 ☐ No ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer ~~(Do not check if a smaller reporting company)~~	☑	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 any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of ~~August 13, 2021,~~February 14, 2022, there were ~~92,209,521~~95,041,184 shares of the issuer's common stock, $0.0001 par value per share, outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information included in this Quarterly Report on Form 10-Q and other filings of the Registrant under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as well as information communicated orally or in writing between the dates of such filings, contains or may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from expected results. Among these risks, trends and uncertainties are the availability of working capital to fund our operations, the competitive market in which we operate, the efficient and uninterrupted operation of our computer and communications systems, our ability to generate a profit and execute our business plan, the retention of key personnel, our ability to protect and defend our intellectual property, the effects of governmental regulation, and other risks identified in the Registrant's filings with the Securities and Exchange Commission from time to time.

In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Although the Registrant believes that the expectations reflected in the forward-looking statements contained herein are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Registrant, nor any other person, assumes responsibility for the accuracy and completeness of such statements. The Registrant is under no duty to update any of the forward-looking statements contained herein after the date of this Quarterly Report on Form 10-Q.

ITEM 9 LABS CORP.

FORM 10-Q

~~JUNE 30,~~DECEMBER 31, 2021

INDEX

		Page
Part I - Financial Information

Item 1.	Financial Statements	F-1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1619
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2124
Item 4.	Controls and Procedures	2125

Part II - Other Information

Item 1.	Legal Proceedings	2226
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2226
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	2226
Item 5.	Other Information	26
Item 6.	Exhibits	2327

Signatures		2428

Certifications

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

INDEX	F-1
Condensed Consolidated Balance Sheets as of ~~June 30,~~December 31, 2021 (Unaudited) and September 30, ~~2020~~2021	F-2
Unaudited Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~June 30,~~December 31, 2021 and 2020 ~~(Unaudited)~~	F-3
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2021 and 2020	F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three ~~and Nine~~ Months Ended ~~June 30,~~December 31, 2021 and 2020 ~~(Unaudited)~~	~~F-4~~
~~Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended June 30, 2021 and 2020 (unaudited)~~	F-5
Notes to Condensed Consolidated Financial Statements (Unaudited)	F-6

F-1

ITEM 9 LABS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
June 30, September 30,
2021 2020
ASSETS
Current Assets:
Cash and cash equivalents $ 296,892 $ 84,677
Accounts receivable, net of allowance for doubtful accounts of $76,052 and $81,018, respectively 2,055,690 352,598
Deferred costs 8,495,683 2,147,110
Prepaid expenses and other current assets 629,138 307,905
Total current assets 11,477,403 2,892,290

Property and equipment, net 9,413,989 7,208,760
Right of use asset 156,938 196,756
Deposits 600,000 1,243,738
Receivable for sale of Airware assets, net of reserves of $596,430 155,715 160,715
Notes and interest receivable, net 80,000 80,000
Other intangible assets, net 126,922,930 7,765,114
Goodwill 1,116,396 1,116,396
Total Assets $ 149,923,371 $ 20,663,769

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,534,030 $ 1,977,207
Accrued payroll 83,286 197,989
Accrued interest 1,332,201 780,903
Accrued expenses 2,707,622 1,808,819
Deferred revenue 685,349 -
Notes payable, current portion, net of discounts 838,894 3,193,150
Operating lease liability - current portion 60,480 60,480
Convertible notes payable, net of discounts 1,317,821 2,270,000
Total current liabilities 10,559,683 10,288,548

Operating lease liability, net of current portion 100,518 140,336
Convertible notes payable, net of current portion and discounts 188,093
Notes payables, net of current portion and discounts 3,465,106 2,219,636

Total liabilities 14,313,400 12,648,520

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 104,509,521 and 68,336,113 shares issued and 92,209,521 and 56,036,113 outstanding at June 30, 2021 and September 30, 2020, respectively 10,451 6,834
Additional paid-in capital 173,877,183 44,426,737
Accumulated deficit (24,827,663 ) (22,968,322 )
Total Item 9 Labs Corp. stockholders' equity 149,059,971 21,465,249
Treasury stock (13,450,000 ) (13,450,000 )

Total Stockholders' Equity 135,609,971 8,015,249

Total Liabilities and Stockholders' Equity $ 149,923,371 $ 20,663,769

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

	~~F-2~~
ITEM 9 LABS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ITEM 9 LABS CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended June 30, Nine months ended June 30,
2021 2020 2021 2020
Revenues, net $ 6,693,061 $ 2,207,453 $ 15,843,256 $ 5,602,321
Cost of services 3,802,447 1,188,831 8,531,623 3,508,350
Gross profit 2,890,614 1,018,622 7,311,633 2,093,971

Operating expenses
Professional fees and outside services 442,483 182,610 1,350,196 654,447
Payroll and employee related expenses 1,592,673 698,477 4,014,819 2,229,493
Sales and marketing 262,473 37,997 389,819 199,215
Depreciation and amortization 112,159 138,252 360,601 521,024
Other operating expenses 728,100 205,250 1,292,154 806,070
Provision for bad debt -   -   -   22,460
Total expenses 3,137,888 1,262,586 7,407,589 4,432,709

Loss from operations (247,274 ) (243,964 ) (95,956 ) (2,338,738 )

Other income (expense)
Interest expense (629,265 ) (1,362,347 ) (1,806,019 ) (2,820,137 )
Other income (expense) 42,634 (1,492 ) 42,634 (1,492 )
Total other income (expense), net (586,631 ) (1,363,839 ) (1,763,385 ) (2,821,629 )

Net loss, before income tax provision (833,905 ) (1,607,803 ) (1,859,341 ) (5,160,367 )

Income tax provision (benefit) -   -   -   -

Net loss $ (833,905 ) $ (1,607,803 ) $ (1,859,341 ) $ (5,160,367 )

Less: Net loss attributable to noncontrolling interest $ -   $ -   $ -   $ (26,274 )

Net loss attributable to Item 9 Labs Corp $ (833,905 ) $ (1,607,803 ) $ (1,859,341 ) $ (5,134,093 )

Basic and diluted net loss per common share $ (0.01 ) $ (0.03 ) $ (0.03 ) $ (0.08 )

Basic and diluted weighted average common shares outstanding 92,209,521 61,424,905 72,115,022 61,834,030

		December 31,			September 30,
		2021			2021
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	160,711		$	1,454,460
Accounts receivable, net		1,622,604			1,448,280
Inventory		5,253,327			6,391,351
Prepaid expenses and other current assets		1,350,807			1,302,558
Total current assets		8,387,449			10,596,649

Property and equipment, net		19,206,064			10,877,848
Right of use asset		154,309			156,938
Deferred commissions		80,822			108,874
Escrow deposits		12,836,228			17,744,913
Other deposits		—			600,000
Intangible assets, net		18,291,328			18,659,095
Goodwill		58,064,816			58,064,816
Total Assets	$	117,021,016		$	116,809,133

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	4,487,717		$	3,759,818
Accrued payroll and payroll taxes		2,190,834			2,678,694
Accrued interest		1,612,987			1,391,766
Accrued expenses		1,561,454			1,169,776
Deferred revenue, current portion		319,992			119,992
Notes payable, current portion		3,521,822			4,536,002
Operating lease liability, current portion		55,935			56,592
Convertible notes payable, net of discounts		1,988,040			1,277,394
Total current liabilities		15,738,781			14,990,034

Deferred revenue, net of current portion		450,853			655,851
Operating lease liability, net of current portion		104,677			104,406
Notes payables, net of current portion and discounts		16,264,502			14,957,399

Total liabilities		32,558,813			30,707,690

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 107,243,344 and 107,074,417 shares issued and 94,943,344 and 94,774,417 shares outstanding at December 31, 2021 and September 30, 2021, respectively		10,724			10,707
Additional paid-in capital		135,120,587			133,414,830
Accumulated deficit		(37,219,108	)		(33,874,094	)
Treasury stock		(13,450,000	)		(13,450,000	)

Total Stockholders' Equity		84,462,203			86,101,443

Total Liabilities and Stockholders' Equity	$	117,021,016		$	116,809,133

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

~~F-3~~

ITEM 9 LABS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended June 30,
2021 2020
Operating Activities:
Net loss $ (1,859,341 ) $ (5,160,367 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 100,535 96,330
Amortization of intangible assets 260,066 709,740
Amortization of right of use asset 39,818 60,557
Amortization of debt discount 565,021 1,273,739
Common stock issued for services 163,236 132,106
Stock compensation expense 914,016 75,000
Provision for bad debt -   22,460
Changes in operating assets and liabilities:
Accounts receivable (1,703,092 ) (191,656 )
Deferred costs (6,348,573 ) (1,053,221 )
Prepaid expenses and other current assets (192,292 ) (319,927 )
Accounts payable 524,088 1,178,434
Accrued payroll (114,703 ) 134,359
Accrued compensated absences -   2,193
Accrued interest 643,068 1,088,462
Accrued expenses 147,868 1,023,933
Deferred income 22,844
Operating lease liability (39,818 ) (42,543 )
Net Cash Used in Operating Activities (6,877,259 ) (970,401 )

Investing Activities:
Deposit on acquisition (1,685,368 ) -
Cash paid for acquisition -   (500,000 )
Purchases of property and equipment (2,263,388 ) (82,500 )
Cash received from sale of Airware assets 5,000 50,000
Cash received from note receivable -   20,000
Cash acquired in merger 94,596 -
Capitalized license fees (2,790 ) (426,663 )
Net Cash Used in Investing Activities (3,851,950 ) (939,163 )

Financing Activities:
Proceeds from the sale of common stock, net of issuance costs 13,298,965 -
Proceeds from the issuance of debt 1,355,000 4,092,000
Debt payments (3,712,541 ) (2,192,664 )
Net Cash Provided by Financing Activities 10,941,424 1,899,336

Net Increase (Decrease) in Cash 212,215 (10,228 )

Cash and cash equivalents- Beginning of Period 84,677 574,943

Cash and cash equivalents - End of Period $ 296,892 $ 564,715

Supplemental disclosure of cash flow information:
Interest paid in cash $ 597,930 $ 116,000
Income taxes paid in cash $ -   $ -

Supplemental disclosure of non-cash investing and financing activities:
Stock issued (or to be issued) for acquisitions $ 65,000,000 $ 3,507,000
Warrants issued for debt and acquisition $ 49,648,201 $ 5,069,734
Non-cash equity compensation $ 1,077,252 $ -
Non-cash Treasury Stock $ -   $ 150,216
Fixed assets purchased with debt $ 50,914 $ -
Right of use asset $ -   $ 268,359
Lease liability $ -   $ 268,359
Debt issued for acquisition $ -   $ 1,000,000
Amortization of debt discount $ 565,021 $ 1,273,739
Accrued interest transferred to debt $ 160,590 $ 300,705
Beneficial conversion feature $ 428,802 $ -

Net liabilities assumed in acquisition:
Cash $ 94,596 $ -
Other current assets $ 128,941 $ -
Fixed assets, net $ 41,549 $ -
Other assets - intangibles $ 10,935 $ -
Accounts payable $ 1,032,735 $ -
Other current liabilities $ 3,224,771 $ -
Notes payable $ 1,186,658 $ -
Other noncurrent liabilities $ 662,505 $ -
Net liabilities $ (5,830,648 ) $ -

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

~~F-4~~

ITEM 9 LABS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2021 AND 2020

Item 9 Labs Corp Equity
Additional Non
Common Stock Paid-in Treasury Stock Accumulated Controlling
Shares Amount Capital Shares Amount (Deficit) Interest Total
Balance at September 30, 2019 63,643,005 $ 6,365 $ 18,148,962 -   $ -   $ (10,694,939 ) $ (123,942 ) $ 7,336,446

Treasury stock acquired in settlement agreement -   -   3,450,000 (2,300,000 ) (3,450,000 ) -   -   -
Issuance of shares for services 55,618 6 132,100 -   -   -   -   132,106
Stock compensation 26,282 3 74,997 -   -   -   -   75,000
Net loss -   -   -   -   -   (1,950,190 ) (25,138 ) (1,975,328 )
Balance at December 31, 2019 63,724,905 6,374 21,806,059 (2,300,000 ) (3,450,000 ) (12,645,129 ) (149,080 ) 5,568,224

Stock to be issued for acquisition 3,250,000 325 3,506,675 -   -   -   -   3,507,000
Noncontrolling interest dissolution from acquisition -   -   (150,216 ) -   -   -   150,216 -
Warrants issued -   -   257,094 -   -   -   -   257,094
Warrants to be issued -   -   3,336,198 -   -   -   -   3,336,198
Net loss -   -   -   -   -   (1,576,100 ) (1,136 ) (1,577,236 )
Balance at March 31, 2020 66,974,905 6,699 28,755,810 (2,300,000 ) (3,450,000 ) (14,221,229 ) -   11,091,280

Warrants issued -   -   1,476,442 -   -   -   -   1,476,442
Net loss -   -   -   -   -   (1,607,803 ) -   (1,607,803 )
Balance at June 30, 2020 $ 66,974,905 $ 6,699 $ 30,232,252 $ (2,300,000 ) $ (3,450,000 ) $ (15,829,032 ) $ -   $ 10,959,919

Balance at September 30, 2020 68,336,113 $ 6,834 $ 44,426,737 (12,300,000 ) $ (13,450,000 ) $ (22,968,322 ) $ -   $ 8,015,249
Stock issued for cash, net 6,813,206 681 5,790,544 -   -   -   -   5,791,225
Issuance of shares for services 111,765 11 163,225 -   -   -   -   163,236
Stock compensation -   -   304,672 -   -   -   -   304,672
Net loss -   -   -   -   -   (1,074,456 ) -   (1,074,456 )
Balance at December 31, 2020 75,261,084 7,526 50,685,178 (12,300,000 ) (13,450,000 ) (24,042,778 ) -   13,199,926

Stock issued for cash, net 8,433,437 843 7,167,740 -   -   -   -   7,168,583
Stock issued for acquisition 19,080,000 1,908 64,998,092 -   -   -   -   65,000,000
Warrants issued for acquisition -   -   51,081,066 -   -   -   -   51,081,066
Stock to be issued for convertible notes - forced conversion 1,335,000 134 (134 ) -   -   -   -   -
Warrants issued with convertible notes -   -   926,198 -   -   -   -   926,198
Beneficial conversion - convertible notes -   -   428,802 -   -   -   -   428,802
Stock compensation -   -   304,672 -   -   -   -   304,672
Net income -   -   -   -   -   49,020 -   49,020
Balance at March 31, 2021 104,109,521 10,411 175,591,614 (12,300,000 ) (13,450,000 ) (23,993,758 ) -   138,158,267

Stock issued for cash, net 400,000 40 339,960 -   -   -   -   340,000
Adjustment to acquisition price, warrants -   -   (2,359,063 ) -   -   -   -   (2,359,063 )
Stock compensation -   -   304,672 -   -   -   -   304,672
Net loss -   -   -   -   -   (833,905 ) -   (833,905 )
Balance at June 30, 2021 104,509,521 10,451 173,877,183 (12,300,000 ) (13,450,000 ) (24,827,663 ) -   135,609,971

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-2


ITEM 9 LABS CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the three months ended			For the three months ended
	December 31, 2021			December 31, 2020

Revenues, net	$	6,186,011		$	3,039,564
Cost of revenues		3,787,245			1,608,131
Gross profit		2,398,766			1,431,433

Operating expenses
Professional fees and outside services		657,445			293,955
Payroll and employee related expenses		2,150,706			1,103,304
Sales and marketing		439,436			43,181
Depreciation and amortization		439,135			142,545
Other operating expenses		846,668			214,537
Total expenses		4,533,390			1,797,522

Loss from operations		(2,134,624	)		(366,089	)

Other income (expense)
Interest expense		(1,210,390	)		(708,367	)
Total other income (expense), net		(1,210,390	)		(708,367	)

Net loss, before income tax provision (benefit)		(3,345,014	)		(1,074,456	)

Income tax provision (benefit)		—			—

Net loss	$	(3,345,014	)	$	(1,074,456	)

Basic and diluted net loss per common share	$	(0.04	)	$	(0.02	)

Basic and diluted weighted average common shares outstanding		94,910,167			58,488,133

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-3


ITEM 9 LABS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020

					Additional
	Common Stock				Paid-in			Treasury Stock						Accumulated
	Shares		Amount		Capital			Shares			Amount			(Deficit)			Total
Balance at September 30, 2020		68,336,113	$	6,834	$	44,426,737			(12,300,000	)	$	(13,450,000.00	)	$	(22,968,322	)	$	8,015,249

Stock issued for cash, net		6,813,206		681		5,790,544			—			—			—			5,791,225
Issuance of shares for services		111,765		11		163,225			—			—			—			163,236
Stock based compensation		—		—		304,672			—			—			—			304,672
Net loss		—		—		—			—			—			(1,074,456	)		(1,074,456	)
Balance at December 31, 2020		75,261,084	$	7,526	$	50,685,178			(12,300,000	)	$	(13,450,000	)	$	(24,042,778	)	$	13,199,926

Balance at September 30, 2021		107,074,417	$	10,707	$	133,414,830			(12,300,000	)	$	(13,450,000.00	)	$	(33,874,094	)	$	86,101,443
Stock to be issued for debt inducement		142,365		14		128,348			—			—			—			128,362
Warrants issued with debt		—		—		574,239			—			—			—			574,239
Beneficial conversion - convertible notes		—		—		470,047			—			—			—			470,047
Issuance of shares for services		16,666		2		25,830			—			—			—			25,832
Stock based compensation		—		—		507,294			—			—			—			507,294
Stock issued on exercise of options		9,896		1		(1	)		—			—			—			—
Net loss		—		—		—			—			—			(3,345,014	)		(3,345,014	)
Balance at December 31, 2021		107,243,344		10,724		135,120,587			(12,300,000	)		(13,450,000	)		(37,219,108	)		84,462,203

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-4

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the three months ended			For the three months ended
		December 31, 2021			December 31, 2020
Operating Activities:
Net loss	$	(3,345,014	)	$	(1,074,456	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		71,368			32,484
Amortization of intangible assets		367,767			110,061
Amortization of right of use asset		2,629			16,136
Amortization of debt discount		990,281			119,298
Common stock issued for services		—			163,236
Stock based compensation expense		507,294			304,672
Changes in operating assets and liabilities:
Accounts receivable		(174,324	)		(1,102,238	)
Inventory		1,138,024			(1,302,352	)
Prepaid expenses and other current assets		(20,197	)		(302,941	)
Accounts payable		841,910			569,641
Accrued payroll		(487,860	)		(52,543	)
Accrued interest		144,459			270,191
Accrued expenses		(298,647	)		332,414
Deferred revenue		(4,998	)		—
Operating lease liability		(386	)		(16,136	)
Net Cash Used in Operating Activities		(267,694	)		(1,932,533	)

Investing Activities:
Deposit on acquisition		—			(696,293	)
Purchases of property, equipment and construction in progress		(2,492,445	)		(499,452	)
Cash received from sale of Airware assets		—			5,000
Cash received from escrow accounts		1,053,290			—
Capitalized license fees		—			(130	)
Net Cash Used in Investing Activities		(1,439,155	)		(1,190,875	)

Financing Activities:
Proceeds from the sale of common stock		—			5,791,225
Payment of debt discount		(18,750	)		—
Proceeds from the issuance of debt		1,500,000			—
Payment of debt		(1,068,150	)		(1,138,917	)
Net Cash Provided by Financing Activities		413,100			4,652,308

Net Increase (Decrease) in Cash		(1,293,749	)		1,528,900

Cash and cash equivalents- Beginning of Period		1,454,460			84,677

Cash and cash equivalents - End of Period	$	160,711		$	1,613,577

Supplemental disclosure of cash flow information:
Interest paid in cash	$	75,650		$	318,878
Income taxes paid in cash	$	—		$	—

Supplemental disclosure of non-cash investing and financing activities:
Stock and warrants issued for debt	$	728,433		$	—
Fixed assets purchased with debt	$	—		$	50,914
Transfer of accrued interest to debt	$	1,762		$	—
Land purchased with escrow funds and deposit	$	3,000,000		$	—
Beneficial conversion feature on convertible debt	$	470,047		$	—
Escrow funds used to pay construction in progress	$	1,019,944		$	—
Accrued liabilities capitalized in construction in progress	$	1,125,776		$	—
Amortized debt discount capitalized in construction in progress	$	875,430		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-5

ITEM 9 LABS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Description of Business and Summary of Significant Accounting Policies

Description of Business

Item 9 Labs Corp. ("Item 9 Labs" or, including its subsidiaries, the "Company"), formerly Airware Labs Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp.

~~Through~~Item 9 Labs Corp. is a ~~licensing agreement,~~holding company, investing in cannabis and cannabis-related businesses. Its subsidiaries currently compete in two different market segments: (1) producing cannabis and cannabis-derived products and technologies through its Item 9 Labs brand (“Cultivation”), which is currently distributed though out the ~~Company grows marijuana~~State of Arizona in licensed medical and ~~produces~~adult-use dispensaries; and (2) sell medical and adult-use cannabis ~~related products at their facility in Pinal County, Arizona on behalf of a licensed marijuana~~ dispensary ~~in the state of Arizona.~~franchises under its franchise brand “Unity Rd.” (“Franchising”).

In March 2021, the Company closed on the acquisition of OCG, Inc, dba Unity Rd, a dispensary franchisor. The transaction was structured as a reverse triangular merger, with the effect of OCG, Inc. becoming a wholly owned subsidiary of the Company. Unity Rd has agreements with more than ~~fifteen (15)~~twenty (20) entrepreneurial groups to open more than ~~thirty (30)~~thirty-five (35) Unity Rd retail dispensary locations in 7fourteen (14) states. The majority of the locations are in the licensing process. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to ~~confidently and successfully~~ operate their business and contribute to their local communities. As the Unity Rd dispensaries achieve sufficient market penetration, Item 9 Labs aims to offer its products in those locations to expand the distribution footprint of its premium product offerings.

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The services we provide are currently designated an essential critical infrastructure business under the President's COVID-19 guidance, the continued operation of which is vital for national public health, safety and national economic security. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.

Principles of Consolidation

The accompanying condensed consolidated financial statements of the Company as of December 31, 2021 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended December 31, 2021 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.

The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

Certain prior period balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current ~~year~~period presentation. These reclassifications had no effect on the prior ~~year's~~period's net loss or accumulated deficit.

The accompanying condensed consolidated financial statements of the Company as of June 30, 2021 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with accounting principles generally accepted in the United States of America ("GAAP") and should be read in conjunction with our September 30, 2020 audited financial statements filed with the SEC on our Form 10-K on January 12, 2021. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2020 condensed balance sheet data from audited financial statements, however, we did not include all disclosures required by GAAP. The results for the interim period ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending September 30, 2021.

F-6

Accounting Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, ~~deferred costs,~~inventory, accruals and contingencies, carrying value of goodwill and intangible assets, ~~collectability of notes receivable,~~ the fair value of common stock and the estimated fair value of stock options and ~~warrants, and the estimated fair value of the consideration paid and the fair value of assets purchased and liabilities assumed in the acquisition of OCG, Inc. (See Note 2).~~warrants. Due to the uncertainties in the formation of accounting estimates, and the significance of these items, it is reasonably possible that these estimates could be materially changed in the near term.

~~Cash and Cash Equivalents~~

Cash represents cash on hand, demand deposits placed with banks and other financial institutions and all highly liquid instruments purchased with a remaining maturity of three months or less as of the purchase date of such investments. The Company maintains cash on deposit, which, can exceed federally insured limits. The Company has not experienced any losses on such accounts nor believes it is exposed to any significant credit risk on cash.

~~Accounts Receivable~~Inventory

~~Accounts receivable are reported~~Inventory is stated at the ~~amount management expects to collect from outstanding balances. Differences between~~lower of cost or net realizable value with cost being determined on the ~~amount due and the amount management expects to collect are recognized~~first in the results of operations in the year in which those differences are determined. Accounts receivable are written off when all reasonable collection efforts have been taken. At June 30, 2021 and September 30, 2020, the Company has reserved $~~76,052~~ ~~and $81,018, respectively, of specific accounts deemed uncollectible. Accounts receivable are pledged as collateral for debt, bear no interest, and are unsecured.~~

~~Deferred Costs~~

~~Deferred costs consist~~first out method. Inventory consists of the costs directly related to the production and cultivation of ~~marijuana~~cannabis crops, cannabis oils, and cannabis concentrate products. ~~Deferred costs are~~Inventory is relieved to cost of ~~services~~revenues as products are delivered to dispensaries. ~~Deferred costs consist~~Inventory consists primarily of labor, utilities, costs of raw materials, packaging, nutrients and overhead.

~~Property~~The Company routinely evaluates the carrying value of inventory for slow moving and ~~Equipment~~

~~Property~~potentially obsolete inventory and, ~~equipment are~~when appropriate, will record an adjustment to reduce inventory to its estimated net realizable value. There were no inventory reserves recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period incurred. Depreciation expense is not included in cost of revenues. Equipment not yet in service will be depreciated once operations commence.

~~The estimated useful lives of property and equipment are:~~

•

~~Cultivation and manufacturing equipment~~ 2-7 ~~years~~

•

~~Buildings~~ 30 ~~years~~

~~Notes and Other Receivables, net~~

Notes and other receivables are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations in the period in which those differences are determined, with an offsetting entry to a valuation allowance for receivables. Management assesses all receivables individually and in total, considering historical credit losses as well as existing economic conditions to determine the likelihood of future credit losses. The Company stops accruing interest on interest bearing receivables when the receivable is in default. There was a total valuation allowance as of June 30,December 31, 2021 and September 30, ~~2020 of $745,430~~.

~~Impairment of Long-Lived Assets~~

We analyze long-lived assets, including property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and estimated period of useful life at least at annually. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amount of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets, which is generally calculated using discounted cash flows.

~~Intangible Assets Subject to Amortization~~

Intangible assets include trade name, customer relationships, website, a noncompete agreement and intellectual property obtained through a business acquisition. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired. Intangible assets with finite lives are amortized over their estimated useful life and reported net of accumulated amortization, separately from goodwill. Amortization is calculated on the straight-line basis using the following estimated useful lives:

•

~~Trade names~~ 10 ~~years~~

•

~~Customer relationships~~ 2 ~~years~~

•

~~Noncompete agreement~~ 4 ~~months~~

•

~~Websites and other intellectual property~~ 5 ~~years~~

~~Generally, the Company utilizes~~ the relief from royalty method to value trade name, the with or without method for valuing the customer relationships, and the discounted cash flow method for valuing website and intellectual property.2021.

~~F-7~~

~~Goodwill and Intangible Assets Not Subject to Amortization~~

Goodwill represents the excess of the purchase price paid for the acquisition of a business over the fair value of the net tangible and intangible assets acquired. Indefinite life intangible assets represent licenses purchased for cultivation, processing and distribution of cannabis. Goodwill and indefinite life intangibles are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The goodwill included in these condensed consolidated financial statements represents the amount of consideration paid above the amount of the individually identifiable assets acquired. In assessing potential impairment, management first considers qualitative factors to determine if an impairment of goodwill or indefinite life intangibles existed. Upon the determination of a likely impairment, management assesses the recorded goodwill or indefinite life intangibles balance with the fair value of the business or assets acquired.

In addition to the annual impairment test, we are required to regularly assess whether a triggering event has occurred which would require interim testing. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on our operations. Currently, we have determined that a triggering event has not occurred that would require an interim impairment test to be performed. However, we refer you to our comment in the first section of this Note 1 as it relates to the impact of COVID-19 and certain economic uncertainties.

~~Licenses~~

Cannabis licenses vary in term for each jurisdiction. The Company capitalizes all costs associated with the acquisition of cannabis licenses in the year the license is obtained. Subsequent measurement is determined by the length of the term of the license. The Company acquired licenses during the year ended September 30, 2020 that have indefinite useful lives. As such, the license costs will not be amortized, but tested annually for impairment or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable. Costs associated with maintaining licenses (annual fees) are expensed as incurred. The anticipated maintenance fees are not expected to be material to the condensed consolidated financial statements.

~~Income Taxes~~

Deferred tax assets and liabilities are recorded based on the difference between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company calculates a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment and interpretation of statutes are required.

In assessing realizable deferred tax assets, management assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established. The Company adjusts the valuation allowance in the period management determines it is more likely than not that net deferred tax assets will or will not be realized. After review of the deferred tax asset and valuation allowance in accordance with ASC 740, management determined that it is more likely than not that the Company will not fully realize all of its deferred tax asset and a valuation allowance was recorded at June 30, 2021 and September 30, 2020.

The Company is generally subject to tax audits for its United States federal and state income tax returns for approximately the last four years, however, earlier years may be subject to audit under certain circumstances. Tax audits by their very nature are often complex and can require several years to complete.

Revenue Recognition

~~The Company has adopted ASC Topic 606, "Revenue from Contracts with Customers" ("ASC 606") and all the related amendments.~~Cultivation revenue

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle, ~~and, in doing so, it is possible more judgment and estimates may be required within~~including identifying the ~~revenue recognition process than previously required under GAAP, including~~contract with the customer, identifying the performance obligations in the contract, determining the transaction price, including estimating the amount of variable consideration to include in the transaction price, ~~and~~ allocating the transaction price to each separate performance ~~obligation.~~obligation and recognizing revenue when (or as) the performance obligation is satisfied.

~~All~~Substantially all of the Company's revenue is associated with a customer contract that represents an obligation to ~~perform services~~provide cannabis products that are delivered at a single point in time. Any costs incurred prior to the period in which the ~~services~~products are ~~performed~~delivered are recorded to ~~completion are deferred~~inventory and recognized as cost of ~~services~~revenues in the period in which the performance ~~obligations are~~obligation is completed. For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2021 and 2020, substantially all of the Company's revenue was generated from performance obligations completed in the state of Arizona.

The Company recognizes revenue ~~as services~~once the products are ~~rendered. Services are~~delivered. Revenue is considered ~~complete~~earned upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is reasonably assured. Under the performance contract, the Company acted as an agent for the dispensary, did not own the marijuana products, could not exchange the marijuana products, prepared invoices for the dispensary and all employees that were in contact with marijuana products were agents of the dispensary with which we had our contract. Given these facts and circumstances, it was the Company's policy to record the revenue related to the contract net of the amount retained by the dispensary. Per the dispensary contract, the Company was paid 85% of the wholesale market price of the marijuana products for the services rendered for the three months ended December 31, 2019. The contract was amended in December 2019 and beginning in January 2020, the Company was paid 100% of the wholesale market price of the marijuana for the services rendered. The contract called for monthly payments in the amount of $80,000 for the three months ending March 31, 2020. Beginning April 1, 2020, the Company entered into a three-year agreement with another dispensary, which calls for monthly payments of $40,000. Prior to January 1, 2020, the Company recorded revenues at the amount it expected to collect, 85% of the total wholesale sales. Since January 1, 2020, the Company records revenue at the amount it expects to collect, 100% of the wholesale ~~sales.~~sales revenue. The fees paid for operating under the contract are expensed to cost of revenues.

The Company's revenues accounted for under ASC 606 do not require significant estimates or judgments based on the nature of the Company's revenue stream. The sales price is generally fixed at the point of sale and all consideration from the contract is included in the transaction price. The Company's contracts do not include multiple performance obligations, variable consideration, ~~a significant contract,~~ rights of return or warranties.

~~F-8~~F-7

~~Fair Value of Financial Instruments~~Franchising revenue

Through OCG, Inc., the Company enters into franchise agreements and consulting agreements. The ~~carrying value~~franchise agreement allows the franchisee to, among other things, establish a franchised outlet under the Company’s Unity Rd. brand. Under the consulting agreements, the Company assists customers with applying for and being awarded a retail cannabis license through the state license application process. The initial franchise fee and the consulting fee are due upon execution of the ~~Company's financial instruments, consisting~~related agreement. These payments are deferred on the condensed consolidated balance sheet and is recognized into revenue on the condensed consolidated statement of ~~cash~~operations when (or as) the performance obligations included in the agreements are satisfied. Deferred revenue had a balance of $770,845 and ~~cash equivalents, accounts receivable, accounts payable,~~$775,843 at December 31, 2021 and ~~accrued expenses~~September 30, 2021, respectively, and ~~approximates fair value due to their short term to maturity (level 3 inputs). The Company's receivable resulting from~~is included in deferred revenue on the ~~sale of Airware, notes receivable~~condensed consolidated balance sheets. Revenue recognized during the three months ended December 31, 2021 and ~~notes payable approximate fair value based on borrowing rates currently available on notes with similar terms~~2020 that was included in deferred revenue at September 30, 2021 and ~~maturities (level 3 inputs).~~2020 was $4,998 and $0, respectively.

Net Loss Per Share

Basic net loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the ~~earnings~~losses of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. ~~June 30,~~The following table summarizes the securities outstanding at December 31, 2021 and ~~September 30,~~ 2020 ~~there were~~ ~~44,634,209~~ ~~and~~ ~~22,024,419, respectively shares underlying convertible notes payable, warrants and options,~~ that were ~~anti-dilutive, respectively.~~excluded from the diluted net loss per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss.

~~Stock-Based Compensation~~

~~The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10,~~ ~~"Compensation - Stock Compensation",~~ which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. The estimated fair value is then expensed over the requisite service period of the award which is generally the vesting period and the related amount is recognized in the condensed consolidated statements of operations. The Company recognizes forfeitures at the time they occur.

~~Assumptions used to estimate compensation expense are determined as follows:~~

•

~~Expected term is generally determined using the average of the contractual term and vesting period of the award;~~

•

Expected volatility is measured using the historical daily changes in the market price of the Company's common stock over a period consistent with the expected term or since March 20, 2018, if earlier, the day of the merger between BSSD Group LLC ("BSSD") and Airware Labs Corp;

•

~~Risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards.~~

	2021		2020
Potentially dilutive common share equivalents
Options		5,206,251		3,211,709
Warrants		47,834,744		16,500,000
Convertible notes		2,350,969		2,526,969
Potentially dilutive shares outstanding		55,391,964		22,238,678

~~Item 9 Labs Corp Incentive Stock Option Plan~~:

On June 21, 2019, our board and shareholders voted to approve the 2019 Equity Incentive Plan (the "2019 Plan"). Pursuant to the 2019 Plan, the maximum aggregate number of Shares available under the Plan through awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the adoption of the plan by 2 percent of the then-outstanding shares, or (b) 10,000,000 shares. It is the policy of the Company to issue new shares for options that are exercised.

Warrants, Conversion Options and Debt Discounts

The Company ~~bifurcates the value of~~analyzes warrants issued with ~~debt. This~~debt to determine if the warrants are required to be bifurcated and accounted for at fair value at each reporting period. When bifurcation ~~results in~~is not required, the ~~establishment of~~Company records a debt discount, based on the relative fair values of the warrants and the debt, with a corresponding charge to equity unless the terms of the warrant require it to be classified as a liability. The warrants and corresponding note discounts are valued using the Black-Scholes valuation model. This model uses estimates of volatility, risk free interest rate and the expected term of the warrants, along with the current market price of the Company's stock, to estimate the value of the outstanding warrants. The Company estimates the expected term using an average of the contractual term and vesting period of the award. The expected volatility is measured using the average historical daily changes in the market price of the Company's common stock over the expected term of the award or, if earlier, since March 20, 2018, the day of the merger between BSSD Group LLC ("BSSD") and Airware Labs Corp, and the risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards.

The Company also analyzes conversion options embedded with debt to determine if the conversion options are required to be bifurcated and accounted for at fair value at each reporting period or to determine if there is a beneficial conversion feature. At December 31, 2021 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.

Segment Reporting

The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three months ended December 31, 2021, the Company has identified two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”) and the sales of Unity Rd. franchises to dispensaries (“Franchising”).

F-8

Recently Issued Accounting Pronouncements

Pending Adoption

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for usthe Company on October 1, 2023, with early adoption permitted on October 1, 2019. We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our condensed consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt ~~- Debt~~ with Conversion and Other ~~options~~Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in ~~Entity's~~Entity’s Own Equity (Subtopic 815-40).~~The amendment is meant to simplify~~ This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for ~~convertible instruments by removing~~ certain ~~separation models~~contracts in ~~subtopic 470-20~~an entity’s own equity that are currently accounted for ~~convertible instruments. The amendment also changed~~as derivatives because of specific settlement provisions. In addition, the ~~method used to calculate diluted EPS for~~new guidance modifies how particular convertible instruments and ~~for instruments~~certain contracts that may be settled in ~~cash. The amendment~~cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods ~~for~~within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of adoption of this standard on the ~~Company's~~Company’s condensed consolidated financial statements and ~~related~~disclosures.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic 606 as if the acquirer had originated the contracts. For public business entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years and early adoption is permitted. We are currently evaluating the impact of adoptions of this standard on the Company’s condensed consolidated financial statements and disclosures.

There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.

Note 2 - Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company's planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company's ability to continue as a going concern.

In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management's plans in regard to these matters are described as follows:

Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company's revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of Arizona, with construction of a cultivation and processing facility nearing completion in Nevada. The Company believes that it will continue reducing the overall costs of revenues and costs of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.

F-9

Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will continue to grow, thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company's overall efforts will be successful.

If the Company is unable to generate additional sales growth in the near term and raise additional capital, there is a risk that the Company could default on its obligations, and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

Note ~~2 -~~3 – Inventory

Inventory consisted of the following at December 31, 2021 and September 30, 2021.

	December 31,		September 30,
	2021		2021
Raw materials and work in process	$	3,062,686	$	4,291,095
Finished goods		955,789		1,052,375
Packaging and other		1,234,852		1,047,881
	$	5,253,327	$	6,391,351

Note 4 – Pending Acquisitions

~~Strive Management, LLC~~

~~In February 2020,~~On October 6, 2021, the Company ~~executed~~entered into an ~~agreement with the other members of Strive Management, LLC~~Asset Purchase Agreement to purchase ~~the remaining 80%~~certain assets, which include licenses, a lease and certain personal property to operate a licensed recreational cannabis dispensary. The purchase price is $2.0 million comprised of ~~Strive Management, LLC ("Strive"), as well as the Nevada licenses its members held in another entity. The Company agreed to pay $500,000 in~~$1.0 million of cash, ~~$1,000,000 in an unsecured~~a $200,000 note, ~~payable, 3,250,000~~and 300,000 shares of the ~~Company's restricted common stock and issue 2,000,000 warrants exercisable into the Company's~~Company’s common stock. The ~~warrants are to be issued upon~~note has an interest rate of 5% per annum and a term of 18 months and payable in six installments on the ~~earlier~~last day of ~~September 30, 2020 or~~each three ~~months~~month period following the ~~date on which each provisional certificate becomes a final certificate, which has~~Closing Date. At December 31, 2021, this acquisition had not yet occurred. The warrants have a three-year term, exercise price of $1.13 and include down round provisions. In order to close the transaction, the Company borrowed $500,000 from Stockbridge Enterprises, a related party (See note 6). Though the Company acquired the remaining portion of Strive, Strive was not considered a business under ASC 805, Business Combinations, as it did not have a substantive process.been finalized. As such, the ~~Company has recorded the transaction as an asset acquisition. As~~effects of ~~June 30, 2021 and September 30, 2020, $6,703,981 has~~this acquisition have not been ~~recorded to licenses relating to the transaction.~~

~~OCG Inc. (Unity Rd)~~

~~On December 13, 2020, the Company and I9 Acquisition Sub Inc. ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Agreement") with OCG Inc., a Colorado corporation ("Target~~"), pursuant to which the Merger Sub will be merged with and into the Target in a reverse triangular merger with the Target continuing as the surviving entity as a wholly-owned direct subsidiary of the Company ("Merger"). On the terms and subject to the conditions set forthincluded in the ~~Agreement, upon the completion~~Company’s condensed consolidated balance sheet or statement of the Merger, the Target Shareholders became stockholders of the Company through the receipt of an aggregate 19,080,000 restricted shares of the Common Stock of the Company, of which 7,632,000 shares will be held in escrow for 6-18 months ("Merger Consideration"). As the initial merger agreement was agreed upon in February 2020, the Company agreed to fund a line of credit to assist in funding the operations ~~of OCG Inc. during the process. The payments made on behalf of OCG, Inc. were reported as deposits in the amount of $640,000~~ as of ~~September 30, 2020. As of~~ ~~June 30, 2021, the amount is reported as an internal balance~~ and has been eliminated in consolidation for financial reporting purposes. The Agreement dated December 13, 2020 superseded and replaced all prior agreements between the parties, including that certain merger agreement dated February 27, 2020. The transaction closed on March 19, 2021, which has currently been determined to be the acquisition date. Per ASC 805, Business Combinations, the measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination. The measurement period shall not exceed one year from the acquisition date. As of the date of this filing, the purchase price allocation is underway but not yet completed. Subsequent to the issuance of these financial statements, the Company expects to obtain a third-party valuation of the fair value of the assets acquired, liabilities assumed and consideration paid for use in the purchase price allocation. The estimated consideration paid was recorded based on the market price of Item 9 Labs stock as of March 19, 2021 for the 19,080,000 of restricted common shares issued and the black-scholes model for the 23,560,000 of warrants granted. The assumptions used in the black-scholes model were: grant date stock price of $3.40, term of 1.5 years, 140% volatility and a discount rate of .09% (1 year treasury bond), with a total estimated purchase price of $113,722,003. The valuation and allocation are significant estimates and may be materially modified in future filings as the accounting for this acquisition progresses and is finalized. Management has retained an independent valuation expert to review the value of the transaction as well as the purchase price allocation. Currently the report is not yet available, but it's results may affect the purchase price as well as intangible assets. The following table summarizes the allocation of the estimated purchase price to the estimated fair values of the assets acquired and the liabilities assumed as of the transaction date:three months ended December 31, 2021.

Consideration paid $ 113,722,003

Tangible assets acquired

Cash 94,596
Other current assets 128,941
Fixed assets 41,549
Other assets 10,935

Total tangible assets $ 276,021

Assumed liabilities

Accounts payable 1,032,735
Other current liabilities 3,224,771
Officer and shareholder loans 1,186,658
Unearned franchise fee revenue 662,505

Total assumed liabilities 6,106,669

Net liabilities assumed (5,830,648 )

Intangible assets (a)(b) $ 119,552,651

~~(a)~~

- The excess purchase price over the tangible assets acquired and liabilities assumed will be allocated to intangible assets and goodwill after completion of the third-party valuation. In accordance with applicable accounting standards, any goodwill will not be amortized but instead will be tested for impairment at least annually or more frequently if certain indicators are present. Goodwill and intangible assets may not be deductible for tax purposes

~~(b)~~

Any goodwill resulting from the acquisition represents expected synergies from the merger of operations and intangible assets that do not qualify for separate recognition. With the addition of a retail dispensary franchise business, it brings the full vertical to Item 9 Labs Corp (cultivation, processing, distribution and retail), providing a built in premium supply chain to distribute Item 9 Labs products while maintaining a mode of growth which may be less dependent on outside capital for expansion.

The following unaudited pro forma information presents the consolidated results of operations of the Company and OCG, Inc. as if the acquisition consummated on March 19, 2021 had been consummated on October 1, 2019. Such unaudited pro forma information is based on historical unaudited financial information with respect to the acquisition and does not include operational or other charges which might have been affected by the Company.

Nine months ended June 30,
2021 2020
Revenue $ 15,763,858 $ 5,728,692

Net loss $ (10,242,081 ) $ (11,220,516 )

Basic and diluted net loss per common share $ (0.11 ) $ (0.14 )

Basic and diluted weighted average common shares outstanding 91,195,022 80,914,030

~~F-10~~

Note 35 - Property and Equipment, Net

The following represents a summary of our property and equipment as of ~~June 30,~~December 31, 2021 and September 30, ~~2020:~~2021:

PPE
June 30, September 30,
2021 2020
Equipment $ 507,907 $ 169,069
Construction in progress 6,213,234 4,212,208
Land and building 3,097,539 3,093,780
9,818,680 7,475,057
Accumulated Depreciation (404,691 ) (266,297 )
$ 9,413,989 $ 7,208,760

	December 31,			September 30,
	2021			2021
Cultivation and manufacturing equipment	$	506,271		$	506,271
Computer equipment and software		266,427			266,427
Buildings and improvements		2,823,523			2,785,781
		3,596,221			3,558,479
Accumulated Depreciation		(550,688	)		(479,320	)
		3,045,533			3,079,159
Land		3,455,563			380,584
Construction on progress		12,704,968			7,418,105
Property and Equipment, Net	$	19,206,064		$	10,877,848

During the three months ended December 31, 2021, the Company completed the purchase of 44 acres of land from a related party for $3.0 million plus expenses. The ~~Company had~~land-owner is one of the original members of BSSD and a current employee of the Company.

F-10

Construction in progress relates to multiple capital projects ongoing during the ~~nine~~three months ended ~~June 30, 2021. The fees associated with engineering~~December 31, 2021, including the construction of the Nevada facility, the expansion of the Arizona facility and ~~plan submittal, material orders, as well as electrical upgrades are reported as construction in progress as of June 30, 2021. Additionally, the Company began~~ implementation of an ERP ~~system, which was~~system. Construction in progress also ~~reported as construction in progress.~~includes interest and fees on debt that is directly related to the financing of the Company’s capital projects.

Depreciation expense for the ~~nine~~three months ended ~~June 30,~~December 31, 2021 and 2020 was $~~100,535~~71,368 and $~~96,330~~32,484, respectively.

Note 46 - ~~Sale of Airware Assets and Investment in Health Defense LLC~~Debt

	Effective Date		Maturity Date	Annual Interest Rate			Balance at December 31, 2021			Balance at September 30, 2021		Conversion Price
C-2	3/23/2020		9/23/2020	12	%		1,100,000			1,100,000		1.00
C-3	8/15/2011		8/15/2012	8	%		20,000			20,000		0.50
C-5	3/19/2021		9/19/2021	10	%		—			80,000		2.50
C-7	9/29/2021		9/29/2022	10	%		250,000			250,000		1.67
C-8	9/29/2021		9/29/2022	10	%		500,000			500,000		1.67
C-9	10/1/2021		9/29/2022	10	%		750,000			—		1.67
C-10	10/29/2021		4/29/2022	15	%		750,000			—		1.50
							3,370,000			1,950,000
		Less: unamortized discounts					(1,381,960	)		(672,606	)
						$	1,988,040		$	1,277,394

On May 3, 2018, the Company entered into an intellectual property sales agreement with Health Defense LLC. Pursuant to the terms of the agreement, the Company sold all of the assets related to the former business of the Company, nasal dilator sales.

~~In consideration for entering into the agreement, the Company was to receive: (i) $300,000~~ ~~in cash at execution, (ii) $700,000~~ ~~in cash within one year of execution and (iii) an additional $300,000~~ ~~by December 31, 2019.~~

~~Due to the long-term nature of the final $300,000~~ ~~payment, the Company recognized a discount of $70,070~~ ~~using a discount rate of 21.50%. As additional consideration, the Company was given a~~ 10~~% ownership interest in Health Defense LLC. This ownership was valued at $100,000~~ and was previously reflected on the consolidated balance sheet as Investment in Health Defense. During 2020, the Company determined the fair value of the investment to be lower than the carrying value. As such, the Company recorded an impairment charge of $~~100,000~~ ~~during the year ended September 30, 2020, reducing the carrying amount to $~~0.

During the year ended September 30, 2019, management determined that the receivable described above should be classified as long-term on the consolidated balance sheet as the payments have not been made as scheduled. Additionally, management has recorded a reserve on the receivable of $~~596,430~~ ~~as of June 30, 2021 and September 30, 2020.~~

~~Note 5 - Notes Receivable~~

~~On May 11, 2018, the Company entered into a Promissory Note Agreement with a borrower in the principal amount of $150,000. This was a one year note with~~ 20% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into a unit offering of the borrower at a 15% discount. The note is personally guaranteed by the borrowers. This note is in default and is on non-accrual status. The Company has recorded a reserve of $~~80,000~~ ~~on this note at June 30, 2021 and September 30, 2020.~~

~~On May 15, 2018, the Company entered into a Promissory Note Agreement with a borrower in the principal amount of $60,000. This was a one year note with~~ 15% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into an interest in a strategic partnership of ownership and operations of a certain dispensary license. The note is personally guaranteed by the borrower. This note is in default and is on non-accrual status. At June 30, 2021 and September 30, 2020, the principal and interest has been fully reserved, totaling $~~69,000~~.

~~F-11~~

~~Note 6 - Notes Payable~~

~~Convertible Notes:~~

Note Maturity Annual Interest Current Principal Original Discount Net Conversion Shares Issuable Upon
Date Date Rate Balance Discount Amortization Balance Price Conversion
C-2 3/23/2020 9/23/2020 12 % $ 1,100,000 $ (863,049 ) $ 863,049 $ 1,100,000 $ 1.00 1,206,730
C-3 8/15/2011 8/15/2012 8 % 20,000 -   -   20,000 0.50 63,510
C-4 4/15/2021 4/15/2023 10 % 30,000 -   -   30,000 1.00 30,000
C-5 3/19/2021 9/19/2021 10 % 167,821 -   -   167,821 2.50 51,998
C-6 3/19/2021 3/19/2023 10 % 1,355,000 (1,355,000 ) 188,093 188,093 1.00 1,355,000

1,505,914 2,707,238

Less current portion (1,317,821 )

$ 188,093

(C-2) Convertible Viridis ~~Notes~~Note

On March 23, 2020 the Company borrowed proceeds from ~~two~~a related ~~parties, Stockbridge Enterprises and~~party, Viridis I9 Capital ~~LLC. The $2,200,000 borrowing is unsecured, had an original term~~LLC (“Viridis”), in the amount of ~~six months, and accrued interest at a rate of 12% per year.~~$1.1 million. All principal and interest were due on the maturity date. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 15% per annum, will be paid at maturity, which has been postponed to a date that has not yet been determined. At December 31, ~~2020, these notes were~~2021 the Viridis note was in default. ~~In February 2021, the Stockbridge note was amended to cure the default (see (n) below).~~ The Viridis note remains in default as of this filing, though the parties are negotiating a long-term arrangement.

(C-9) Convertible Tysadco Note

On October 1, 2021, the Company entered into a convertible note agreement. Up to fifty percent (50%) of the outstanding and unpaid principal amount is convertible into common stock. The note included warrants to purchase a total of 825,000 shares of the Company’s common stock for $3 per share, with a 4 year term. Further, the Company issued 67,365 shares of common stock, valued at $112,500 as an inducement to the lenders to enter into the note agreements. The debt included a ~~provision for~~beneficial conversion feature after consideration of the ~~issuance~~relative fair values of ~~10,000,000~~the warrants ~~exercisable into the Company's~~and shares of common stock. The ~~exercise price on the warrants is $.75 and the warrants have a term~~debt, shares of ~~5 years. The debt~~common stock and warrants were recorded at their relative fair ~~values.~~values, along with the beneficial conversion feature. The resulting discount of $597,606 and an additional $75,000 discount related to a one-time interest charge of 10% of the original principal amount, is amortized to interest expense over the term of the debt. The one-time interest charge was accrued at December 31, 2021.

(C-10) Convertible Gaines Note

On October 29, 2021, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s common stock for $3 per share, with a 2 year term. Further, the Company issued 75,000 shares of common stock, valued at $116,250 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $561,272, which also included debt issuance costs of $44,582, is amortized to interest expense over the term of the debt.

~~(C-3, C-4, C-5) Other Convertible Notes~~

F-11

The Company has various convertible notes outstanding under various provisions. C-5 note was assumed in the OCG, Inc. transaction. It was restructured to be a 6 month convertible note with an initial principal balance of $300,000, with a principal payment due and paid by March 24, 2021, and additional principalfuture minimum payments of ~~$10,000 due monthly~~the Company’s convertible debt obligations as ~~well~~of December 31, 2021 are as ~~accrued interest at 10%.~~follows. The ~~note matures September 2021 and may be converted into common stock of the Company at any time before then with an exercise price of $2.50 per share.~~

~~(C6) Convertible Notes~~

The Company and OCG Inc. borrowed $1,355,000 from various investors in March 2021 under a convertible note agreement. The notes bear interest at 10%, calculated semi-annually, payable on the maturity date in which any accrued but unpaid and unconverted interest and unconverted and outstanding principal is due. In addition to the notes being convertible at the option of the noteholders, the notes include automatic conversion features in which the notes will convert to common shares of the Company upon the earlier of the maturity date or when the quoted market price of the Company is $2.00 or above for five consecutive trading days and has 20,000 shares traded in the same five days. The notes also included warrants to purchase 1,355,000 shares of Company stock for $3 per share, with a 3 year term. The debt, and warrants were recorded at their relative fair values. The resultingunamortized discount will be amortized to interest expense over the term of the debt. The beneficial conversion feature was recorded at its intrinsic value, but was limited to the amount of the proceeds allocated to the debt. Subsequent to June 30, 2021, the mandatory conversion feature of the notes was triggered by the market and all shares underlying conversion were issued in place of the notes.through September 2022.

Notes Payable

~~Non-convertible notes~~:

Note Maturity Annual Interest Current Principal Original Discount Net
Date Date Rate Balance Discount Amortization Balance Secured by
f 5/1/2020 11/1/2023 10 % $ 1,386,370 (612,760 ) 203,774 $ 977,384 2nd DOT AZ property
g 5/1/2020 4/1/2024 10 % 1,564,849 (731,228 ) 237,593 1,071,214 1st DOT NV property
h 5/1/2020 5/1/2023 15 % 283,666 (151,212 ) 53,005 185,459 N/A
i 2/14/2020 10/14/2022 2 % 366,033 (155,040 ) 104,582 315,575 Secured by licenses
m 12/20/2020 12/20/2021 9 % 39,740 -   -   39,740 2 vehicles in AZ
n 2/1/2021 2/5/2022 10 % 880,590 -   -   880,590 N/A
o 3/19/2021 4/1/2024 10 % 233,427 -   -   233,427 N/A
p 3/19/2021 4/1/2024 10 % 58,003 -   -   58,003 N/A
q 3/19/2021 4/1/2024 10 % 542,608 -   -   542,608 N/A

4,304,000

Less current portion (838,894 )

Long-term debt $ 3,465,106

~~(e) Aeneas Venture Partners 3, LLC Note~~

On August 28, 2019, Item 9 Properties, LLC, a Nevada limited liability company, and BSSD Group, LLC, an Arizona limited liability company, each wholly owned subsidiaries of Item 9 Labs Corp. collectively, entered into a Loan Agreement of up to $2.5 million (the "Loan Agreement") with Aeneas Venture Partners 3, LLC, an Arizona limited liability company (the "Lender"). The Loan is secured by a first priority interest in the Company's real property located in Coolidge, Arizona, including improvements and personal property thereon (the "Property") and includes an unconditional guarantee by Item 9 Labs Corp. The 5-acre property has 20,000 square feet of buildings, housing the cultivation and processing operations. On March 23, 2020, the Company paid $2,000,000 on the note and reached a settlement to bring the note current. The settlement calls for monthly interest payments of $22,000 and the remaining principal balance of the note is due on March 1, 2021. The note was paid in full on March 1, 2021.

	Effective Date		Maturity Date		Annual Interest Rate			Balance at December 31, 2021			Balance at September 30, 2021			Secured by
f	5/1/2020			11/1/2023		10	%		1,386,370			1,386,370		2nd DOT AZ property
h	5/1/2020			5/1/2023		15	%		283,666			283,666		N/A
i	2/14/2020			10/14/2022		2	%		—			312,500		Secured by licenses
l	8/18/2021			8/18/2022		36	%		1,545,325			2,162,590		Future revenues
n	12/20/2020			12/20/2021		9	%		—			13,148		Secured by vehicles
o	3/19/2021			4/1/2024		10	%		769,582			816,582		N/A
p	2/1/2021			2/1/2022		10	%		520,590			520,590		N/A
q	8/6/2021			2/6/2023		16	%		13,500,000			13,500,000		1st AZ property and other personal property
r	8/6/2021			2/6/2023		16	%		5,500,000			5,500,000		1st NV property and other personal property
s	9/30/2021			12/31/2021		15	%		500,000			500,000		Restricted common stock
t	3/19/2021			3/19/2022		0	%		500,000			500,000		N/A
									24,505,533			25,495,446
		Less: unamortized discounts							(4,719,209	)		(6,002,045	)
								$	19,786,324		$	19,493,401

(f) Viridis AZ

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC ("Viridis"), a related party, in which Viridis agreed to loan the Company up to ~~$2.7~~$1.2 million for the expansion of the Company's Arizona ~~and Nevada properties.~~property. In exchange for the loan, Viridis was to be repaid in the form of waterfall revenue participation schedules. Viridis was to receive 5% of the Company's gross revenues from the Arizona operations until the loan was repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. The loan was originally collateralized with a Deed of Trust on the Company's 5-acre parcel in Coolidge, AZ and its two 10,000 square foot buildings. In August 2019, Viridis agreed to subordinate its first priority Deed of Trust and move into a 2^nd position. At that time, the loan was amended to include 6% annualized interest.

On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the ~~$1,200,000~~ $1,200,000 note payable. As part of the restructuring, the Company issued 1,555,556 warrants exercisable into the Company's common stock. The warrants have an exercise price ~~on the warrants is $1.00~~ of $1.00 and ~~they have~~ a term of 5 years. Accrued interest in the amount of ~~$186,370~~ $186,370 was added to the principal balance of the note, making the total principal ~~$1,386,370.~~$1,386,370. Interest only payments of ~~$11,553~~ $11,553 shall be paid monthly until November 1, 2020 at which time monthly principal and interest payments of ~~$28,144~~ $28,144 are required for 36 months, with a balloon payment of ~~$693,185~~all outstanding principal and interest due upon the note's maturity. The note also entitles Viridis to a gross revenue participation of the Arizona Operations equal to 1% of the gross sales (up to $20,000 monthly) upon the maturity of the note and for the subsequent 5 year period. The debt and warrants were recorded at their relative fair values. The resulting discount ~~will be~~is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, ~~during this time~~accrued at the default interest rate of 12% per annum, will be added to the balloon payment at maturity.

F-12

~~(g) Viridis NV~~

~~On September 13, 2018,~~In August 2021, the ~~Company borrowed $1,500,000 from~~ Viridis ~~Group I9 Capital LLC, a related party. The proceeds~~AZ and Viridis NV debt was modified to subordinate these notes to the Pelorus Notes (see (q) and (r)). As part of this modification, it is anticipated that 2.0 million warrants were ~~utilized~~granted to ~~acquire a 20% ownership in Strive Management, LLC and is collateralized with a Deed~~Viridis. As of ~~Trust~~the date of these condensed consolidated financial statements, the terms of this modification have not been finalized. Based on the ~~Company's approximately 5 acre property and construction in progress. In exchange~~expected modification terms, this modification was accounted for ~~the loan, Viridis was to be repaid in the form of waterfall revenue participation schedules. Viridis was to receive 5%~~as an extinguishment of the ~~Company's gross revenues from~~debt during the ~~Nevada operations until~~year ended September 30, 2021. The 2.0 million warrants were allocated to the ~~loan~~accrued interest outstanding on the Viridis NV debt at the payoff date and then to the Viridis AZ and Viridis NV debt based on the amount of each debt outstanding at the time the warrants were granted at the relative fair value. The resulting discount is ~~repaid, 2% until repaid 200%~~amortized to interest expense over the term of the ~~amount loaned, and 1% of gross revenues in perpetuity or until a change in control. Payments on the loan was to commence 90 days after the Nevada operation begins earning revenue.~~debt.

(h) Viridis (unsecured)

The Company's subsidiary, BSSD Group, LLC borrowed $269,000 from Viridis, a related party, in December 2019. This note bears annualized interest at 15%. On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the ~~$1,500,000~~ $269,000 note payable. ~~As part of the restructuring, the Company issued 1,944,444 warrants exercisable into the Company's common stock. The exercise price on the warrants is $1.00 and they have a term of 5 years.~~ Accrued interest in the amount of ~~$64,849~~ $14,666 was added to the principal balance of the note, making the total principal ~~$1,564,849. Interest only payments of $13,040 shall be paid monthly until 3 months following the commencement date~~$283,666. As part of the ~~Nevada Operations at which time monthly~~restructuring, the Company issued 400,000 warrants exercisable into the Company's common stock. The warrants have an exercise price of $.05 and a term of 5 years. Payments of principal and interest ~~payments~~in the amount of ~~$33,962 will be required for 36 months,~~$9,833 are due monthly, with a balloon payment of ~~$761,007~~all outstanding principal and interest is due upon the note's maturity. The note also entitles Viridis to a gross revenue participation of the Nevada Operations equal to 1% of the gross sales (up to $20,000 monthly) upon the maturity of the note and for the subsequent 5 year period. The debt and warrants were recorded at their relative fair values. The resulting discount ~~will be~~is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, ~~during this time~~accrued at the default interest rate of 18% per annum, will be added to the balloon payment at maturity.

~~(h) Viridis (unsecured)~~(o) OCG Officers Debt

The Company's subsidiary, BSSD Group, LLC borrowed $269,000 from Viridis, a related party, in December 2019. This note bore annualized interest at 15%. On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $269,000 note payable. Accrued interest in the amount of $14,666 was added to the principal balance of the note, making the total principal $283,666. As part of the ~~restructuring,~~OCG transaction in March 2021, the Company ~~issued 400,000 warrants exercisable into~~assumed the ~~Company's common stock. The warrants have an exercise price~~debt that OCG, Inc. owed to its officers. Principal and interest payments are due monthly with a balloon payment of ~~$.05 and a term of 5 years. Payments of~~all outstanding principal and interest ~~in the amount of $9,833 are~~ due monthly until the note's maturity on May 1, 2023. The debt and warrants were recorded at their relative fair values. The resulting discount will be amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest during this time will be added to the balloon payment at maturity.

~~(i) Strive Note~~

In connection with the license acquisition described in Note 2, the Company entered into a note payable with the sellers in February 2020. The $1,000,000 note has a term of two years starting September 30, 2020 and bears interest at 2% per year. A principal payment in the amount of $500,000 was due on the earlier of October 10, 2020 or three months following the date on which each provisional certificate becomes a final certificate. The remaining balance is to be paid in quarterly installments of $62,500 plus accrued interest. Due to the low stated interest rate on the note, management imputed additional interest on the note.

~~(j) CBR 1~~

In June 2020, the Company executed on a short-term financing arrangement. The net proceeds of $873,000 were utilized to further expand the production capabilities of our operations in Arizona. Thirty payments of $40,500 were due weekly and the arrangement matured and was paid in full in January 2021. The loan was secured by future revenues of our operations in Arizona.

~~(k) CBR 2~~

In September 2020, the Company executed on a short-term financing arrangement. The proceeds of $490,000 are being utilized to further expand the production capabilities of our operations in Arizona. Five payments of $11,250 are due weekly through October 14, 2020 and twenty-five payments of $24,750 are then due weekly until the arrangement matures in April 2021. The loan is secured by future revenues of our operations in Arizona. The note was paid in full April 2021.

~~(l) Stockbridge Note~~

The Company entered into an additional note with Stockbridge Enterprises, a related party, in February 2020. The $500,000 borrowing had a term of 60 days and bore interest at 6% per year. All principal and interest were due on the maturity date of April 2020. The note included a provision for the issuance of 500,000 warrants exercisable into the Company's common stock. The warrants have an exercise price of $.05 and a term of 5 years. In February 2021, this note was amended to cure the default (see (n) below).

~~(m) Automotive Debt~~

~~In December 2020, the Company's subsidiary, BSSD Group purchased vehicles for use in operations. The dealership financed the vehicles. The initial principal balance of the note was $50,914.~~

~~(n)~~(p) Stockbridge Amended Debt

In February 2021, the Company and Stockbridge Enterprises, a related party, under a trouble debt restructuring, agreed to restructure and settle the outstanding notes. The total outstanding balance of ~~$1,660,590~~ $1,660,590, including accrued interest, ~~will~~were to be repaid under a new promissory note, calling for a down payment of ~~$300,000 (paid~~$300,000 (paid at time of signing), ~~$120,000~~ $120,000 monthly payments for 11 months with the remaining balance of ~~$40,590 paid~~$40,590 payable on February 1, 2022. ~~The note bears~~This agreement was amended to extend the maturity date to March 31, 2022 and starting with the October 1, 2021 payment, the loan payments are interest only at ~~10%. The restructured notes removed~~an interest rate of 15% per annum until January 25, 2022. Principal payments in the ~~conversion features included in one~~amount of $50,000 are due on January 25, 2022, February 15, 2022 and March 15, 2022, with a final payment of the ~~notes that was restructured.~~

~~(o, p, q) OCG Officers Debt~~

remaining principal and accrued interest due on March 31, 2022. Upon closing of an equity raise of at least $750,000, the Company will repay the outstanding balance plus any accrued interest immediately. As part of the ~~OCG transaction in March~~amendment, the Company issued 164,744 warrants to purchase the Company’s common stock. The warrants have a two-year period and an exercise price of $1.00. The resulting discount of $58,352 was fully amortized to interest expense during the three months ended December 31, 2021.

(s) Viridis $500,000

On September 30, 2021, the Company ~~assumed~~borrowed $500,000 from Viridis Group I9 Capital LLC, a related party. The proceeds of the ~~officer~~ debt ~~of OCG, Inc.~~were used to make a payment on the outstanding unpaid payroll tax liability. The debt is ~~held~~collateralized by restricted common stock in ~~OCG, Inc., bears interest~~the amount of twice the balance of the debt. It is anticipated that the note will include warrants to purchase a total of 500,000 shares of the Company’s common stock for $0.60 per share, with a five-year term. As of the date of these condensed consolidated financial statements, the terms of these warrants have not been finalized. The debt and anticipated warrants were recorded at ~~10% and~~their relative fair values. The resulting discount is amortized to interest expense over ~~a 3 year term. Interest only payments are due monthly for 6 months, then half~~the term of the ~~principal balance will be amortized over~~debt. The lender has granted a payment forbearance for the ~~remaining 30 months, with principal~~note and ~~accrued interest paid monthly, with a balloon payment of~~ all ~~outstanding~~unpaid principal and interest, ~~due~~accrued at ~~maturity.~~the default interest rate of 18% per annum beginning January 1, 2022, will be paid at maturity, which has been postponed to a date that has not yet been determined.

F-13

The future minimum payments of the Company’s notes payable obligations as of December 31, 2021 are as follows. The unamortized discount will be amortized through November 2023.

Year ended
December 31,		Amount
	2022	$	4,074,783
	2023		20,631,773
	2024		351,937
			25,058,493
	Less: unamortized discount		(4,719,209	)
	Less: imputed interest		(552,960	)
			19,786,324
	Less: current portion		(3,521,822	)
		$	16,264,502

A summary of interest expense for the three months ended December 31, 2021 and 2020 is as follows.


	Three months ended December 31,
	2021			2020
Amortization of debt discounts from equity issuances and beneficial conversion features	$	1,559,401		$	126,264
Amortization of debt discounts from success and other fees		306,310			—
Stated interest paid or accrued		1,203,932			569,444
Finance charges and other interest		817			12,659
		3,070,460			708,367
Less: interest capitalized to construction in progress		(1,860,070	)		—
	$	1,210,390		$	708,367

Note 7 - Concentrations

For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2021 and 2020, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides ~~services~~cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license.

Note 8 - Commitments and Contingencies

The production and possession of marijuana is prohibited on a national level by the ~~United States of America,~~Controlled Substances Act, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. If the federal government decides to ~~enforce~~change its policy on the enforcement of the Controlled Substances Act, it ~~could~~would have a material adverse effect on our business. However, the Company does not currently believe the federal prohibition of these activities will negatively impact the business. As such, the Company has not elected to record a related accrual contingency.

~~On April 20, 2018, the Company entered into an agreement for the purchase of approximately 44 acres of land from an affiliate of a founding member of BSSD. The purchase price of the property is $3,000,000, payable as follows; (i) $200,000~~ ~~deposited with escrow agent as an initial earnest money deposit, (ii) on or before February 1, 2019, the Company will deposit an additional $800,000~~ into escrow as additional earnest money deposit and (iii) the balance of the purchase price shall be paid via a promissory note. The earnest money amounts are non-refundable. The Company has negotiated an amendment to this agreement that will spread the $~~800,000~~ ~~payment over the course of 4 months. As of the date of these financial statements, $600,000~~ ~~has been deposited in escrow which has been classified as a long-term asset on the condensed consolidated balance sheet as of June 30, 2021 and September 30, 2020.~~

F-14

The Company entered into a 60 month lease with VGI Citadel LLC, a related party, to rent office space for its corporate headquarters which began ~~on September 1,~~in June 2019. The monthly lease payments ~~total~~were $6,478 ~~monthly~~ for the first twelve months and include all utilities and an estimated amount for common area maintenance and real estate taxes. The monthly lease ~~rate increases~~payments increase to $6,653, $6,828, $7,003, and $7,178for years two through five, respectively. Rent expense for the three months ended December 31, 2021 and 2020 on this lease was $23,200 and $20,710, respectively. Interest was imputed using a discount rate of 20%. The lease does not include renewal options. The future lease payments are as follows.

Year ended
December 31,		Amount
	2022	$	83,165
	2023		85,266
	2024		35,891
			204,322
	Less: imputed interest		(43,710	)
			160,612
	Less: current portion:		(55,935	)
		$	104,677

In August 2021, the Company signed a ten-year lease to rent approximately 7,000 square feet of retail space in Broomfield, Colorado. The lease will call for base rent payments of $12,097, plus a prorated share of taxes and operating expenses, per month for the first year and escalate each year to $15,786 per month in year 10. The commencement of this lease is contingent upon the Company obtaining a license for the retail sale of recreational and medical marijuana. The Company shall pay $3,500 per month as consideration to the landlord for keeping the premises available until the contingency is met. The agreement will terminate if the contingency is not met. At December 31, 2021, the contingency has not been met. As such, the future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at December 31, 2021 or the future lease payments schedule above.

In September 2021, the Company signed a seven-year lease to rent approximately 3,000 square feet of retail space in Biddeford, Maine. The lease will call for base rent payments of $6,604, plus taxes and operating expenses, per month for the first year and escalate each year to $7,886 per month in year seven. The commencement of this lease is contingent upon the issuance and receipt of a license and city approval. The Company shall pay $4,500 per month, plus utilities and operating expenses as consideration to the landlord for keeping the premises available until the contingency is met. The agreement will terminate if the contingency is not met. At December 31, 2021, the contingency has not been met. As such, the future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at December 31, 2021 or the future lease payments schedule above.

In October 2021, the Company entered into a commercial lease agreement to rent 12,000 square feet located in Denver, Colorado. The lease has a term of five years with escalating monthly base rent beginning at $6,354 and escalating each year to $7,295 in year five. Commencement of the lease is contingent upon the Company receiving an approved retail license within 120 days from October 22, 2021. The agreement will terminate if the contingency is not met. At December 31, 2021, the contingency has not been met. As such, the future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at December 31, 2021 or the future lease payments schedule above.

As of ~~June 30,~~December 31, 2021 and September 30, ~~2020,~~2021, the Company has accrued unpaid payroll taxes ~~of approximately $2,100,000~~and $~~1,700,000, respectively, which includes~~ estimated penalties and interest of approximately $2,000,000 and $2,400,000, respectively, and is included in accrued expenses in the accompanying condensed consolidated balance sheets.

There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company.

F-15

Note 9 - Related Party Transactions

As discussed in Note 8,5, the Company ~~has entered into an agreement as of April 20, 2018 for~~completed the purchase of ~~land.~~44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.

~~As discussed in Note 6, BSSD Group, LLC, a wholly owned subsidiary of the Company entered into a loan agreement with Viridis.~~

As discussed in Note 6, the Company has ~~notes payable to~~entered into various loan agreements with Viridis ~~I9 Capital LLC~~or its related entities. Two members of Viridis serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.

As discussed in Note 6, the Company has a loan agreement with Stockbridge Enterprises. Stockbridge Enterprises ~~with varying terms as~~holds more than 5% of ~~June 30, 2021.~~the Company’s common stock.

As discussed in Note 8, the Company has a lease agreement with VGI Capital LLC. ~~A member~~Two members of VGI Capital ~~was elected to~~LLC serve on the ~~Company's~~Company’s board of directors onand one of these members also serves as the Company’s Chief Executive Officer.

During the three months ended December ~~21, 2018~~31, 2021 and 2020, the Company purchased cultivation supplies from a related party in the amount of $12,993 and $10,089, respectively. This related party is ~~currently~~owned by the ~~Company's CEO.~~father of a stockholder that holds more than 5% of the Company’s common stock.

Included in our accounts payable at ~~June 30,~~December 31, 2021 and September 30, ~~2020~~2021 is approximately $~~80,000~~158,000, and $~~90,000~~138,000, respectively in amounts due to related parties.

~~F-14~~

Note 10 - Stockholders' Equity

~~Common Stock~~

~~In the nine months ended June 30, 2020, in the normal course of business, the Company issued~~ ~~55,618~~ ~~shares of restricted common stock, valued at $132,106~~ ~~as consideration for various contracts, including venue sponsorships, marketing, and investor relations.~~

~~As discussed in Note 2, during the nine months ended June 30, 2020, the Company agreed to issue~~ ~~3,250,000~~ ~~shares of restricted common stock, valued at $3,507,000~~ ~~as part of an asset acquisition. The stock has been reserved, though certain criteria must be met for the issuance to occur.~~

~~In the nine months ended June 30, 2020, the Company issued~~ ~~26,282~~ ~~shares of restricted common stock to employees, valued at $75,000~~.

~~In the nine months ended June 30, 2021, in the normal course of business, the Company issued~~ ~~111,765~~ ~~shares of restricted common stock to vendors, valued at $163,236~~.

~~During the nine months ended June 30, 2021, the Company raised $13,299,808~~ ~~via private placement. The Company issued~~ ~~15,646,643~~ ~~shares with a selling price for its restricted common stock of $0.85~~.

~~In March 2021, the Company issued 19,080,000 shares of restricted common stock for the OCG, Inc. acquisition. See Note 2.~~

Warrants

AsThe following table summarizes the Company’s warrant activity for the three months ended December 31, 2021:

	Common Shares Issuable Upon Exercise of Warrants		Weighted Average Exercise Price		Weighted Average Contractual Term in Years		Aggregate Intrinsic Value
Balance of warrants at September 30, 2021		46,095,000		2.08		3.9		14,243,000

Warrants granted		1,739,744		2.81		3.0		—

Balance of warrants at December 31, 2021		47,834,744	$	2.10	$	3.7	$	5,932,122

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock as of December 31, 2021, for those awards that have an exercise price currently below the closing price as of December 31, 2021. Awards with an exercise price above the closing prices as of December 31, 2021 are considered to have no intrinsic value.

The Company estimates the fair value of warrants issued using the Black-Scholes option-pricing model. The following range of assumptions were used during the three months ended December 31, 2021. No warrants were issued, exercised or forfeited during the three months ended December 31, 2020.

	Three months ended December 31,
	2021
Expected stock price volatility		92% - 130%
Risk-free interest rate		0.10% - 0.30%
Expected term (years)		1.0 - 2.0
Expected dividend yield		0%
Black-scholes value		$0.34 - $0.89

F-16

Stock Options

On June ~~30, 2021, there are 41,415,000 warrants for purchase~~21, 2019, our shareholders voted to approve the 2019 Equity Incentive Plan (the “2019 Plan”). Pursuant to the 2019 Plan, the maximum aggregate number of Shares available under the Plan through awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the ~~Company's common stock outstanding. Warrants~~adoption of the plan by 2 percent of the then-outstanding shares, or (b) 10,000,000 shares. We have4,141,021 shares available for issuance under the 2019 Plan. The maximum contractual term of the award is 10 years. The vesting period for options outstanding ~~as of June 30,~~at December 31, 2021 ~~are as follows:~~

Common Shares Issuable Upon Exercise Exercise Price Grant Date Expiration
Warrants issued by predecessor 100,000 $ 1.00 7/28/2016 7/28/2021
Warrants issued in connection with debt financing 500,000 $ 0.05 2/14/2020 2/14/2025
Warrants issued in connection with acquisition 2,000,000 $ 1.13 2/14/2020 2/14/2023
Warrants issued in connection with debt financing 10,000,000 $ 0.75 3/28/2020 3/29/2025
Warrants issued in connection with debt financing 3,500,000 $ 1.00 5/1/2020 5/2/2025
Warrants issued in connection with debt financing 400,000 $ 0.05 5/1/2020 5/2/2025
Warrants issued in connection with acquisition 23,560,000 $ 3.00 3/19/2021 6/30/2024
Warrants issued in connection with debt financing 1,355,000 $ 3.00 3/16/2021 6/30/2024
Balance of Warrants at June 30, 2021 41,415,000

~~Stock Options~~ranges from 6 months to four years.

AsThe following table summarizes the Company’s stock option activity for the three months ended December 31, 2021:

	Common Shares Issuable Upon Exercise of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value (1)
Balance of Options at September 30, 2021		5,217,315			1.23		8.9		2,633,375

Options granted		31,913			0.80		9.7		22,000
Forfeited/Cancelled		(42,977	)		1.00		—		—

Balance of Options at December 31, 2021		5,206,251		$	1.22		8.7	$	153,597

Exercisable at December 31, 2021		2,208,562		$	1.29		7.9	$	471,080
Unvested at December 31, 2021		2,997,689		$	1.18


		Number of Options			Weighted Average Grant Date Fair Value
Unvested at December 31, 2021		2,997,689		$	1.18
Granted during the three months ended December 31, 2021		31,913		$	1.72
Forfeited during the three months ended December 31, 2021		42,977		$	0.96

(1)

The Company estimates the fair value of ~~June 30,~~stock options granted using the Black-Scholes option-pricing model. The following range of assumptions were used during the three months ended December 31, 2021. No options were granted, exercised or forfeited during the three months ended December 31, 2020.

	Three months ended December 31,
	2021
Expected stock price volatility		161% - 164%
Risk-free interest rate		.9% - 1.1%
Expected term (years)		5.0 - 5.5
Expected dividend yield		0%
Black-scholes value		$1.48 - $3.01

During the three months ended December 31, 2021 and 2020, the Company recognized compensation expense of $507,294 and $304,672, respectively. At December 31, 2021, there ~~are~~ was $~~3,211,709~~ ~~stock options outstanding,~~ ~~287,491~~2,798,762 of ~~those options are exercisable with a~~total unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average ~~exercise price~~vesting period of $1.4 years.

~~5.34. The~~ ~~2,924,218~~ ~~unvested options have a weighted average exercise price of $0.87~~.

F-17

Note 11 ~~- Going Concern~~– Segment Information

~~The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern.~~ The Company has identified two segments: the cultivation, production and sale of cannabis products (Cultivation) and the sales of Unity Rd. franchises to dispensaries (Franchising). The following table presents segment information for the three months ended December 31, 2021. Segment information for the three months ended December 31, 2020 has not ~~yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with~~been presented as the ~~associated substantial accumulated deficit, are a direct result~~Company did not acquire the Franchising segment until the closing of the ~~Company's planned ramp up period as it is pursuing market acceptance and geographic expansion. In view~~acquisition of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company's ability to continue as a going concern. As a result, the Company's independent registered public accounting firm included an emphasis-of-matter paragraph with respect to the consolidated financial statements for the year ended September 30, 2020, expressing uncertainty regarding the Company's assumption that it will continue as a going concern.OCG, Inc. effective March 19, 2021.

Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will grow significantly, thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company's overall efforts will be successful.

If the Company is unable to generate significant sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations, and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

	Cultivation		Franchising			Corporate			Total
Revenues from external customers	$	6,141,217	$	30,418		$	14,376		$	6,186,011
Operating income (loss)		1,569,295		(959,139	)		(2,744,780	)		(2,134,624	)
Interest expense		196		22,810			1,187,384			1,210,390
Depreciation and amortization		31,265		300,739			107,131			439,135

Additions to property, equipment and construction in progress		—		—			8,399,584			8,399,584
Property, equipment and construction in progress, net		658,276		77,630			18,470,158			19,206,064
Total assets (after intercompany eliminations)		7,905,440		68,151,658			40,963,918			117,021,016

Note 12 - Subsequent Events

Subsequent to ~~June 30,~~December 31, 2021 the ~~100,000~~ ~~warrants set to expire on July 28, 2021 were exercised using the cashless provision.~~following events have occurred.

In January 2022, the Company executed on a short-term financing arrangement. The net proceeds of $2.45 million were used to repay the outstanding principal and interest of note payable (l) in Note 6 - Debt above in the amount of approximately $1.84 million. The remaining approximately $610,000 of proceeds will be used for general working capital purposes. Payments of $66,468 are due weekly until $3.35 million is repaid. This results in an effective interest rate of approximately 34%.

The Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially all of the assets of the dispensary, excluding cannabis and cannabis related products, and assumed the dispensary’s lease. The purchase price is $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company will pay the seller $65,000 in the Company’s common stock at a 10% discount to the stock’s 10-day volume weighted average.

The Company has issued 97,840 shares of common stock related to the Co-Management Agreement discussed above and for other services received.

~~F-15~~F-18

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended September 30, ~~2020~~2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company's Annual Report on Form 10-K for the year ended September 30, ~~2020,~~2021, filed with the Securities and Exchange Commission (the "SEC") on January ~~12, 2021.~~13, 2022.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the securities Exchange Act of 1934, as amended, (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. The words "anticipated," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "should," "could," "predicts," ~~potential,~~"potential," ~~continue,~~"continue," "would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this quarterly report on Form 10-Q. You should carefully consider these risks and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Overview

Item 9 Labs produces premium cannabis and cannabis related products in a rapidly growing market. WeThe Company currently ~~offer~~offers over seventy-five (75) active cannabis strains and more than ~~300~~one hundred fifty (150) differentiated cannabis vape products ~~that we group in the following categories: flower; concentrates; distillates~~as well as premium concentrates and ~~hardware. Our~~Orion vape technologies. The Company’s product offerings will continue to grow as wethey develop new products to meet the needs of the end users. ~~We make our~~The Company makes its products available to consumers through licensed dispensaries in Arizona. Item 9 ~~Labs'~~Labs’ products are now carried in more than 8070 dispensaries throughout the state of Arizona.

The Company believes its past and future success is dependent upon its ongoing ability to understand the needs and desires of the consumers, and the Company develops and offers products that meet those needs.

The Company’s objective is to leverage its assets (tangible and intangible) to fuel the growth of its share of the Arizona cannabis market, as well as expand the geographical reach of its products into markets outside of Arizona, with the ultimate goal of providing comfortable cannabis health solutions to a larger population in a manner that will create value for the Company’s shareholders.

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ~~("COVID-19"~~(“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The services we provide are currently designated an essential critical infrastructure business under the President's COVID-19 guidance, the continued operation of which is vital for national public health, safety and national economic security. The extent of the impact of the COVID-19 outbreak on ~~our~~the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on ~~our~~its customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time. ~~As of the date of this filing,~~

In March 2021, the Company ~~has not experienced any material negative impact from~~closed on the ~~pandemic, though it is unknown what will occur going forward.~~

~~We believe our past and future success is dependent upon our ongoing ability to understand the needs and desires~~acquisition of ~~the consumers, and we develop and offer products that meet those needs.~~

Our objective is to leverage our assets (tangible and intangible) to fuel the growth of our share of the Arizona cannabis market, as well as expand the geographical reach of our products into markets outside of Arizona, with the ultimate goal of providing comfortable cannabis solutions to a larger population in a manner that will create value for our shareholders.

~~On December 13, 2020, the Company and I9 Acquisition Sub Inc. ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Agreement") with~~ OCG, Inc., dba Unity Rd., a ~~Colorado corporation ("Target"), pursuant to which the Merger Sub will be merged with and into the Target in~~cannabis dispensary franchisor. The transaction was structured as a reverse triangular merger, with the ~~Target continuing as the surviving entity as~~effect of OCG, Inc. becoming a ~~wholly-owned direct~~wholly owned subsidiary of the ~~Company ("Merger"). OCG Inc. owns~~Company. Unity Rd. has agreements with more than twenty (20) partners for such partners to open more than thirty-five (35) Unity Rd. retail dispensary locations in fourteen (14) states. The majority of the ~~dispensary~~locations are in the licensing process. One such franchise ~~concept, Unity Rd.~~unit has been opened to date, in Boulder, Colorado. Unity Rd. will ~~be the retail vertical of the Company, will be supplied with premium~~assist in providing distribution for Item 9 Labs products ~~and gives the Company a less capital intensive method of expanding into other markets.~~ ~~The transaction closed on March 19, 2021.~~

~~Unity Rd will~~to be ~~the vehicle to bring Item 9 Labs products~~sold across the United States and internationally to its franchisees for public resale, while keeping dispensaries locally owned and ~~operated, empowering entrepreneurs to confidently and successfully operate their business and contribute to their local communities.~~operated. As ~~the~~ Unity RdRd. dispensaries ~~achieve sufficient~~expand in its market penetration, Item 9 Labs aims to offer its products in those locations ~~to expand~~by expanding the distribution footprint of its premium product ~~offerings. In June 2021, the first Unity Rd franchise location opened in Boulder, Colorado.~~offerings to new states.

~~Our~~

The Company’s Arizona cannabis operations ~~saw significant expansion as well, both~~have expanded in ~~our physical and geographic footprint. Our physical footprint expanded~~recent years, with the addition of a 2^nd2nd nearly 10,000 square foot facility in the 4^th4th quarter of fiscal year 2019, more than doubling ~~our~~the Company’s cultivation and processing space for Arizona. As the Company methodically expanded ~~our~~its operational capacity by more than 100% in fiscal year 2020, ~~we were~~it was also able to significantly increase efficiencies within the cultivation and processing operations.

The Arizona expansion ~~will continue~~has continued in fiscal year ~~2021. We have~~2022 and is expected to continue thereafter. The Company has tripled production since October 1, 2020, ~~and we continue driving towards doubling production in the second half of the year,~~ while beginning construction on phase 1 of ~~our~~its construction plan to build additional cultivation space. Phase 1 plans total over 60,000 square feet of additional cultivation and processing space, and the planned remaining five phases ~~will~~would add over ~~600,000~~560,000 square feet of cultivation and processing space. By the conclusion of their master site development, the Company anticipates a total of more than 640,000 square feet of cultivation and processing space; there is no assurance the Company can complete these construction projects as planned.

Item 9 Labs Corp. has continued its expansion plans into other states ~~during fiscal year 2020~~ as well as the Company acquired (pending regulatory approval) cultivation and processing licenses in Nye County, Nevada which will be paired with ~~our~~their Nevada facility. In fiscal 2019, wethe Company broke ground on ~~our~~their 20,000 square foot cultivation and processing facility in Nevada. The facility is now approximately ~~65%~~70% complete. ~~With financing plans~~Construction recommenced, after a pause due to Covid-19, in ~~process, we anticipate recommencing construction in the coming months as we aim~~August 2021. The Company aims to commence operations in Nevada in ~~the fourth quarter of fiscal year 2021 or first quarter of~~ fiscal year 2022.

On October 6, 2021, the Company entered into an Asset Purchase Agreement (“APA”) to acquire an existing dispensary license and storefront from Nebrina Adams County LLC, a Colorado limited liability company (“Seller”) in Adams County, CO. The total purchase price is two million dollars ($2,000,000), as to which one million dollars ($1,000,000) will be paid to an escrow account upon conditional approvals of the change of ownership from state and local licensing authorities concerning the transfer of ownership. At closing, that amount will be released to the Seller along with an 18-month promissory note in the principal amount of $200,000 and the balance payable in 300,000 shares of Company common stock. For additional terms of the APA, please see the Company’s filing on Form 8-K filed with the Securities and Exchange Commission on October 7, 2021. The Company intends to obtain financing to consummate this transaction. There can be no assurance that the Company can consummate this transaction. The existing dispensary license has never been operational.

If completed, this will be the first corporate-owned shop under its cannabis dispensary franchise brand, Unity Rd., and is anticipated to open in early fiscal year 2022. Currently, the Company is awaiting regulatory approval by Colorado's Marijuana Enforcement Division (“MED”). This APA is part of an overarching acquisition strategy that is intended to accelerate national expansion by creating turnkey investment opportunities for Unity Rd. franchisees. The Company plans to convert acquired dispensaries into Unity Rd. shops, operate them internally and sell them to an existing or future franchise partner. This offers an expedited solution for entrepreneurs seeking immediate entry into cannabis. The Company is targeting numerous similar transactions in the next 12 months to gain a deeper market penetration in select markets. Subsequently and/or concurrently, the Company plans to introduce the Item 9 Labs suite of products to the same markets through the acquisition of cultivation and production licenses or through joint ventures with qualified local, licensed operators.

Results of Operations

	Three months ended December 31,
	2021			2020			$ Change			% Change
Revenues, net	$	6,186,011		$	3,039,564		$	3,146,447			104	%
Cost of revenues		3,787,245			1,608,131			2,179,114			136	%
Gross profit		2,398,766			1,431,433			967,333			68	%
Operating expenses
Professional fees and outside services		657,445			293,955			363,490			124	%
Payroll and employee related expenses		2,150,706			1,103,304			1,047,402			95	%
Sales and marketing		439,436			43,181			396,255			918	%
Depreciation and amortization		439,135			142,545			296,590			208	%
Other operating expenses		846,668			214,537			632,131			295	%
Total operating expenses		4,533,390			1,797,522			2,735,868			152	%
Loss from operations		(2,134,624	)		(366,089	)		(1,768,535	)		483	%
Other expense, net		(1,210,390	)		(708,367	)		(502,023	)		71	%
Net loss, before income tax provision (benefit)		(3,345,014	)		(1,074,456	)		(2,270,558	)		211	%
Income tax provision (benefit)		—			—			—			0	%
Net loss	$	(3,345,014	)	$	(1,074,456	)	$	(2,270,558	)		211	%

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~~Results of Operations~~

Three Months Ended June 30, Nine Months Ended June 30,
2021 2020 2021 2020
Revenues, net $ 6,693,061 $ 2,207,453 $ 15,843,256 $ 5,602,321
Cost of services 3,802,447 1,188,831 8,531,623 3,508,350
Gross profit 2,890,614 1,018,622 7,311,633 2,093,971

Operating expenses 3,137,888 1,262,586 7,407,589 4,432,709

Income (loss) from operations (247,274 ) (243,964 ) (95,956 ) (2,338,738 )

Other income (expense), net (586,631 ) (1,363,839 ) (1,763,385 ) (2,821,629 )

Net income (loss) $ (833,905 ) $ (1,607,803 ) $ (1,859,341 ) $ (5,160,367 )

Revenues

~~Total revenues~~The increase in revenue was primarily due to a change in certain processes and procedures in the Company’s lab during the year ended September 30, 2021. That is, during fiscal year 2021, the Company purchased equipment to automate certain manual processes. The purchase of this equipment made certain processes, such as the filling of cartridges, more efficient, which allowed for increased output. In order to support this increased output, the Company purchases certain inventory materials from third party vendors that it had previously produced itself. This allows the Company to avoid interruptions in production due to a lack of material. Further, during fiscal year 2021, the Company added and reorganized post-production space to more efficiently package its products for sale. This allows the Company to deliver its products to the dispensaries more timely. The demand for the Company’s products is greater than the supply it is able to produce and the changes in processes and procedures in the Company’s lab allowed the Company to increase production more than 100% during the three months ended ~~June 30,~~December 31, 2021 ~~were $6,693,061~~ compared to the ~~revenue for~~same period of the ~~period ended June 30, 2020 of $2,207,453, an increase of $4,485,608 or 203%.~~

~~Total~~prior fiscal year. Management anticipates revenues ~~for the nine months ended June 30, 2021 were $15,843,256 compared~~ to continue to grow as the revenue ~~for the period ended June 30, 2020~~trends are positive month over month.

Cost of ~~$5,602,321, an increase of $10,240,935 or 183%.~~

~~The increase is due to management's focus of increasing production as the market demand remains to be higher than our production capacity.~~

~~Costs of Services~~Revenues

~~Costs~~Cost of ~~services~~revenues consist primarily of labor, materials, supplies ~~utilities,~~ and ~~overhead. Costs~~utilities. Cost of ~~services~~revenues as a percentage of revenues was ~~57%~~61% for the three months ended ~~June 30,~~December 31, 2021 compared to ~~54%~~53% for the ~~three months~~same period ended ~~June 30,~~December 31, 2020. ~~Costs of services as a percentage of revenues~~The Company was ~~54% for the nine months ended June 30, 2021 compared to 63% for the nine months ended June 30, 2020.~~

~~As the initial ramp up costs were significant in fiscal year 2020, the Company has been~~ able to increase operational efficiency throughout fiscal year 2021. However, the cost of the purchased inventory materials discussed above and increases in other costs, such as product testing, primarily negated these efficiency gains. Management will remain focused on reducing costs through bulk purchasing, implementing additional efficiencies in ~~production. Management~~production and making additional investments in property and equipment. The Company believes ~~these costs~~that it will continue toreducing the overall cost of revenues and cost of revenues will increase at a lower rate than ~~revenue growth, and production~~revenues in future periods, which will lead to ~~higher~~increased profit margins than these historical figures illustrate. Given the sixteen to seventeen-week grow cycle, efficiencies are not immediately realized in costs. The upcoming expansion is expected to increase profit margins as well as the Company will reduce its outsourced purchases.margins.

Gross Profit

Gross profit for the three months ended June 30, 2021 was $2,890,614 (43%) compared to $1,018,622 (46%) for the three months ended June 30, 2020. Gross profit for the nine months ended June 30, 2021 was $7,311,633 (46%) compared to $2,093,971 (37%) for the nine months ended June 30, 2020. The decrease in gross profit ~~margin in the current quarter is~~was due to increases in revenue offset by increases in purchased inventory materials and other costs. With the ~~maturation of the Arizona cannabis market, which saw downward pressure~~Company’s continued efforts to increase capacity and focus on ~~pricing. The increase in~~efficiencies and reducing costs, management expects gross profit ~~for the nine month period is due~~ to the Company operating more efficiently during its production expansion. The Company has been able to lower costs since first half of fiscal year 2020 and expects to see gross profit margins continue to increase in future periods.grow going forward.

Operating Expenses

Professional fees and outside services increased primarily due to the amortization of prepaid consulting agreements that were entered into subsequent to the three months ended December 31, 2020 and additional expenses incurred for corporate advisory services, and investor and public relations services. The increase in payroll expenses was primarily due to the scheduled amortization of stock-based compensation expense for stock options granted subsequent to the three months ended December 31, 2020. Further, payroll expenses increased due to an increase in employee headcount during fiscal year 2021 and the three months ended December 31, 2021. Sales and marketing expenses increased due to increased spending on marketing and branding initiatives during the three months ended December 31, 2021. The increase in depreciation and amortization is due to the scheduled amortization of intangible assets acquired in the OCG Inc. acquisition in March 2021. Other operating expenses increased primarily due to increases in insurance expenses, travel related expenses and additional IT support for the increase in employees. Total operating expenses as a percentage of gross profit increased from 126% for the three months ended ~~June 30, 2021 were $3,137,888 compared~~December 31, 2020 to ~~$1,262,586~~189% for the three ~~months~~month periods ended June 30, 2020, an increase of $1,875,302 or 149%. Total operating expenses for the nine months ended June 30, 2021 were $7,407,589 compared to $4,432,709 for the nine months ended June 30, 2020, an increase of $2,974,880 or 67%. Operating expenses as a percentage of revenue decreased to 47% and 47% from 57% and 79% for the three and nine months ending June 30, 2021 and 2020, respectively. The increase in the current quarter and nine month period operating expenses is largely attributable to the acquisition of OCG Inc., its subsidiaries and its brand, Unity Rd.December 31, 2021. Management believes this ratio will decrease for the Cultivation segment going forward as the expectation is that revenues will continue to grow at a higher rate than operating ~~expenses. The decrease in~~expenses, however, management believes that operating expenses ~~as a percentage of~~will outpace revenues for the ~~three and nine months ended June 30, 2021 was due~~Franchising segment as the Franchising segment continues to ~~the Company's focus~~perform on ~~increasing revenue, reducing expenses and performing more efficiently.~~its growth initiatives.

~~Interest~~Other Expense, net

~~Total~~Other expenses consist of interest expense of $1,210,390 and $708,367 for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2021 ~~was $629,265~~ and ~~$1,806,019, respectively, compared to $1,362,347 and $2,820,137, respectively, for the three and nine months ended June 30,~~ 2020, ~~a decrease of $733,082 and $1,014,118 for the three and nine months~~ respectively. ~~Included~~The increase in interest expense ~~is non-cash~~was primarily the result of the continued interest and amortization of debt ~~discounts. Amortization~~discounts for debt outstanding at December 31, 2020 and the additional interest and amortization of debt discounts ~~totaled $292,662~~for debt incurred subsequent to December 31, 2020. This increase in interest expense was offset by debt and ~~$565,021, respectively, for~~amortization of debt discounts that were capitalized to construction in progress related to the ~~three and nine months ended June 30, 2021 compared with $926,803 and 1,273,739 for the three and nine months ended June 30, 2020, respectively.~~Company’s capital projects.

Adjusted EBITDA

Management uses the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation expense, acquisition-related costs, and other adjustments, or “Adjusted EBITDA,” to evaluate the Company’s performance. Adjusted EBITDA is a non-GAAP measure that is also frequently used by analysts, investors and other interested parties to evaluate the market value of companies considered to be in similar businesses. The Company suggests that Adjusted EBITDA be viewed in conjunction with its reported financial results or other financial information prepared in accordance with accounting principles generally accepted in the United States, or “US GAAP.”

1721

The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three months ended December 31, 2021 and 2020:

Three months ended December 31,
2021 2020
Net loss $ (3,345,014 ) $ (1,074,456 )
Depreciation and amortization 439,135 142,545
Interest expense 1,210,390 708,367
Stock-based expense 507,294 467,908
Acquisition related costs —   179,677
Adjusted EBITDA $ (1,188,195 ) $ 424,041
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

~~Our~~The Company’s primary need for liquidity is to fund working capital requirements of ~~our~~its business, capital expenditures, acquisitions, debt service, and for general corporate purposes. ~~Our~~The Company’s primary source of liquidity is funds generated byfrom revenues, financing activities and from private placements. ~~Our~~The Company’s ability to fund ~~our~~its operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on ~~our~~its future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond ~~our~~the Company’s control.

The accompanying condensed consolidated financial statements have been prepared ~~in conformity with accounting principles generally accepted in~~assuming the ~~United States, which contemplate~~ continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company's planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company's ability to continue as a going concern. As a result, the Company's independent registered public accounting firm included an emphasis-of-matter paragraph with respect to the consolidated financial statements for the year ended September 30, 2020, expressing uncertainty regarding the Company's assumption that it will continue as a going concern.

In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management's plans in regard to these matters are described as follows:

Sales and ~~Marketing~~.Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company's revenues have increased significantly since its inception in May ~~2017 and continue to grow as of the date of these condensed consolidated financial statements.~~2017. Management will continue its plans to increase revenues in the Arizona market by providing ~~top quality~~superior products. Additionally, as capital resources become available, the Company ~~will~~plans to expand into additional markets outside of Arizona, with construction of a cultivation and processing facility ~~underway~~nearing completion in Nevada. The Company believes that it will continue reducing the overall cost of revenues and cost of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.

~~Financing~~.Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will continue to grow, ~~significantly,~~ thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company's overall efforts will be successful.

If the Company is unable to generate ~~significant~~additional sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

22
As of ~~June 30,~~December 31, 2021, the Company had ~~$296,892~~$160,711 of cash and cash equivalents and negative working capital of ~~$917,720~~($7,351,332) (current assets minus current liabilities), compared with ~~$84,677~~$1,454,460 of cash and ~~($7,396,258) of~~cash equivalents and negative working capital of ($4,393,385) as of September 30, ~~2020.~~2021. The ~~increase~~decrease of ~~$8,313,978~~$2,957,947 in ~~our~~the Company’s working capital ~~and $212,215~~was primarily due to decreases in cash and inventory. Additionally, the Company’s working capital decreased due to increases in accounts payable and accrued expenses. The $1,293,749 decrease in cash and cash equivalents was primarily due to the ~~sale~~purchases of property, equipment and construction in progress related to the ~~Company's restricted common stock as well as investing the cash proceeds in inventory to be able to increase sales and profitability.~~Company’s capital projects. The Company is an early-stage growth company. It is generating cash from sales and is investing its capital reserves in current operations ~~plant expansion and enhancement,~~ and new acquisitions that ~~will~~are expected to generate additional earnings in the long term. The Company expects that its cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet its capital requirements and operational needs for the next 12 months, although no assurance can be given that private and/or public financing can be obtained on terms acceptable to the Company, or at all.

Cash Flows

The following table summarizes the sources and uses of cash for each of the periods presented:

Nine Months Ended June 30,
2021 2020
Net cash used in operating activities $ (6,877,259 ) $ (970,401 )
Net cash used in investing activities (3,851,950 ) (939,163 )
Net cash provided by financing activities 10,941,424 1,899,336
Net increase (decrease) in cash and cash equivalents $ 212,215 $ (10,228 )
18
Three months ended December 31,
2021 2020 $ Change % Change
Net cash used in operating activities $ (267,694 ) $ (1,932,533 ) $ 1,664,839 -86 %
Net cash used in investing activities (1,439,155 ) (1,190,875 ) (248,280 ) 21 %
Net cash provided by financing activities 413,100 4,652,308 (4,239,208 ) -91 %
Net increase (decrease) in cash and cash equivalents $ (1,293,749 ) $ 1,528,900 $ (2,822,649 ) -185 %
Operating Activities

During the ~~nine~~three months ended ~~June 30,~~December 31, 2021, operating activities used ~~$6,877,259~~$267,694 of cash and cash equivalent, primarily resulting from a net loss of $1,859,341which was extended by net cash used in operating assets and liabilities of $7,060,610. There was significant non-cash activity that contributed to the net loss totaling $2,042,692 including depreciation and amortization of $400,419, amortization of debt discount of $565,021, and stock based compensation of $1,077,252. With the increase in revenues, the Company's receivables increased $1,703,092, deferred costs increased $6,348,573 and prepaid expenses increased $192,292, offset by an increase in current liabilities of $1,183,347.
~~During the nine months ended June 30, 2020, operating activities used $970,401 of cash, primarily resulting from a net loss of $5,160,367~~$3,345,041 which was offset by net cash provided by operating assets and liabilities of ~~$1,820,034.~~$1,137,981. There was significant non-cash activity that contributed to the net loss totaling ~~$2,369,932~~$1,939,339 including depreciation and amortization of ~~$2,140,366, provision for bad~~$441,764, amortization of debt discount of ~~$22,460,~~$990,281, and stock based compensation of $507,294.
During the three months ended December 31, 2020, operating activities used $1,932,533 of cash, primarily resulting from a net loss of $1,074,456 which was extended by net cash used in operating assets and liabilities of $1,603,964. There was significant non-cash activity that contributed to the net loss totaling $745,887 including depreciation and amortization of $158,681, amortization of debt discount of $119,298, and compensation paid in the form of stock of ~~$207,106.~~$467,908.

Investing Activities

During the ~~nine~~three months ended ~~June 30,~~December 31, 2021, investing activities used ~~$3,851,950~~$1,439,155 of cash and cash equivalents, consisting primarily of $2,492,445 in purchases of property, equipment and construction in progress, offset by $1,053,290 of cash received from the escrow deposit accounts.
During the three months ended December 31, 2020, investing activities used $1,190,875 of cash, consisting primarily of ~~$2,263,388~~$499,452 in purchase of property and equipment and ~~$1,685,368~~$696,293 of deposits paid on an acquisition.
During the nine months ended June 30, 2020, investing activities used $939,239 of cash, consisting primarily of $500,000 in purchases of cannabis licenses and $426,663 of capitalized legal fees related to trademarks and licenses.

Financing Activities

During the ~~nine~~three months ended ~~June 30,~~December 31, 2021, financing activities provided ~~$10,941,424,~~$413,100, consisting of ~~$13,298,965~~$1,500,000 in proceeds from the issuance of ~~stock and proceeds from the issuance of convertible~~ debt ~~of $1,355,000~~ and offset by ~~$3,712,541~~$1,068,150 in debt payments made.

During the ~~nine~~three months ended ~~June 30,~~December 31, 2020, financing activities provided ~~$1,899,336,~~$4,652,308, consisting of ~~$4,092,000~~$5,791,225 in proceeds from the issuance of ~~debt~~stock offset by ~~$2,192,664,~~$1,138,917 in debt payments made.

Given that our cash needs are strongly driven by our growth requirements, we also intend to maintain a cash reserve for other risk contingencies that may arise.

23
We intend to meet our cash requirements for the next 12 months through the use of the cash we have on hand and through business operations, future equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. We ~~currently~~have filed an offering document on Form 1-A with the Securities and Exchange Commission in order to sell units comprising of one share of common stock and one warrant. We are also in discussion with various potential capital partners to provide additional debt capital for accretive acquisitions. We do not have any other arrangements in place to complete any private placement financings of debt and ~~equity and there~~equity. There is no assurance that we will be successful in completing the offering on Form 1-A, or in finding a capital partner to provide additional debt capital or any other such financings on terms that will be acceptable to us.

Off-Balance Sheet Arrangements

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

19
Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. ~~Significant~~Critical accounting policies and estimates in these condensed consolidated financial statements ~~include but~~ are ~~not limited~~those related to ~~accounting for depreciation~~revenue recognition, valuation of options, warrants and ~~amortization, current and deferred income taxes, deferred costs, accruals and contingencies,~~debt discounts, carrying value of ~~goodwill and~~ intangible assets ~~collectability of notes receivable, the fair value of common stock~~subject to amortization, infinite life intangible assets and ~~the estimated fair value of stock options~~goodwill, stock-based compensation, and ~~warrants and the estimated fair value of the consideration paid and the fair value of assets purchased and liabilities assumed in the acquisition of OCG, Inc.~~income taxes. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. For a discussion of our critical accounting policies, refer to Part I, item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended September 30, ~~2020.~~2021. Management believes that there have been no changes in our critical accounting policies during the three months ended ~~June 30,~~December 31, 2021.

Recently Issued Accounting Pronouncements

See Note 1 to our condensed consolidated financial statements, included in Part I, Item 1, Financial Information for this quarterly report on Form 10-Q.
~~Seasonality~~
We do not expect our sales to be impacted by seasonal demands for our products and services. Also, due to the fact we use indoor grow space, seasonality should not have any impact on our cultivation operations.
~~Inflation~~
We do not believe that inflation had a material impact on us for the three and nine months ended June 30, 2021 or 2020, though the increase in prices in building materials will impact the costs of our construction projects, though the Company believes the increase in costs will not impact the overall return on investment significantly.

Contractual Obligations

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

24
ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of ~~June 30,~~December 31, 2021.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting subsequent to the fiscal year ended September 30, ~~2020,~~2021, which were identified in connection with our management's evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Disclosure Controls and Internal Controls

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

2125

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.

1. Quarterly Issuances:
The Company issued ~~400,000~~142,365 shares related to the issuance of debt, 16,666 of shares issued for services received and 9,896 related to the exercise of stock options during the three months ended ~~June 30, 2021 for $340,000. The proceeds of the issuance are being used to expand the production capacity.~~December 31, 2021.

2. Subsequent Issuances:

Subsequent to ~~June 30,~~December 31, 2021, the Company issued ~~265,558~~ ~~shares.~~97,840 shares of common stock related to the Co-Management Agreement and for other services received.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Company has a convertible note payable to a related party outstanding with an original principal balance of $1,100,000 which is in default as of the date of this filing. The Company and lender are negotiating a long-term arrangement to cure the default.None.

ITEM 4. MINE SAFETY DISCLOSURES

N/A.

ITEM 5. OTHER INFORMATION
N/AA.
2226

ITEM 6. EXHIBITS

The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:

Exhibit
Number Description of Exhibit
3.01a Articles of Incorporation dated June 15, 2010 Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
3.01b ~~3.01~~b Certificate of Amendment to Articles of Incorporation dated October 22, 2012 Filed with the SEC on November 13, 2012 as part of our Current Report on Form 8-K
3.01c ~~3.01~~c Certificate of Amendment to Articles of Incorporation dated March 15, 2018 Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01d ~~3.01~~d Certificate of Amendment to Articles of Incorporation dated March 19, 2018 Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01e ~~3.01~~e Certificate of Amendment to Articles of Incorporation dated April 3, 2018 Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01f ~~3.01~~f Certificate of Amendment to Articles of Incorporation dated October  9, 2018 Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.02 Bylaws Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
4.1 2019 Equity Incentive Plan Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.03 Share Exchange Agreement between Crown Dynamics Corp. and Airware Dated March 20, 2012 Filed with the SEC on March 26, 2012 as part of our current report on Form 8-K.
10.04 Agreement and Plan of Exchange   between Item 9 Labs Corp. fka Airware and  BSSD Group, LLC dated March 20, 2018 Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.05 Purchase Agreement between Sidewinder Dairy, Inc. and the Company  dated April 20, 2018 Filed with the SEC on August 16, 2019 as an exhibit to our Form 10-Q
10.6 Asset Purchase Agreement between Item 9 Labs Corp. and AZ DP Consulting, LLC dated November 26, 2018 Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.7 Loan and Revenue Participation Agreement between Item 9 Labs Corp. and Viridis Group I9 Capital LLC dated September 13, 2018 Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.8 Severance Agreement between Airware Labs Corp and Jeffrey Rassas, effective July 16, 2013 Filed with the SEC on July 19, 2013 as part of our Current Report on Form 8-K.
10.11 ~~10.9~~Agreement and Plan of Merger between Item 9 Labs Corp, I9 Acquisition Sub, Inc., and OCG Inc. Filed with the SEC on December 14, 2020 as part of our Current Report on Form 8-K.
10.12 ~~Employment~~AZ Construction Loan and Security Agreement with ~~Sara Gullickson dated November 26, 2018~~Pelorus Fund REIT LLC Filed with the SEC on August 31, 2021 as part of our Current Report on Form 8-K.
10.13 NV Construction Loan and Security Agreement with Pelorus Fund REIT LLC Filed with the SEC on August 31, 2021 as part of our Current Report on Form 8-K.
14.1 Code of Ethics Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
31.01 ~~10.11~~Certification of Principal Executive Officer Pursuant to Rule 13a-14 ~~Agreement and Plan of Merger between Item 9 Labs Corp, I9 Acquisition Sub, Inc., and OCG Inc.~~ Filed ~~with the SEC on December 14, 2020 as part of our Current Report on Form 8-K.~~herewith.
31.02 ~~14.1~~Certification of Principal Financial Officer Pursuant to Rule 13a-14 Filed herewith.
32.01 ~~Code~~CEO Certification Pursuant to Section 906 of ~~Ethics~~the Sarbanes-Oxley Act Filed herewith.
32.02 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act Filed herewith.
99.1 Audit Committee Charter Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
99.2 ~~31.01~~ ~~Certification of Principal Executive Officer Pursuant to Rule 13a-14~~ ~~Filed herewith.~~
~~31.02~~ ~~Certification of Principal Financial Officer Pursuant to Rule 13a-14~~ ~~Filed herewith.~~
~~32.01~~ ~~CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act~~ ~~Filed herewith.~~
~~32.02~~ ~~CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act~~ ~~Filed herewith.~~
~~99.1~~ ~~Audit~~Compensation Committee Charter Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
99.3 ~~99.2~~ ~~Compensation~~Nominations and Governance Committee Charter Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
~~99.3~~ ~~Nominations and Governance Committee Charter~~ ~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
101.INS* Inline XBRL Instance Document Filed herewith.
101.SCH* Inline XBRL Taxonomy Extension Schema Document Filed herewith.
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith.
101.LAB* Inline XBRL Taxonomy Extension Labels Linkbase Document Filed herewith.
101.PRE* ~~101.~~PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith.
101.DEF* ~~101.~~DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document Filed herewith.
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

2327

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Item 9 Labs Corp.
Date: ~~August 16, 2021~~February 14, 2022 By: /s/ Andrew Bowden
Name:
Title:
Andrew Bowden
Chief Executive Officer
(Principal Executive Officer)

Date: ~~August 16, 2021~~February 14, 2022 By: /s/ Robert Mikkelsen
Name:
Title:
Robert Mikkelsen
Chief Financial Officer
(Principal Financial Officer)

2428


ITEM 9 LABS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)
		June 30,			September 30,
		2021			2020
ASSETS
Current Assets:
Cash and cash equivalents	$	296,892		$	84,677
Accounts receivable, net of allowance for doubtful accounts of $76,052 and $81,018, respectively		2,055,690			352,598
Deferred costs		8,495,683			2,147,110
Prepaid expenses and other current assets		629,138			307,905
Total current assets		11,477,403			2,892,290

Property and equipment, net		9,413,989			7,208,760
Right of use asset		156,938			196,756
Deposits		600,000			1,243,738
Receivable for sale of Airware assets, net of reserves of $596,430		155,715			160,715
Notes and interest receivable, net		80,000			80,000
Other intangible assets, net		126,922,930			7,765,114
Goodwill		1,116,396			1,116,396
Total Assets	$	149,923,371		$	20,663,769

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	3,534,030		$	1,977,207
Accrued payroll		83,286			197,989
Accrued interest		1,332,201			780,903
Accrued expenses		2,707,622			1,808,819
Deferred revenue		685,349			-
Notes payable, current portion, net of discounts		838,894			3,193,150
Operating lease liability - current portion		60,480			60,480
Convertible notes payable, net of discounts		1,317,821			2,270,000
Total current liabilities		10,559,683			10,288,548

Operating lease liability, net of current portion		100,518			140,336
Convertible notes payable, net of current portion and discounts		188,093
Notes payables, net of current portion and discounts		3,465,106			2,219,636

Total liabilities		14,313,400			12,648,520

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 104,509,521 and 68,336,113 shares issued and 92,209,521 and 56,036,113 outstanding at June 30, 2021 and September 30, 2020, respectively		10,451			6,834
Additional paid-in capital		173,877,183			44,426,737
Accumulated deficit		(24,827,663	)		(22,968,322	)
Total Item 9 Labs Corp. stockholders' equity		149,059,971			21,465,249
Treasury stock		(13,450,000	)		(13,450,000	)

Total Stockholders' Equity		135,609,971			8,015,249

Total Liabilities and Stockholders' Equity	$	149,923,371		$	20,663,769


ITEM 9 LABS CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three months ended June 30,						Nine months ended June 30,
	2021			2020			2021			2020
Revenues, net	$	6,693,061		$	2,207,453		$	15,843,256		$	5,602,321
Cost of services		3,802,447			1,188,831			8,531,623			3,508,350
Gross profit		2,890,614			1,018,622			7,311,633			2,093,971

Operating expenses
Professional fees and outside services		442,483			182,610			1,350,196			654,447
Payroll and employee related expenses		1,592,673			698,477			4,014,819			2,229,493
Sales and marketing		262,473			37,997			389,819			199,215
Depreciation and amortization		112,159			138,252			360,601			521,024
Other operating expenses		728,100			205,250			1,292,154			806,070
Provision for bad debt		-			-			-			22,460
Total expenses		3,137,888			1,262,586			7,407,589			4,432,709

Loss from operations		(247,274	)		(243,964	)		(95,956	)		(2,338,738	)

Other income (expense)
Interest expense		(629,265	)		(1,362,347	)		(1,806,019	)		(2,820,137	)
Other income (expense)		42,634			(1,492	)		42,634			(1,492	)
Total other income (expense), net		(586,631	)		(1,363,839	)		(1,763,385	)		(2,821,629	)

Net loss, before income tax provision		(833,905	)		(1,607,803	)		(1,859,341	)		(5,160,367	)

Income tax provision (benefit)		-			-			-			-

Net loss	$	(833,905	)	$	(1,607,803	)	$	(1,859,341	)	$	(5,160,367	)

Less: Net loss attributable to noncontrolling interest	$	-		$	-		$	-		$	(26,274	)

Net loss attributable to Item 9 Labs Corp	$	(833,905	)	$	(1,607,803	)	$	(1,859,341	)	$	(5,134,093	)

Basic and diluted net loss per common share	$	(0.01	)	$	(0.03	)	$	(0.03	)	$	(0.08	)

Basic and diluted weighted average common shares outstanding		92,209,521			61,424,905			72,115,022			61,834,030


ITEM 9 LABS CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2021 AND 2020

	Item 9 Labs Corp Equity
					Additional												Non
	Common Stock				Paid-in			Treasury Stock						Accumulated			Controlling
	Shares		Amount		Capital			Shares			Amount			(Deficit)			Interest			Total
Balance at September 30, 2019		63,643,005	$	6,365	$	18,148,962			-		$	-		$	(10,694,939	)	$	(123,942	)	$	7,336,446

Treasury stock acquired in settlement agreement		-		-		3,450,000			(2,300,000	)		(3,450,000	)		-			-			-
Issuance of shares for services		55,618		6		132,100			-			-			-			-			132,106
Stock compensation		26,282		3		74,997			-			-			-			-			75,000
Net loss		-		-		-			-			-			(1,950,190	)		(25,138	)		(1,975,328	)
Balance at December 31, 2019		63,724,905		6,374		21,806,059			(2,300,000	)		(3,450,000	)		(12,645,129	)		(149,080	)		5,568,224

Stock to be issued for acquisition		3,250,000		325		3,506,675			-			-			-			-			3,507,000
Noncontrolling interest dissolution from acquisition		-		-		(150,216	)		-			-			-			150,216			-
Warrants issued		-		-		257,094			-			-			-			-			257,094
Warrants to be issued		-		-		3,336,198			-			-			-			-			3,336,198
Net loss		-		-		-			-			-			(1,576,100	)		(1,136	)		(1,577,236	)
Balance at March 31, 2020		66,974,905		6,699		28,755,810			(2,300,000	)		(3,450,000	)		(14,221,229	)		-			11,091,280

Warrants issued		-		-		1,476,442			-			-			-			-			1,476,442
Net loss		-		-		-			-			-			(1,607,803	)		-			(1,607,803	)
Balance at June 30, 2020	$	66,974,905	$	6,699	$	30,232,252		$	(2,300,000	)	$	(3,450,000	)	$	(15,829,032	)	$	-		$	10,959,919

Balance at September 30, 2020		68,336,113	$	6,834	$	44,426,737			(12,300,000	)	$	(13,450,000	)	$	(22,968,322	)	$	-		$	8,015,249
Stock issued for cash, net		6,813,206		681		5,790,544			-			-			-			-			5,791,225
Issuance of shares for services		111,765		11		163,225			-			-			-			-			163,236
Stock compensation		-		-		304,672			-			-			-			-			304,672
Net loss		-		-		-			-			-			(1,074,456	)		-			(1,074,456	)
Balance at December 31, 2020		75,261,084		7,526		50,685,178			(12,300,000	)		(13,450,000	)		(24,042,778	)		-			13,199,926

Stock issued for cash, net		8,433,437		843		7,167,740			-			-			-			-			7,168,583
Stock issued for acquisition		19,080,000		1,908		64,998,092			-			-			-			-			65,000,000
Warrants issued for acquisition		-		-		51,081,066			-			-			-			-			51,081,066
Stock to be issued for convertible notes - forced conversion		1,335,000		134		(134	)		-			-			-			-			-
Warrants issued with convertible notes		-		-		926,198			-			-			-			-			926,198
Beneficial conversion - convertible notes		-		-		428,802			-			-			-			-			428,802
Stock compensation		-		-		304,672			-			-			-			-			304,672
Net income		-		-		-			-			-			49,020			-			49,020
Balance at March 31, 2021		104,109,521		10,411		175,591,614			(12,300,000	)		(13,450,000	)		(23,993,758	)		-			138,158,267

Stock issued for cash, net		400,000		40		339,960			-			-			-			-			340,000
Adjustment to acquisition price, warrants		-		-		(2,359,063	)		-			-			-			-			(2,359,063	)
Stock compensation		-		-		304,672			-			-			-			-			304,672
Net loss		-		-		-			-			-			(833,905	)		-			(833,905	)
Balance at June 30, 2021		104,509,521		10,451		173,877,183			(12,300,000	)		(13,450,000	)		(24,827,663	)		-			135,609,971


Consideration paid	$	113,722,003

Tangible assets acquired

Cash		94,596
Other current assets		128,941
Fixed assets		41,549
Other assets		10,935

Total tangible assets	$	276,021

Assumed liabilities

Accounts payable		1,032,735
Other current liabilities		3,224,771
Officer and shareholder loans		1,186,658
Unearned franchise fee revenue		662,505

Total assumed liabilities		6,106,669

Net liabilities assumed		(5,830,648	)

Intangible assets (a)(b)	$	119,552,651

	Note	Maturity		Annual Interest			Current Principal		Original			Discount		Net			Conversion		Shares Issuable Upon
	Date	Date		Rate			Balance		Discount			Amortization		Balance			Price		Conversion
C-2	3/23/2020		9/23/2020		12	%	$	1,100,000	$	(863,049	)	$	863,049	$	1,100,000		$	1.00		1,206,730
C-3	8/15/2011		8/15/2012		8	%		20,000		-			-		20,000			0.50		63,510
C-4	4/15/2021		4/15/2023		10	%		30,000		-			-		30,000			1.00		30,000
C-5	3/19/2021		9/19/2021		10	%		167,821		-			-		167,821			2.50		51,998
C-6	3/19/2021		3/19/2023		10	%		1,355,000		(1,355,000	)		188,093		188,093			1.00		1,355,000

															1,505,914					2,707,238

										Less current portion					(1,317,821	)

														$	188,093

	Common Shares Issuable Upon Exercise		Exercise Price		Grant Date	Expiration
Warrants issued by predecessor		100,000	$	1.00	7/28/2016		7/28/2021
Warrants issued in connection with debt financing		500,000	$	0.05	2/14/2020		2/14/2025
Warrants issued in connection with acquisition		2,000,000	$	1.13	2/14/2020		2/14/2023
Warrants issued in connection with debt financing		10,000,000	$	0.75	3/28/2020		3/29/2025
Warrants issued in connection with debt financing		3,500,000	$	1.00	5/1/2020		5/2/2025
Warrants issued in connection with debt financing		400,000	$	0.05	5/1/2020		5/2/2025
Warrants issued in connection with acquisition		23,560,000	$	3.00	3/19/2021		6/30/2024
Warrants issued in connection with debt financing		1,355,000	$	3.00	3/16/2021		6/30/2024
Balance of Warrants at June 30, 2021		41,415,000

Exhibit
Number		Description of Exhibit
3.01a		Articles of Incorporation dated June 15, 2010		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
3.01b	~~3.01~~b		Certificate of Amendment to Articles of Incorporation dated October 22, 2012		Filed with the SEC on November 13, 2012 as part of our Current Report on Form 8-K
3.01c	~~3.01~~c		Certificate of Amendment to Articles of Incorporation dated March 15, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01d	~~3.01~~d		Certificate of Amendment to Articles of Incorporation dated March 19, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01e	~~3.01~~e		Certificate of Amendment to Articles of Incorporation dated April 3, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01f	~~3.01~~f		Certificate of Amendment to Articles of Incorporation dated October 9, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.02		Bylaws		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
4.1		2019 Equity Incentive Plan		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.03		Share Exchange Agreement between Crown Dynamics Corp. and Airware Dated March 20, 2012		Filed with the SEC on March 26, 2012 as part of our current report on Form 8-K.
10.04		Agreement and Plan of Exchange between Item 9 Labs Corp. fka Airware and BSSD Group, LLC dated March 20, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.05		Purchase Agreement between Sidewinder Dairy, Inc. and the Company dated April 20, 2018		Filed with the SEC on August 16, 2019 as an exhibit to our Form 10-Q
10.6		Asset Purchase Agreement between Item 9 Labs Corp. and AZ DP Consulting, LLC dated November 26, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.7		Loan and Revenue Participation Agreement between Item 9 Labs Corp. and Viridis Group I9 Capital LLC dated September 13, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.8		Severance Agreement between Airware Labs Corp and Jeffrey Rassas, effective July 16, 2013		Filed with the SEC on July 19, 2013 as part of our Current Report on Form 8-K.
10.11		~~10.9~~Agreement and Plan of Merger between Item 9 Labs Corp, I9 Acquisition Sub, Inc., and OCG Inc.		Filed with the SEC on December 14, 2020 as part of our Current Report on Form 8-K.
10.12		~~Employment~~AZ Construction Loan and Security Agreement with ~~Sara Gullickson dated November 26, 2018~~Pelorus Fund REIT LLC		Filed with the SEC on August 31, 2021 as part of our Current Report on Form 8-K.
10.13		NV Construction Loan and Security Agreement with Pelorus Fund REIT LLC		Filed with the SEC on August 31, 2021 as part of our Current Report on Form 8-K.
14.1		Code of Ethics		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
31.01		~~10.11~~Certification of Principal Executive Officer Pursuant to Rule 13a-14		~~Agreement and Plan of Merger between Item 9 Labs Corp, I9 Acquisition Sub, Inc., and OCG Inc.~~		Filed ~~with the SEC on December 14, 2020 as part of our Current Report on Form 8-K.~~herewith.
31.02		~~14.1~~Certification of Principal Financial Officer Pursuant to Rule 13a-14		Filed herewith.
32.01		~~Code~~CEO Certification Pursuant to Section 906 of ~~Ethics~~the Sarbanes-Oxley Act		Filed herewith.
32.02		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith.
99.1		Audit Committee Charter		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
99.2	~~31.01~~		~~Certification of Principal Executive Officer Pursuant to Rule 13a-14~~		~~Filed herewith.~~
~~31.02~~		~~Certification of Principal Financial Officer Pursuant to Rule 13a-14~~		~~Filed herewith.~~
~~32.01~~		~~CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act~~		~~Filed herewith.~~
~~32.02~~		~~CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act~~		~~Filed herewith.~~
~~99.1~~		~~Audit~~Compensation Committee Charter		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
99.3	~~99.2~~		~~Compensation~~Nominations and Governance Committee Charter		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
~~99.3~~		~~Nominations and Governance Committee Charter~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
101.INS*		Inline XBRL Instance Document		Filed herewith.
101.SCH*		Inline XBRL Taxonomy Extension Schema Document		Filed herewith.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document		Filed herewith.
101.LAB*		Inline XBRL Taxonomy Extension Labels Linkbase Document		Filed herewith.
101.PRE*	~~101.~~PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document		Filed herewith.
101.DEF*	~~101.~~DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document		Filed herewith.
104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

	Item 9 Labs Corp.

Date: ~~August 16, 2021~~February 14, 2022	By:	/s/ Andrew Bowden
	Name: Title:	Andrew Bowden Chief Executive Officer (Principal Executive Officer)

Year ended

December 31,

Less: unamortized discount

(1,381,960