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 ~~December~~March 31, ~~2021~~2022

☐	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 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 ☐

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	☑	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 ~~February 14,~~May 16, 2022, there were ~~95,041,184~~96,184,557 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

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	19	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24	31
Item 4.	Controls and Procedures	25	31

Part II - Other Information			33

Item 1.	Legal Proceedings	26	33
Item 1A.	Risk Factors	26	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26	33
Item 3.	Defaults Upon Senior Securities	26	33
Item 4.	Mine Safety Disclosures	26	33
Item 5.	Other Information	26	33
Item 6.	Exhibits	27

~~Signatures~~			28

~~Certifications~~34

Signatures			35

Certifications

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

INDEX	F-1
Condensed Consolidated Balance Sheets as of ~~December~~March 31, ~~2021~~2022 (Unaudited) and September 30, 2021	F-2
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended ~~December~~March 31, ~~2021~~2022 and ~~2020~~2021	F-3
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended ~~December~~March 31, ~~2021~~2022 and ~~2020~~2021	F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~December~~March 31, ~~2021~~2022 and ~~2020~~2021	F-5
Notes to Condensed Consolidated Financial Statements (Unaudited)	F-6

F-1

ITEM 9 LABS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			September 30,
	2022			2021
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	105,128		$	1,454,460
Accounts receivable, net		1,177,003			1,448,280
Inventory		4,819,619			6,391,351
Prepaid expenses and other current assets		782,556			802,558
Total current assets		6,884,306			10,096,649

Property and equipment, net		24,009,739			10,877,848
Right of use asset		730,516			156,938
Construction escrow deposits		10,096,928			17,744,913
Deposits		98,701			600,000
Other assets		1,229,940			608,874
Intangible assets, net		19,590,433			18,659,095
Goodwill		58,233,386			58,064,816
Total Assets	$	120,873,949		$	116,809,133

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	5,522,921		$	3,759,818
Accrued payroll and payroll taxes		2,646,036			2,678,694
Accrued interest		1,792,925			1,391,766
Accrued expenses		1,241,683			1,169,776
Deferred revenue, current portion		219,992			119,992
Notes payable, current portion, net of discounts		21,136,912			4,536,002
Income tax payable		3,324			—
Operating lease liability, current portion		219,773			56,592
Convertible notes payable, net of discounts		2,815,880			1,277,394
Total current liabilities		35,599,446			14,990,034

Deferred revenue, net of current portion		345,855			655,851
Operating lease liability, net of current portion		518,520			104,406
Notes payables, net of current portion and discounts		1,645,043			14,957,399
Total liabilities		38,108,864			30,707,690

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 108,269,428 and 107,074,417 shares issued and 95,969,428 and 94,774,417 shares outstanding at March 31, 2022 and September 30, 2021, respectively		10,827			10,707
Additional paid-in capital		137,280,385			133,414,830
Accumulated deficit		(41,097,186	)		(33,874,094	)
Treasury stock		(13,450,000	)		(13,450,000	)

Total Item 9 Labs Corp. Stockholders' Equity		82,744,026			86,101,443
Non-controlling interest		21,059			—

Total Stockholders' Equity		82,765,085			86,101,443

Total Liabilities and Stockholders' Equity	$	120,873,949		$	116,809,133

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

F-2

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the three months ended			For the three months ended			For the six months ended			For the six months ended
	March 31, 2022			March 31, 2021			March 31, 2022			March 31, 2021
Revenues, net	$	6,638,186		$	6,110,631		$	12,824,197		$	9,150,195
Cost of revenues		3,960,948			3,121,045			7,748,193			4,729,176
Gross profit		2,677,238			2,989,586			5,076,004			4,421,019

Operating expenses
Professional fees and outside services		556,721			613,758			1,214,166			907,713
Payroll and employee related expenses		3,055,244			1,318,842			5,205,950			2,422,146
Sales and marketing		613,902			84,165			1,053,338			127,346
Depreciation and amortization		442,477			105,897			881,612			248,442
Other operating expenses		786,167			349,517			1,632,835			564,054
Provision for (recovery of) bad debt		(5,000	)		—			(5,000	)		—
Total expenses		5,449,511			2,472,179			9,982,901			4,269,701

Income (loss) from operations		(2,772,273	)		517,407			(4,906,897	)		151,318

Other income (expense)
Interest expense		(1,097,373	)		(468,387	)		(2,307,763	)		(1,176,754	)
Other income		318			—			318			—
Total other income (expense), net		(1,097,055	)		(468,387	)		(2,307,445	)		(1,176,754	)

Net income (loss), before income tax provision (benefit)		(3,869,328	)		49,020			(7,214,342	)		(1,025,436	)

Income tax provision (benefit)		3,324			—			3,324			—

Net income (loss)		(3,872,652	)		49,020			(7,217,666	)		(1,025,436	)

Less: Net income attributable to non-controlling interest		5,426			—			5,426			—

Net income (loss) attributable to Item 9 Labs Corp.	$	(3,878,078	)	$	49,020		$	(7,223,092	)	$	(1,025,436	)

Basic net income (loss) per common share	$	(0.04	)	$	0.00		$	(0.08	)	$	(0.02	)

Basic weighted average common shares outstanding		95,271,726			65,880,141			95,088,960			62,143,521

Diluted net income (loss) per common share	$	(0.04	)	$	0.00		$	(0.08	)	$	(0.02	)

Diluted weighted average common shares outstanding		95,271,726			84,938,235			95,088,960			62,143,521

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

~~ITEM 9 LABS CORP. AND SUBSIDIARIES~~
~~CONDENSED CONSOLIDATED BALANCE SHEETS~~F-3

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE AND SIX MONTHS ENDED MARCH 31, 2022 AND 2021


	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, 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 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

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		1,335,000		134		(134	)		—			—			—			—		—
Warrants issued with convertible notes		—		—		926,198			—			—			—			—		926,198
Beneficial conversion features		—		—		428,802			—			—			—			—		428,802
Stock based 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

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 issued for debt inducement		142,365		14		128,348			—			—			—			—		128,362
Warrants issued with debt		—		—		574,239			—			—			—			—		574,239
Beneficial conversion feature		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

Stock issued for cash, net		278,000		28		288,813			—			—			—			—		288,841
Stock issued for acquisition		69,892		7		64,993			—			—			—			—		65,000
Stock issued for licenses		300,000		30		335,970			—			—			—			—		336,000
Stock issued for debt inducement		25,000		2		24,998			—			—			—			—		25,000
Beneficial conversion feature		—		—		25,000			—			—			—			—		25,000
Issuance of shares for services		335,159		34		328,466			—			—			—			—		328,500
Stock based compensation		—		—		1,091,560			—			—			—			—		1,091,560
Stock issued on exercise of options		18,033		2		(2	)		—			—			—			—		—
Non-controlling interest		—		—		—			—			—			—			15,633		15,633
Net income (loss)		—		—		—			—			—			(3,878,078	)		5,426		(3,872,652	)
Balance at March 31, 2022		108,269,428	$	10,827	$	137,280,385			(12,300,000	)	$	(13,450,000	)	$	(41,097,186	)	$	21,059	$	82,765,085

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

F-4

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

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended			For the six months ended
	March 31, 2022			March 31, 2021
Operating Activities:
Net loss	$	(7,217,666	)	$	(1,025,436	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		146,078			64,570
Amortization of intangible assets		735,534			183,872
Amortization of right of use asset		29,964			27,977
Amortization of debt discounts		1,728,325			272,359
Common stock issued for services		271,925			163,236
Stock based compensation expense		1,598,854			609,344
Recovery of bad debt		(5,000	)		—
Loss on disposal of fixed assets		10,841			—
Changes in operating assets and liabilities:
Accounts receivable		271,277			(2,213,229	)
Inventory		1,587,365			(3,622,372	)
Prepaid expenses and other current assets		(234,057	)		(1,024,680	)
Accounts payable		1,810,603			1,107,669
Accrued payroll		(32,658	)		308,893
Income tax payable		3,324			—
Accrued interest		324,397			442,693
Accrued expenses		(320,350	)		253,474
Deferred revenue		(209,996	)		—
Operating lease liability		(26,247	)		(27,977	)
Net Cash Provided by (Used in) Operating Activities		373,812			(4,479,607	)

Investing Activities:
Deposit on acquisition		—			(1,685,368	)
Cash paid for acquisitions		(70,724	)		—
Purchases of property, equipment and construction in progress		(3,235,125	)		(739,560	)
Cash received for note receivable		5,000			5,000
Cash received from construction escrow accounts		794,807			—
Cash acquired in acquisition		6,143			94,596
Cash paid to acquisition escrow accounts		(381,932	)		—
Capitalized license fees		—			(2,790	)
Purchase of license		(1,130,872	)		—
Net Cash Used in Investing Activities		(4,012,703	)		(2,328,122	)

Financing Activities:
Proceeds from the sale of common stock		288,841			12,959,808
Payment of debt discount		(35,750	)		—
Proceeds from the issuance of debt		3,980,762			1,355,000
Payment of debt		(1,944,294	)		(3,283,879	)
Net Cash Provided by Financing Activities		2,289,559			11,030,929

Net Increase (Decrease) in Cash		(1,349,332	)		4,223,200

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

Cash and cash equivalents - End of Period	$	105,128		$	4,307,877

Supplemental disclosure of cash flow information:
Interest paid in cash	$	1,990,720		$	461,702
Income taxes paid in cash	$	—		$	—

Supplemental disclosure of non-cash investing and financing activities:
Stock issued for acquisitions	$	65,000		$	65,000,000
Stock issued for acquisition of a license	$	336,000		$	—
Accrued interest transferred to debt	$	1,762		$	160,590
Warrants issued for debt and acquisition	$	574,239		$	52,007,264
Stock issued for debt	$	203,194		$	—
Non-controlling interest	$	15,633		$	—
Stock issuance costs paid in stock	$	89,645		$	—
Fixed assets purchased with debt	$	—		$	50,914
Debt issued for acquisition of a license	$	200,000		$	—
Debt proceeds used to pay debt discounts	$	80,000		$	—
Land purchased with escrow funds and deposit	$	3,000,000		$	—
Stock issued to pay accounts payable and prepay expenses	$	292,500		$	—
Operating lease right of use asset and liability	$	603,542		$	—
Beneficial conversion feature on convertible debt	$	495,047		$	428,802
Construction in progress paid with escrow funds	$	4,937,018		$	—
Accrued debt discount fees	$	75,000		$	—
Debt discount amortization capitalized to construction in progress	$	1,763,399		$	—
Accrued liabilities capitalized in construction in progress	$	272,981		$	—

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.

Item 9 Labs Corp. is a 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 State of Arizona in licensed medical and adult-use dispensaries; and (2) sell medical and adult-use cannabis dispensary franchises under its franchise brand “Unity Rd.” (“Franchising”).

In March 2021, the Company closed on the acquisition of OCG, Inc, dba Unity Rd, a dispensary franchisor. The transaction was structured as a reverse triangular merger, with the effect of OCG, Inc. becoming a wholly owned subsidiary of the Company. Unity Rd has agreements with more than twenty (20) entrepreneurial groups to open more than ~~thirty-five (35)~~thirty (30) Unity Rd retail dispensary locations in ~~fourteen (14)~~twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating in Boulder, Colorado. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to operate their business and contribute to their local communities. As the Unity Rd dispensaries achieve sufficient market penetration, Item 9 Labs aims to offer its products in those locations to expand the distribution footprint of its premium product offerings.

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.

Principles of Consolidation

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

The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned ~~subsidiaries.~~subsidiaries and a consolidated variable interest entity (“VIE”). Intercompany balances and transactions have been eliminated.

Item 9 Labs consolidates a VIE in which the Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company makes significant judgments in determining whether an entity is a VIE and, for each reporting period, the Company assesses whether it is the primary beneficiary of the VIE. Effective February 1, 2022, the Company was deemed the primary beneficiary of Elevated Connections, Inc. The equity in Elevated Connections, Inc. held by its stockholder has been presented on the balance sheet and the statement of operations as a non-controlling interest.

F-6

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

~~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~~those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, inventory, accruals and contingencies, carrying value of goodwill and intangible assets, the fair value of common stock and the estimated fair value of stock options and warrants. Due to the uncertainties in the formation of accounting estimates, and the significance of these items, it is reasonably possible that these estimates could be materially changed in the near term.

Inventory

Inventory is stated at the lower of cost or net realizable value with cost being determined on the first in first out method. Inventory primarily consists of the costs directly related to the production and cultivation of cannabis crops, cannabis oils, and cannabis concentrate products. Inventory is relieved to cost of revenues as products are delivered to dispensaries. Inventory consists primarily of labor, utilities, costs of raw materials, packaging, nutrients and overhead.

The Company routinely evaluates the carrying value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce inventory to its estimated net realizable value. There were no inventory reserves recorded at ~~December~~March 31, ~~2021~~2022 and September 30, 2021.

Licenses

Cannabis licenses vary in term for each jurisdiction. The Company capitalizes all costs associated with the acquisition of cannabis licenses in the year the license is obtained. Subsequent measurement is determined by the length of the term of the license. The Company acquired licenses during the three months ended March 31, 2022 that have indefinite useful lives, subject to annual renewals. Costs associated with maintaining licenses (annual fees) are expensed as incurred. The anticipated maintenance fees are not expected to be material to the condensed consolidated financial statements. Licenses are included on the balance sheet under the heading Intangible assets, net at March 31, 2022 and September 30, 2021.

Revenue Recognition

Cultivation revenue

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

Substantially all of the Company's revenue is associated with a customer contract that represents an obligation to provide cannabis products that are delivered at a single point in time. Any costs incurred prior to the period in which the products are delivered are recorded to inventory and recognized as cost of revenues in the period in which the performance obligation is completed. For the three months ended ~~December~~March 31, ~~2021~~2022 and ~~2020, substantially~~2021, all of the Company's cultivation revenue was generated from performance obligations completed in the state of Arizona.

The Company recognizes revenue once the products are delivered. Revenue is considered earned upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is reasonably assured. The Company records revenue at the amount it expects to collect, 100% of the wholesale sales revenue. The fees paid for operating under the contract are expensed to cost of revenues.

F-7

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

~~F-7~~

Franchising revenue

Through OCG, Inc., the Company enters into franchise agreements and consulting agreements. The franchise agreement allows the franchisee to, among other things, establish a franchised outlet under the Company’s Unity Rd. brand. Under the consulting agreements, the Company assists customers with applying for and being awarded a retail cannabis license through the state license application process. The initial franchise fee and the consulting fee are due upon execution of the related agreement. These payments are deferred on the condensed consolidated balance sheet and is recognized into revenue on the condensed consolidated statement of operations when (or as) the performance obligations included in the agreements are satisfied. Deferred revenue had a balance of $~~770,845~~565,847 and $775,843 at ~~December~~March 31, ~~2021~~2022 and September 30, 2021, respectively, and is included in deferred revenue on the condensed consolidated balance sheets. Revenue recognized during the three months ended ~~December~~March 31, ~~2021~~2022 and ~~2020~~2021 that was included in deferred revenue at September 30, 2021 and 2020 was $~~4,998~~204,998 and $0, respectively. Revenue recognized during the six months ended March 31, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $209,996 and $0, respectively.

Net ~~Loss~~Income (Loss) Per Share

Basic net ~~loss~~income (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~~income (loss) per share reflects the potential dilution of securities that could share in the losses of an entity. Diluted income (loss) per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method and using the if-converted method for outstanding convertible debt. Under the treasury stock method, the Company will calculate the number of shares issuable under the terms of its options and warrants based on the average market price of Company common stock during the period, and include that number in the total diluted shares figure for the period. Under the if-converted method, the Company will calculate the shares issuable under the terms of its convertible debt instruments. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. A reconciliation of basic and diluted income (loss) per share is as follows:


	Three months ended March 31,					Six months ended March 31,
	2022			2021		2022			2021
Numerator:
Net income (loss) attributable to Item 9 Labs Corp.	$	(3,878,078	)	$	49,020	$	(7,223,092	)	$	(1,025,436	)

Denominator:
Weighted average common shares outstanding		95,271,726			65,880,141		95,088,960			62,143,521
Dilutive common share equivalents
Options		—			2,141,528		—			—
Warrants		—			14,161,326		—			—
Convertible notes		—			2,755,240		—			—
Weighted average diluted shares outstanding		95,271,726			84,938,235		95,088,960			62,143,521

Income (loss) per share
Basic	$	(0.04	)	$	0.00	$	(0.08	)	$	(0.02	)
Diluted	$	(0.04	)	$	0.00	$	(0.08	)	$	(0.02	)

F-8

The following table summarizes the securities outstanding at ~~December~~March 31, ~~2021~~2022 and ~~2020~~2021 that were excluded from the diluted net loss per share calculation for the three and six months ended March 31, 2022 and the six months ended March 31, 2021 because the effect of including these potential shares was antidilutive due to the Company’s net loss.

	2021		2020		2022		2021
Potentially dilutive common share equivalents
Options		5,206,251		3,211,709		6,237,693		3,211,709
Warrants		47,834,744		16,500,000		47,938,030		16,500,000
Convertible notes		2,350,969		2,526,969		2,661,571		2,526,969
Potentially dilutive shares outstanding		55,391,964		22,238,678		56,837,294		22,238,678

Warrants, Conversion Options and Debt Discounts

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

The Company also analyzes conversion options embedded with debt to determine if the conversion options are required to be bifurcated and accounted for at fair value at each reporting period or to determine if there is a beneficial conversion feature. At ~~December~~March 31, ~~2021~~2022 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.

Segment Reporting

The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three and six months ended ~~December~~March 31, ~~2021,~~2022, the Company has identified two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”) and the sales of Unity Rd. franchises to dispensaries (“Franchising”).

Business Combination

The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.

~~F-8~~F-9

Recently Issued Accounting Pronouncements

Pending Adoption

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

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

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

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

Note 2 - Going Concern

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

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

Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company's revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of Arizona, with construction of a cultivation and processing facility nearing completion in Nevada. The Company believes that it will 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~~F-10

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 3 – Inventory

Inventory consisted of the following at ~~December~~March 31, ~~2021~~2022 and September 30, 2021.

	December 31,		September 30,		March 31,		September 30,
	2021		2021		2022		2021
Raw materials and work in process	$	3,062,686	$	4,291,095	$	2,811,583	$	4,291,095
Finished goods		955,789		1,052,375		1,404,820		1,052,375
Packaging and other		1,234,852		1,047,881		603,216		1,047,881
	$	5,253,327	$	6,391,351	$	4,819,619	$	6,391,351

Note 4 – ~~Pending~~ Acquisitions

Oklahoma City dispensary acquisition

In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease. The purchase price was $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date. The accrued purchase price balance is $119,276 at March 31, 2022 and is included in accrued expenses on the condensed consolidated balance sheet. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company paid the seller $65,000 in the Company’s common stock at a 10% discount to the stock’s 10-day volume weighted average. The Company has issued 69,892 shares of common stock related to the Co-Management Agreement.

As of March 31, 2022, the consideration paid or accrued for this acquisition was determined as follows:

Cash	$	190,000
Common stock		65,000
	$	255,000

F-11

The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired as of the transaction date:

Tangible assets acquired

Cash	$	6,143
Fixed assets		80,287
Tangible net assets acquired		86,430
Goodwill		168,570

Consideration paid	$	255,000

Adams County acquisition

On October 6, 2021, the Company entered into an Asset Purchase Agreement with Nebrina Adams County LLC to purchase certain assets, which include licenses, a lease and certain personal property to operate a licensed recreational cannabis ~~dispensary.~~dispensary (the “Adams County Acquisition”). The purchase price is $~~2.0~~ ~~million~~$1,651,789 comprised of $~~1.0~~$1.0 million of cash, a $~~200,000~~$200,000 note, and 300,000 shares of the Company’s common ~~stock.~~stock, valued at $1.12 per share. The note has an interest rate of 5%5% per annum and a term of 18 months and payable in six installments on the last day of each ~~three month~~three-month period following the Closing Date. The Adams County Acquisition closed on March 2, 2022. The acquisition is not considered a business combination under ASC 805, Business Combinations, as a substantive process was not acquired. Substantially all of the consideration paid was allocated to the licenses purchased.

As of March 31, 2022, the consideration paid in this asset acquisition was determined as follows:

Cash	$	1,000,000
Debt		200,000
Common stock		336,000
Direct costs of acquisition		130,872
	$	1,666,872

The Herbal Cure pending acquisition

On March 11, 2022, the Company entered into an Asset Purchase Agreement with The Herbal Cure LLC (“Seller”), pursuant to which, the Company is purchasing certain assets from the Seller. The total purchase price for the assets to be acquired is $5,750,000, payable as follows:

(i) Upon mutual execution and delivery of the Asset Purchase Agreement, the Company shall convey to the Seller a down payment in the amount of $250,000;

(ii) At ~~December~~the Closing, the Company shall pay to Seller $3,700,000 in immediately available funds;

(iii) $700,000 shall be financed by the Seller and paid pursuant to the terms and conditions of the Secured Promissory Note (the "Herbal Cure Note"), which interest shall accrue at a rate of 5% per annum, for a term of 18 months commencing on the Closing Date, and payable in even monthly installments until paid in full; and

(iv) the Company shall pay the remainder of the purchase price in shares of its common stock on the Closing Date, in such amount of Shares as is the quotient of $1,100,000 divided by the product of the 10 day volume weighted average price of the shares as of the Closing Date, and 85%.

During March 2022, $225,000 of the $250,000 down payment was paid and is included in Other Assets on the condensed consolidated balance sheet as of March 31, ~~2021,~~2022. At March 31, 2022, this acquisition ~~had~~has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three and six months ended ~~December~~March 31, ~~2021.~~2022.

F-12

Note 5 – Variable Interest Entity

In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. Under the terms of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease (see Note 4). Further, under the Co-Management Agreement, the Company is to operate, staff, and otherwise manage the day-to-day operations of the dispensary. The Company shall also pay all claims, costs and liabilities associated with operating the dispensary.

The terms of the Co-Management Agreement provide the Company with, in its judgment, the ability to manage and make decisions that most significantly affect the operations of Elevated Connections and to absorb losses that could potentially be significant to Elevated Connections. As such, the Company has consolidated Elevated Connections effective February 1, 2022. The purpose of Elevated Connections, as a licensed dispensary, is to hold the cannabis and cannabis related products and licenses of the dispensary.

The assets of the VIE cannot be used to settle obligations of the Company or its wholly owned subsidiaries. However, liabilities recognized as a result of consolidating the VIE does represent additional claims on the Company’s general assets.

The following table presents the carrying values of the assets and liabilities of the entity that is a VIE and consolidated by the Company at March 31, 2022.

	March 31,
Assets	2022
Current assets
Inventory	$	24,383
Total assets	$	24,383

Liabilities
Current liabilities
Income tax payable	$	3,324
Total liabilities	$	3,324

The following table presents the operations (after intercompany eliminations) of the entity that is a VIE and consolidated by the Company for the three and six months ended March 31, 2022.

	Three and six months ended March 31,
	2022
Revenues, net	$	33,337
Cost of revenue		23,017
Gross profit		10,320
Income tax expense		3,324
Net income	$	6,996

F-13

Note 6 – Goodwill and Intangible Assets

Goodwill and identifiable intangible assets, including licenses, consist of the following as of March 31, 2022 and September 30, 2021:

	Gross Carrying		Accumulated		Accumulated
	Amount		Amortization		Impairment		Net
March 31, 2022
Finite lived intangible assets:
Trade names and trademarks	$	8,570,848	$	925,900	$	—	$	7,644,948
Customer relationships		290,000		290,000		—		—
Websites and other intellectual property		2,470,000		1,078,476		955,223		436,301
Franchise and consulting agreements		3,970,000		831,669		—		3,138,331
Total finite lived intangible assets		15,300,848		3,126,045		955,223		11,219,580
Indefinite lived intangible assets:
Licenses		8,370,853		—		—		8,370,853
Total intangible assets	$	23,671,701	$	3,126,045	$	955,223	$	19,590,433

	Gross Carrying		Accumulated		Accumulated
	Amount		Amortization		Impairment		Net
September 30, 2021
Finite lived intangible assets:
Trade names and trademarks	$	8,570,848	$	497,356	$	—	$	8,073,492
Customer relationships		290,000		290,000		—		—
Websites and other intellectual property		2,470,000		946,488		955,223		568,289
Franchise and consulting agreements		3,970,000		656,667		—		3,313,333
Total finite lived intangible assets		15,300,848		2,390,511		955,223		11,955,114
Indefinite lived intangible assets:
Licenses		6,703,981		—		—		6,703,981
Total intangible assets	$	22,004,829	$	2,390,511	$	955,223	$	18,659,095

	Gross Carrying Amount Goodwill		Gross Carrying Amount Goodwill Impairment
Changes in goodwill and indefinite lived intangibles:
Balance at September 30, 2021	$	62,868,420	$	4,803,604
Additional goodwill related to Oklahoma City dispensary acquisition		168,570		—
Balance at March 31, 2022	$	63,036,990	$	4,803,604

As of March 31, 2022, the cultivation and processing licenses from the state of Nevada, included above, have not been transferred to the Company as the transfer is awaiting regulatory approval.

F-14

Note 57 - Property and Equipment, Net

The following represents a summary of our property and equipment as of ~~December~~March 31, ~~2021~~2022 and September 30, 2021:

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

	March 31,			September 30,
	2022			2021
Cultivation and manufacturing equipment	$	525,422		$	506,271
Computer equipment and software		266,427			266,427
Leasehold improvements		49,667			—
Buildings and improvements		2,811,340			2,785,781
		3,652,856			3,558,479
Accumulated Depreciation		(624,767	)		(479,320	)
		3,028,089			3,079,159
Land		3,455,563			380,584
Construction on progress		17,526,087			7,418,105
Property and Equipment, Net	$	24,009,739		$	10,877,848

During the ~~three~~six months ended ~~December~~March 31, ~~2021,~~2022, the Company completed the purchase of 44 acres of land from a related party for $~~3.0~~$3.0 million plus expenses. The 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 three and six months ended ~~December~~March 31, ~~2021,~~2022, including the construction of the Nevada facility and the expansion of the Arizona ~~facility and implementation of an ERP system.~~facility. Construction in progress also includes interest and fees on debt that is directly related to the financing of the Company’s capital projects.

Depreciation expense for the three months ended ~~December~~March 31, 2022 and 2021 was $74,710 and ~~2020~~$32,086, respectively. Depreciation expense for the six months ended March 31, 2022 and 2021 was $~~71,368~~$146,078 and $~~32,484~~,$64,570, respectively.

Note 68 - 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

	Effective Date		Maturity Date	Annual Interest Rate			Balance at March 31, 2022			Balance at September 30, 2021		Conversion Price
C-2	3/23/2020		9/23/2020	15	%		1,100,000			1,100,000		See C-2
C-3	8/15/2011		8/15/2012	8	%		20,000			20,000		0.50
C-5	3/19/2021		9/19/2021	10	%		—			80,000		2.50
C-7	9/29/2021		9/29/2022	10	%		250,000			250,000		1.67
C-8	9/29/2021		9/29/2022	10	%		500,000			500,000		1.67
C-9	10/1/2021		9/29/2022	10	%		750,000			—		1.67
C-10	10/29/2021		4/29/2022	15	%		750,000			—		1.50
C-11	2/21/2022		8/31/2022	24	%		250,000			—		1.10
							3,620,000			1,950,000
		Less: unamortized discounts					(804,120	)		(672,606	)
						$	2,815,880		$	1,277,394

(C-2) Convertible Viridis Note

On March 23, 2020 the Company borrowed proceeds from a related party, Viridis I9 Capital LLC (“Viridis”), in the amount of $~~1.1~~$1.1 million. The note is convertible at the lesser of a) $1.00 per share or, b) 20% discount to the ten day average closing price of the Company’s common stock, immediately prior to the conversion date. All principal and interest were due on the maturity date. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 15%15% per annum, will be paid at maturity, which has been postponed to a date that has not yet been determined. At ~~December~~March 31, ~~2021~~2022 the Viridis note was in default. The Viridis note remains in default as of this filing, though the parties are negotiating a long-term arrangement.

F-15

(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$3 per share, with a 4 year term. Further, the Company issued 67,365 shares of common stock, valued at $~~112,500~~$112,500 as an inducement to the lenders to enter into the note agreements. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $~~597,606~~$597,606 and an additional $~~75,000~~$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~~March 31, ~~2021.~~2022.

(C-10) Convertible Gaines Note

On October 29, 2021, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s common stock for $3$3 per share, with a 2 year term. Further, the Company issued 75,000 shares of common stock, valued at $~~116,250~~$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~~,$561,272, which also included debt issuance costs of $~~44,582~~,$44,582, is amortized to interest expense over the term of the debt. This convertible note is currently due on demand and interest is paid monthly.

(C-11) Convertible Goldstein Note

On February 21, 2022, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The Company issued 25,000 shares of common stock, valued at $25,000 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair value of the shares of common stock. The debt and shares of common stock were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $50,000 is amortized to interest expense over the term of the debt.

~~F-11~~

The future minimum payments of the Company’s convertible debt obligations as of ~~December~~March 31, ~~2021~~2022 are as follows. The unamortized discount will be amortized through September 2022.

Year ended	Year ended				Year ended
December 31,		Amount
March 31,					March 31,	Amount
	2022	$	3,370,000		2023	$	3,620,000
			3,370,000				3,620,000
	Less: unamortized discount		(1,381,960	)	Less: unamortized discount		(804,120	)
		$	1,988,040			$	2,815,880

F-16

Notes Payable

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

	Effective Date		Maturity Date		Annual Interest Rate			Balance at March 31, 2022			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	%		2,205,266			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	%		734,970			816,582		N/A
p	2/1/2021			6/30/2022		10	%		370,590			520,590		N/A
q	8/6/2021			2/6/2023		16	%		13,500,000			13,500,000		1st AZ property and other personal property
r	8/6/2021			2/6/2023		16	%		5,500,000			5,500,000		1st NV property and other personal property
s	9/30/2021			12/31/2021		18	%		500,000			500,000		Restricted common stock
t	3/19/2021			7/19/2022		18	%		425,000			500,000		N/A
u	2/22/2022			2/28/2023		36	%		688,472			—		Future revenues
v	2/22/2022			2/28/2023		36	%		229,658			—		Future revenues
w	3/4/2022			On demand		15	%		350,000			—
x	3/10/2022			5/10/2022		20	%		250,000			—		N/A
y	3/2/2022			8/1/2023		5	%		200,000			—		N/A
									26,623,992			25,495,446
		Less: unamortized discounts							(3,842,037	)		(6,002,045	)
								$	22,781,955		$	19,493,401

(f) Viridis AZ

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC ("Viridis"), a related party, in which Viridis agreed to loan the Company up to $~~1.2~~$1.2 million for the expansion of the Company's Arizona property. In exchange for the loan, Viridis was to be repaid in the form of waterfall revenue participation schedules. Viridis was to receive 5% of the Company's gross revenues from the Arizona operations until the loan was repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. The loan was originally collateralized with a Deed of Trust on the Company's 5-acre parcel in Coolidge, AZ and its two 10,000 square foot buildings. In August 2019, Viridis agreed to subordinate its first priority Deed of Trust and move into a 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 of $~~1.00~~ $1.00 and 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 all outstanding principal and interest due upon the note's maturity. The note also entitles Viridis to a gross revenue participation of the Arizona Operations equal to 1% of the gross sales (up to $20,000 monthly) upon the maturity of the note and for the subsequent 5 year period. The debt and warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 12% per annum, will be added to the balloon payment at maturity.

~~F-12~~

In August 2021, the Viridis AZ and Viridis NV debt was modified to subordinate these notes to the Pelorus Notes (see (q) and (r)). ~~As part of this modification, it is anticipated that 2.0 million warrants were granted to Viridis.~~ As of the date of these condensed consolidated financial statements, the terms of this modification have not been finalized. Based on the expected modification terms, this modification was accounted for as an extinguishment of the debt during the year ended September 30, 2021. The 2.0 million warrants were allocated to the 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 amortized to interest expense over the term of the debt.

F-17

(h) Viridis (unsecured)

The Company's subsidiary, BSSD Group, LLC borrowed $~~269,000~~ $269,000 from Viridis, a related party, in December 2019. This note bears annualized interest at 15%15%. On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $~~269,000~~ $269,000 note payable. Accrued interest in the amount of $~~14,666~~ $14,666 was added to the principal balance of the note, making the total principal $~~283,666~~.$283,666. As part of the restructuring, the Company issued 400,000 warrants exercisable into the Company's common stock. The warrants have an exercise price of $~~.05~~ $.05 and a term of 5 years. Payments of principal and interest in the amount of $~~9,833~~ $9,833 are due monthly, with a balloon payment of all outstanding principal and interest is due upon the note's maturity. The debt and warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 18% per annum, will be added to the balloon payment at maturity.

(l) Upwise Capital

In August 2021, the Company executed on a short-term financing arrangement. The proceeds of $2.5 million are being utilized to further expand the production capabilities of the operations in Arizona and to complete the Nevada facility. Payments of $64,762 are due weekly until $3.264 million is repaid. This results in an effective interest rate of approximately 36%.

On January 26, 2022, the Company executed a second short-term financing arrangement. The proceeds of $2.5 million were used to repay the first short-term financing arrangement, discussed above, in the amount of approximately $1.839 million, and the remainder of the proceeds was used for working capital purposes. Payments of $66,468 are due weekly until $3.35 million has been repaid. This results in an effective interest rate of 36%. The repayment of the first short-term financing was accounted for as an extinguishment. As such, all previously unamortized discount in the amount of $46,588 and imputed interest in the amount of $483,840 was capitalized to construction in progress during January 2022. Fees paid for the second short-term financing arrangement in the amount of $91,000 have been recorded as a discount and will be amortized to interest expense over the term of the arrangement.

(o) OCG Officers Debt

As part of the OCG transaction in March 2021, the Company assumed the debt that OCG, Inc. owed to its officers. Principal and interest payments are due monthly with a balloon payment of all outstanding principal and interest due at maturity. One of these notes is currently in default. The Company and the lender are currently negotiating an amendment.

(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~~its outstanding notes. The total outstanding balance of $~~1,660,590,~~ $1,660,590, including accrued interest, 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~~ $40,590 payable on February 1, 2022. This agreement was amended to extend the maturity date to March 31, 2022 and starting with the October 1, 2021 payment, the loan payments are interest only at an interest rate of 15%15% per annum until January 25, 2022. Principal payments in the amount of $~~50,000~~$50,000 are due on January 25, 2022, February 15, 2022 and March 15, 2022, with a final payment of the remaining principal and accrued interest due on March 31, 2022. Upon closing of an equity raise of at least $~~750,000~~,$750,000, the Company will repay the outstanding balance plus any accrued interest immediately. As part of the amendment, the Company issued 164,744 warrants to purchase the Company’s common stock. The warrants have a two-year period and an exercise price of $~~1.00~~.$1.00. The resulting discount of $~~58,352~~$58,352 was fully amortized to interest expense during the ~~three~~six months ended ~~December~~March 31, ~~2021.~~2022.

Effective March 31, 2022, the debt was amended to extend the maturity date to June 30, 2022, interest payments are due on April 1, May 1 and June 1, 2022. Principal payments in the amount of $50,000 are due on April 15, May 15 and June 15, 2022 and a final balloon payment of outstanding principal and interest in the amount of $223,972 is due on June 30, 2022.

(s) Viridis $500,000

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

~~F-13~~F-18

(t) Chessler note

Prior to the acquisition, OCG entered into a settlement agreement with it former landlord, which included a note agreement for $500,000. During March 2022, this note agreement was modified to extend the maturity date to July 19, 2022 and add an interest rate of 18% per annum. The modified note also calls for principal payments of $75,000 on the effective date of the note, $75,000 on April 10, 2022, $100,000 on May 22, 2022 and $250,000 at maturity, plus accrued and unpaid interest.

(u) Lendspark

In February 2022, the Company executed on a short-term financing arrangement for proceeds of $750,000. Payments of $20,400 are due weekly until approximately $1.02 million is repaid. This results in an effective interest rate of approximately 36%. Administrative fees in the amount of $22,500 have been recorded as a discount and will be amortized to interest expense over the term of the arrangement.

(v) Upwise Capital 2

In February 2022, the Company executed on a third short-term financing arrangement with Upwise Capital for proceeds of $250,000. Payments of $6,746 are due weekly until $340,000 is repaid. This results in an effective interest rate of approximately 36%. Origination fees in the amount of $7,500 have been recorded as a discount and will be amortized to interest expense over the term of the arrangement.

(w) Viridis working capital loan

In March 2022, the Company received a short-term working capital loan from Viridis, a related party, in the amount of $400,000. The terms of this loan are still being determined, however, an interest rate of 15% has been estimated.

(x) Non-convertible Gaines Note

On March 10, 2022, the Company entered into a short-term promissory note for $250,000. The short-term promissory note is due and payable in monthly payments of interest only, with all principal and any accrued and unpaid interest due at maturity. This convertible note is currently due on demand and interest is paid monthly.

(y) Nebrina Adams County Note

Effective with the close of the Adams County acquisition (see Note 4), the Company entered into a note for $200,000 with the seller as part of the purchase price. The note is payable in six installments on the last day of each three-month period following the Closing Date.

The future minimum payments of the Company’s notes payable obligations as of ~~December~~March 31, ~~2021~~2022 are as follows. The unamortized discount will be amortized through November 2023.

Year ended	Year ended				Year ended
December 31,		Amount
March 31,					March 31,	Amount
	2022	$	4,074,783		2023	$	25,321,267
	2023		20,631,773		2024		2,227,019
	2024		351,937		2025		—
			25,058,493				27,548,286
	Less: unamortized discount		(4,719,209	)	Less: unamortized discount		(3,842,037	)
	Less: imputed interest		(552,960	)	Less: imputed interest		(924,294	)
			19,786,324				22,781,955
	Less: current portion		(3,521,822	)	Less: current portion		(21,136,912	)
		$	16,264,502			$	1,645,043

F-19

A summary of interest expense for the three and six months ended ~~December~~March 31, ~~2021~~2022 and ~~2020~~2021 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


	Three months ended March 31,					Six months ended March 31
	2022			2021		2022			2021
Amortization of debt discounts	$	1,626,013		$	122,038	$	3,491,724		$	248,302
Stated interest paid or accrued		1,361,523			346,349		2,565,455			915,793
Finance charges and other interest		2,178			—		2,995			12,659
		2,989,714			468,387		6,060,174			1,176,754
Less: interest capitalized to construction in progress		(1,892,341	)		—		(3,752,411	)		—
	$	1,097,373		$	468,387	$	2,307,763		$	1,176,754

Note 79 - Concentrations

For the three and six months ended ~~December~~March 31, ~~2021~~2022 and ~~2020,~~2021, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license.

Note 810 - Commitments and Contingencies

The production and possession of ~~marijuana~~cannabis is prohibited on a national level by the Controlled Substances Act, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. If the federal government decides to change its policy on the enforcement of the Controlled Substances Act, it would have a material adverse effect on our business.

~~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 in June 2019. The monthly lease payments were $6,478 for the first twelve months and include all utilities and an estimated amount for common area maintenance and real estate taxes. The monthly lease payments increase to $6,653, $6,828, $7,003, and $7,178 for years two through five, respectively. Rent expense for the three months ended ~~December~~March 31, ~~2021~~2022 and ~~2020~~2021 on this lease was $~~23,200~~ 20,957and $~~20,710~~20,127, respectively. Rent expense for the six months ended March 31, 2022 and 2021 on this lease was $44,157 and $40,837, respectively. Interest was imputed using a discount rate of 20%. The lease does not include renewal options.

In February 2022, the Company assumed a lease to rent approximately 3,100 square feet of retail space in Oklahoma City, Oklahoma as part of the Oklahoma City acquisition disclosed in Note 4. The lease calls for base rent payments of $21 per square foot ($5,483), plus a prorated share of taxes, insurance and common area maintenance expenses, per month and increasing each year by 3% through the end of the lease term on February 28, 2029. The lease may be extended for two additional 5 year periods. Rent expense for the three and six months ended March 31, 2022 and 2021 on this lease was $14,277 and $0, respectively. Interest was imputed using a discount rate of 18%.

In March 2022, the Company assumed a lease to rent approximately 2,650 square feet of retail space in Adams County, Colorado as part of the Adams County acquisition disclosed in Note 4. The lease calls for base rent payments of $15,450, plus a prorated share of operating costs of the building, per month and escalate each year to $15,913 in the final year which ends on February 1, 2024. The lease may be extended for one additional 3 year period. Rent expense for the three and six months ended March 31, 2022 and 2021 on this lease was $16,048 and $0, respectively. Interest was imputed using a discount rate of 18%.

F-20

The future lease payments are as follows.

Year ended	Year ended				Year ended
December 31,		Amount
March 31,					March 31,	Amount
	2022	$	83,165		2023	$	337,663
	2023		85,266		2024		330,987
	2024		35,891		2025		86,615
			204,322		2026		74,425
	Less: imputed interest		(43,710	)	2027		76,658
			160,612		Thereafter		153,136
	Less: current portion:		(55,935	)			1,059,484
		$	104,677		Less: imputed interest		(321,191	)
							738,293
					Less: current portion:		(219,773	)
						$	518,520

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 $15,786per 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 $3,500per month as consideration to the landlord for keeping the premises available until the contingency is met. The contingency was not met and 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.ended.

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 $7,886per 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 $4,500per 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~~March 31, ~~2021,~~2022, 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~~March 31, ~~2021~~2022 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~~As of March 31, ~~2021,~~2022, the contingency has not been ~~met. As such,~~met and the Company is currently considering its options in regards to this agreement. The future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at ~~December~~March 31, ~~2021~~2022 or the future lease payments schedule above.

As of ~~December~~March 31, ~~2021~~2022 and September 30, 2021, the Company has accrued unpaid payroll taxes and estimated penalties and interest of approximately $~~2,000,000~~1,900,000 and $2,400,000, respectively, and is included in accrued expenses in the accompanying condensed consolidated balance sheets. The Company is making monthly payments of $94,278, beginning March 1, 2022, to pay this liability.

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 911 - Related Party Transactions

As discussed in Note 5,7, the Company completed the purchase of 44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.

As discussed in Note 6,8, the Company has entered into various loan agreements with Viridis or its related entities. Two members of Viridis serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.

As discussed in Note 6,8, the Company has a loan agreement with Stockbridge Enterprises. Stockbridge Enterprises holds more than 5% of the Company’s common stock.

F-21

As discussed in Note 8,10, the Company has a lease agreement with VGI Capital LLC. Two members of VGI Capital LLC serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.

During the three months ended ~~December~~March 31, ~~2021~~2022 and ~~2020,~~2021, the Company purchased cultivation supplies from a related party in the amount of $~~12,993~~18,715 and $~~10,089~~15,440, respectively. During the six months ended March 31, 2022 and 2021, the Company purchased cultivation supplies from a related party in the amount of $31,708 and $25,529, respectively. This related party is owned by the father of a stockholder that holds more than 5% of the Company’s common stock.

Included in our accounts payable at ~~December~~March 31, ~~2021~~2022 and September 30, 2021 is approximately $~~158,000~~236,000, and $138,000, respectively in amounts due to related parties.

Note 1012 - Stockholders' Equity

Unit Offering

During the three months ended March 31, 2022, the Company began offering up to 28,000,000 units of the Company for $1.40 per Unit on a “best-efforts/no minimum” basis pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. Each Unit is comprised of one share of common stock and one-half of one warrant to purchase a share of common stock. Only whole warrants are exercisable. Each whole warrant entitles the holder to purchase one share of common stock for $2.00 per share, subject to certain adjustments, from the date of issuance until the second anniversary of the date of issuance and is redeemable by the Company under certain conditions. Effective May 4, 2022, the Company repriced the offering to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company has incurred approximately $800,000 in fees related to this offering. These fees are included in Other assets on the condensed consolidated balance sheet at March 31, 2022 and will be netted against the proceeds received in the offering.

Warrants

The following table summarizes the Company’s warrant activity for the ~~three~~six months ended ~~December~~March 31, ~~2021:~~2022:

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

Warrants granted		1,739,744		2.81		3.0		—		1,843,030		2.76		2.9		57,660

Balance of warrants at December 31, 2021		47,834,744	$	2.10	$	3.7	$	5,932,122
Balance of warrants at March 31, 2022										47,938,030	$	2.10	$	3.7	$	10,467,660

(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~~March 31, ~~2021,~~2022, for those awards that have an exercise price currently below the closing price as of ~~December~~March 31, ~~2021.~~2022. Awards with an exercise price above the closing prices as of ~~December~~March 31, ~~2021~~2022 are considered to have no intrinsic value.

The ~~Company estimates~~following range of assumptions were used to estimate the fair value of warrants issued during the six months ended March 31, 2022, using the Black-Scholes option-pricing ~~model. The following range~~model, excluding the 103,286 whole warrants issued as part 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.~~Company’s unit offering.

	~~Three~~Six months ended ~~December~~March 31,
	~~2021~~2022
Expected stock price volatility		92% - 130%
Risk-free interest rate		0.10% - 0.30%
Expected term (years)		1.0 - 2.0
Expected dividend yield		0%
Black-scholes value		$0.34 - $0.89

~~F-16~~F-22

Stock Options

On June 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 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 at ~~December~~March 31, ~~2021~~2022 ranges from 63 months to ~~four~~three years.

The following table summarizes the Company’s stock option activity for the ~~three~~six months ended ~~December~~March 31, ~~2021:~~2022:

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

Options granted 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

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

Options granted		1,153,444			1.55		6.9		26,800
Exercised		(41,104	)		0.87		8.3		19,730
Forfeited/Cancelled		(91,962	)		0.94		—		—

Balance of Options at March 31, 2022		6,237,693		$	1.29		8.1	$	1,815,182

Exercisable at March 31, 2022		2,373,123		$	1.34		7.7	$	952,342
Unvested at March 31, 2022		3,864,570		$	1.26

	Number of Options		Weighted Average Grant Date Fair Value
Unvested at March 31, 2022		3,864,570	$	1.20
Granted during the six months ended March 31, 2022		1,153,444	$	1.37
Vested during the six months ended March 31, 2022		264,866	$	1.73
Forfeited during the six months ended March 31, 2022		91,962	$	2.16

(1)

The ~~Company estimates~~following range of assumptions were used to estimate the fair value of stock options granted during the six months ended March 31, 2022, 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~~Six months ended ~~December~~March 31,
	~~2021~~2022
Expected stock price volatility		~~161~~126% - ~~164~~176%
Risk-free interest rate		.9.7% - ~~1.1~~1.5%
Expected term (years)		~~5.0~~2.8 - ~~5.5~~6.5
Expected dividend yield		0%
Black-scholes value		$~~1.48~~0.68 - $3.01

During the three months ended ~~December~~March 31, ~~2021~~2022 and ~~2020,~~2021, the Company recognized compensation expense of $~~507,294~~1,091,560 and $304,672, respectively. During the six months ended March 31, 2022 and 2021, the Company recognized compensation expense of $1,598,854 and $609,344, respectively. At ~~December~~March 31, ~~2021,~~2022, there was $~~2,798,762~~3,224,992 of total unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average vesting period of ~~1.4~~1.2 years.

~~F-17~~F-23

Note 1113 – Segment Information

The Company has identified two segments: the cultivation, production and sale of cannabis products (Cultivation) and the sales of Unity Rd. franchises to dispensaries (Franchising). The following ~~table~~tables presents segment information for the three and six months ended ~~December~~March 31, ~~2021.~~2022. Segment information for the three and six months ended ~~December~~March 31, ~~2020~~2021 has not been presented as the Company did not acquire the Franchising segment until the closing of the acquisition of OCG, Inc. effective March 19, 2021.

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

	Cultivation		Franchising			Corporate			Total
Six months ended March 31, 2022
Revenues from external customers	$	12,499,107	$	258,498		$	66,592		$	12,824,197
Operating income (loss)		3,009,817		(1,703,385	)		(6,213,329	)		(4,906,897	)
Interest expense		157,062		43,216			2,107,485			2,307,763
Depreciation and amortization		62,532		601,525			217,555			881,612
Additions to property, equipment and
construction in progress		—		50,797			13,220,286			13,271,083

Three months ended March 31, 2022
Revenues from external customers	$	6,357,890	$	228,080		$	52,216		$	6,638,186
Operating income (loss)		1,440,522		(744,246	)		(3,468,549	)		(2,772,273	)
Interest expense		156,866		20,406			920,101			1,097,373
Depreciation and amortization		31,267		300,786			110,424			442,477

At March 31, 2022
Property, equipment and construction in progress, net	627,009	77,346	23,305,384	24,009,739
Total assets (after intercompany eliminations)	6,804,504	67,876,897	46,192,548	120,873,949

Note 1214 - Subsequent Events

Subsequent to ~~December~~March 31, ~~2021~~2022 the following events have occurred.

~~In January~~Effective May 4, 2022, the Company ~~executed on~~repriced the Unit offering pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company has sold 215,129 units for total proceeds of $263,104 subsequent to March 31, 2022.

The Company received 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~~loan in the amount of ~~approximately $1.84 million.~~$200,000 from Viridis, a related party. The ~~remaining approximately $610,000~~terms of ~~proceeds will be used for general working capital purposes. Payments of $66,468~~this short-term loan 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~~being determined as of the ~~Co-Management Agreement, the Company purchased substantially all~~date 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.~~filing.

~~F-18~~F-24

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, 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, 2021, filed with the Securities and Exchange Commission (the "SEC") on January 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," "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. The Company currently offers over seventy-five (75) active cannabis strains and more than one hundred fifty (150) differentiated cannabis vape products as well as premium concentrates and Orion vape technologies. The Company’s product offerings will continue to grow as they develop new products to meet the needs of the end users. The Company makes its products available to consumers through licensed dispensaries in Arizona. Item 9 Labs’ products are now carried in more than 70 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”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on 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.

In March 2021, the Company closed on the acquisition of OCG, Inc., dba Unity Rd., a cannabis 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.~~Rd has agreements with more than twenty (20) ~~partners for such partners~~entrepreneurial groups to open more than ~~thirty-five (35)~~thirty (30) Unity ~~Rd.~~Rd retail dispensary locations in ~~fourteen (14)~~twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating in Boulder, Colorado. One such franchise unit has been opened to date, in Boulder, Colorado. Unity Rd. will assist in providing distribution for Item 9 Labs products to be sold across the United States and internationally to its franchisees for public resale, while keeping dispensaries locally owned and operated. As Unity Rd. dispensaries expand in its market penetration, Item 9 Labs aims to offer its products in those locations by expanding the distribution footprint of its premium product offerings to new states.

1925

The Company’s Arizona cannabis operations have expanded in recent years, with the addition of a 2nd nearly 10,000 square foot facility in the 4th quarter of fiscal year 2019, more than doubling the Company’s cultivation and processing space for Arizona. As the Company methodically expanded its operational capacity by more than 100% in fiscal year 2020, it was also able to significantly increase efficiencies within the cultivation and processing operations.

The Arizona expansion has continued in fiscal year 2022 and is expected to continue thereafter. The Company has tripled production since October 1, 2020, while beginning construction on phase 1 of 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 would add over 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 as well as the Company acquired (pending regulatory approval) cultivation and processing licenses in Nye County, Nevada which will be paired with their Nevada facility. In fiscal 2019, the Company broke ground on their 20,000 square foot cultivation and processing facility in Nevada. The facility is now approximately ~~70%~~98% complete. Construction recommenced, after a pause due to Covid-19, in August 2021. The Company aims to commence operations in Nevada in 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),~~was $1,536,000, as to which ~~one million dollars ($1,000,000) will be~~$1,000,000 was 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~~was 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.~~stock, valued at $336,000. 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~~obtained financing to consummate this transaction. ~~There can be no assurance that~~On March 2, 2022, the Company ~~can consummate~~received the necessary regulatory approvals and completed this transaction. The existing dispensary license has never been operational.

If completed, this will be the first corporate-owned shop in Colorado under its cannabis dispensary ~~franchise~~ brand, Unity Rd., and is anticipated to open in early to the middle of fiscal year 2022. ~~Currently, the Company is awaiting regulatory approval by Colorado's Marijuana Enforcement Division (“MED”).~~ This ~~APA~~license acquisition 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~~On March 11, 2022, the Company entered into an Asset Purchase Agreement with The Herbal Cure LLC, a Colorado limited liability company, pursuant to which the Company is purchasing certain assets. Effective upon the completion of ~~Operations~~the sale, which as not occurred as of the date of this filing, the licenses, contracts and certain personal property to operate a licensed medicinal and recreational cannabis dispensary will be delivered to the Company. The total purchase price is $5,750,000, as to which $250,000 is to be paid upon execution of the Asset Purchase Agreement, $3,700,000 payable at closing, $700,000 shall be financed by seller pursuant to a Secured Promissory Note and the remainder of the purchase prices shall be paid in shares of the Company’s common stock on the closing date. The Secured Promissory Note shall accrue interest at 5% per annum and have a term of 18 months, commencing on the closing date, payable in even monthly installments until paid in full. The shares of the Company’s common stock to be issued shall be in such an amount as is the quotient of $1,100,000 divided by the product of the 10-day volume weighted average price of the shares as of the closing date and 85%.

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 %

2026

Results of Operations

	Six months ended March 31,
	2022			2021			$ Change			% Change
Revenues, net	$	12,824,197		$	9,150,195		$	3,674,002			40	%
Cost of revenues		7,748,193			4,729,176			3,019,017			64	%
Gross profit		5,076,004			4,421,019			654,985			15	%
Operating expenses
Professional fees and outside services		1,214,166			907,713			306,453			34	%
Payroll and employee related expenses		5,205,950			2,422,146			2,783,804			115	%
Sales and marketing		1,053,338			127,346			925,992			727	%
Depreciation and amortization		881,612			248,442			633,170			255	%
Other operating expenses		1,632,835			564,054			1,068,781			189	%
Provision for bad debt		(5,000	)		—			(5,000	)		100	%
Total operating expenses		9,982,901			4,269,701			5,713,200			134	%
Income (loss) from operations		(4,906,897	)		151,318			(5,058,215	)		-3343	%
Other expense, net		(2,307,445	)		(1,176,754	)		(1,130,691	)		96	%
Net loss, before income tax provision (benefit)		(7,214,342	)		(1,025,436	)		(6,188,906	)		604	%
Income tax provision (benefit)		3,324			—			3,324			0	%
Net loss		(7,217,666	)		(1,025,436	)		(6,192,230	)		604	%
Less: Net income attributable to non-controlling interests		5,426			—			5,426			100	%
Net loss attributable to Item 9 Labs Corp.	$	(7,223,092	)	$	(1,025,436	)	$	(6,197,656	)		604	%

	Three months ended March 31,
	2022			2021			$ Change			% Change
Revenues, net	$	6,638,186		$	6,110,631		$	527,555			9	%
Cost of revenues		3,960,948			3,121,045			839,903			27	%
Gross profit		2,677,238			2,989,586			(312,348	)		-10	%
Operating expenses
Professional fees and outside services		556,721			613,758			(57,037	)		-9	%
Payroll and employee related expenses		3,055,244			1,318,842			1,736,402			132	%
Sales and marketing		613,902			84,165			529,737			629	%
Other operating expenses		786,167			349,517			436,650			125	%
Provision for (recovery of) bad debt		(5,000	)		—			(5,000	)		100	%
Total operating expenses		5,449,511			2,472,179			2,977,332			120	%
Income (loss) from operations		(2,772,273	)		517,407			(3,289,680	)		-636	%
Other expense, net		(1,097,055	)		(468,387	)		(628,668	)		134	%
Net income (loss), before income tax provision (benefit)		(3,869,328	)		49,020			(3,918,348	)		-7993	%
Income tax provision (benefit)		3,324			—			3,324			0	%
Net income (loss)		(3,872,652	)		49,020			(3,921,672	)		-8000	%
Less: Net income attributable to non-controlling interests		5,426			—			5,426			100	%
Net income (loss) attributable to Item 9 Labs Corp.	$	(3,878,078	)	$	49,020		$	(3,927,098	)		-8011	%

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 December 31, 2021 compared to the same period of the prior fiscal year. Management anticipates revenues to continue to grow as the revenue trends are positive month over month.

Cost of Revenues

Cost of revenues consist primarily of labor, materials, supplies and utilities. Cost of revenues as a percentage of revenues was 60% and 61% for the three and six months ended ~~December~~March 31, ~~2021~~2022 compared to ~~53%~~51% and 52% for the ~~same period~~three and six months ended ~~December~~March 31, ~~2020.~~2021. The Company was 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 and making additional investments in property and equipment. 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.

Gross Profit

The decrease in gross profit as a percentage of revenue was due to increases in revenue offset by price reduction as competition rises and by increases in purchased inventory materials and other costs. With the Company’s continued efforts to increase capacity and focus on efficiencies and reducing costs, management expects gross profit to ~~grow~~increase going forward.

Operating Expenses

Professional fees and outside services increased for the six months ended March 31, 2022 compared to the six months ended March 31, 2021 primarily due to the amortization of prepaid consulting agreements that were entered into subsequent to ~~the three months ended December~~March 31, ~~2020~~2021 and additional expenses incurred for corporate advisory services, and investor and public relations services. Professional fees and outside services decreased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 as professional fees were higher than usual during the three months ended March 31, 2021 primarily due to fees incurred as part of the OCG, Inc. acquisition.

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~~March 31, ~~2020.~~2021. Further, payroll expenses increased due to an increase in employee headcount during fiscal year 2021 and the ~~three~~six months ended ~~December~~March 31, ~~2021.~~ 2022, as a result of increased hiring of employees and the hiring of OCG, Inc. employees as part of the merger.

Sales and marketing expenses increased due to increased spending on marketing and branding initiatives during the three and six months ended ~~December~~March 31, ~~2021.~~ 2022.

The increase in depreciation and amortization is due primarily 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%~~83% and 97% for the three and six months ended ~~December~~March 31, ~~2020~~2021, respectively, to ~~189%~~193% and 191% for the three ~~month periods~~and six months ended ~~December~~March 31, ~~2021.~~2022, respectively. 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, however, management believes that operating expenses will outpace revenues for the Franchising ~~segment~~and Corporate segments as the Franchising ~~segment continues~~and Corporate segments continue to perform on ~~its~~ growth initiatives.

Other Expense, net

Other expenses consist primarily of interest expense of ~~$1,210,390~~$1,097,373 and ~~$708,367~~$2,307,763 for the three and six months ended ~~December~~March 31, ~~2021~~2022, respectively, and ~~2020,~~$468,387 and $1,176,754 for the three and six months ended March 31, 2021, respectively. The increase in interest expense was primarily the result of the continued interest and amortization of debt discounts for debt outstanding at ~~December~~March 31, ~~2020~~2021 and the additional interest and amortization of debt discounts for debt incurred subsequent to ~~December~~March 31, ~~2020.~~2021. This increase in interest expense was offset by debt and amortization of debt discounts that were capitalized to construction in progress related to the 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.”

2128

The following table reflects the reconciliation of net ~~loss~~income (loss) to Adjusted EBITDA for the three and six months ended ~~December~~March 31, ~~2021~~2022 and ~~2020:~~2021:

	Three months ended December 31,						Three months ended March 31,					Six months ended March 31,
	2021			2020			2022			2021		2022			2021
Net loss	$	(3,345,014	)	$	(1,074,456	)
Net income (loss)							$	(3,872,652	)	$	49,020	$	(7,217,666	)	$	(1,025,436	)
Depreciation and amortization		439,135			142,545			442,477			105,897		881,612			248,442
Interest expense		1,210,390			708,367			1,097,373			468,387		2,307,763			1,176,754
Income tax expense								3,324			—		3,324			—
Stock-based expense		507,294			467,908			1,363,485			304,672		1,870,779			772,580
Acquisition related costs		—			179,677			23,676			87,060		23,676			266,738
Adjusted EBITDA	$	(1,188,195	)	$	424,041		$	(942,317	)	$	1,015,036	$	(2,130,512	)	$	1,439,078

The approximately $1.9 million change from prior year is due to the addition of the franchise business, as well as significant investments in human capital and infrastructure to prepare for anticipated growth.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

The Company’s primary need for liquidity is to fund working capital requirements of its business, capital expenditures, acquisitions, debt service, and for general corporate purposes. The Company’s primary source of liquidity is funds generated from revenues, financing activities and from private placements. The Company’s ability to fund its operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on 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 the Company’s control.

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 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.

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

2229

As of ~~December~~March 31, ~~2021,~~2022, the Company had ~~$160,711~~$105,128 of cash and cash equivalents and negative working capital of ($~~7,351,332)~~28,715,140) (current assets minus current liabilities), compared with $1,454,460 of cash and cash equivalents and negative working capital of ($~~4,393,385)~~4,893,385) as of September 30, 2021. The decrease of ~~$2,957,947~~$23,821,755 in the Company’s working capital ~~was~~is primarily due to increases in the amount of the Company’s debt maturing within the next 12 months. The decrease is also due to decreases in ~~cash and inventory. Additionally,~~ the Company’s ~~working capital decreased due to~~cash, inventory and prepaid balances and increases in the Company’s accounts payable and ~~accrued expenses.~~other operating liabilities and the current portion of operating lease liabilities. The ~~$1,293,749~~$1,349,332 decrease in cash and cash equivalents was primarily due to the purchases of property, equipment and construction in progress related to the Company’s capital ~~projects.~~projects, and the Company’s acquisition of a dispensary license in Colorado. The Company is an early-stage growth company. It is generating cash from sales and is investing its capital reserves in current operations and new acquisitions that 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:

	Three months ended December 31,												Six months ended March 31,
	2021			2020			$ Change			% Change			2022			2021			$ Change			% Change
Net cash used in operating activities	$	(267,694	)	$	(1,932,533	)	$	1,664,839			-86	%
Net cash provided by (used in) operating activities													$	373,812		$	(4,479,607	)	$	4,853,419			-108	%
Net cash used in investing activities		(1,439,155	)		(1,190,875	)		(248,280	)		21	%		(4,012,703	)		(2,328,122	)		(1,684,581	)		72	%
Net cash provided by financing activities		413,100			4,652,308			(4,239,208	)		-91	%		2,289,559			11,030,929			(8,741,370	)		-79	%
Net increase (decrease) in cash and cash equivalents	$	(1,293,749	)	$	1,528,900		$	(2,822,649	)		-185	%	$	(1,349,332	)	$	4,223,200		$	(5,572,532	)		-132	%

Operating Activities

During the ~~three~~six months ended ~~December~~March 31, ~~2021,~~2022, operating activities ~~used $267,694~~provided $373,812 of cash and cash equivalent, primarily resulting from a net loss of ~~$3,345,041~~$7,217,666 which was offset by net cash provided by operating assets and liabilities of ~~$1,137,981.~~$3,173,658. There was significant non-cash activity that contributed to the net loss totaling ~~$1,939,339~~$4,516,521 including depreciation and amortization of ~~$441,764,~~$911,576, amortization of debt discount of ~~$990,281,~~$1,728,325, and ~~stock based~~stock-based compensation of ~~$507,294.~~$1,870,779.

During the ~~three~~six months ended ~~December~~March 31, ~~2020,~~2021, operating activities used ~~$1,932,533~~$4,479,607 of cash, primarily resulting from a net loss of ~~$1,074,456~~$1,025,436 which was extended by net cash used in operating assets and liabilities of ~~$1,603,964.~~$3,454,171. There was significant non-cash activity that contributed to the net loss totaling ~~$745,887~~$1,321,358 including depreciation and amortization of ~~$158,681,~~$276,419, amortization of debt discount of ~~$119,298,~~$272,359, and compensation paid in the form of stock of ~~$467,908.~~ $772,580. With the increase in revenues, the Company’s receivables increased $2,213,229, deferred costs increased $3,622,372 and prepaid expenses increased $1,024,680, offset by an increase in current liabilities of $2,084,752.

Investing Activities

During the ~~three~~six months ended ~~December~~March 31, ~~2021,~~2022, investing activities used ~~$1,439,155~~$4,012,703 of cash and cash equivalents, consisting primarily of ~~$2,492,445~~$3,235,125 in purchases of property, equipment and construction in progress, the purchase of a dispensary license in the amount of $1,130,872 and cash paid to acquisition escrow accounts of $381,932, offset by ~~$1,053,290~~$794,807 of cash received from the escrow deposit accounts.

During the ~~three~~six months ended ~~December~~March 31, ~~2020,~~2021, investing activities used ~~$1,190,875~~$2,328,122 of cash, consisting primarily of ~~$499,452~~$739,560 in purchase of property and equipment and ~~$696,293~~$1,685,368 of deposits paid on an acquisition.

Financing Activities

During the ~~three~~six months ended ~~December~~March 31, ~~2021,~~2022, financing activities provided ~~$413,100,~~$2,289,559, consisting of ~~$1,500,000~~$3,980,762 in proceeds from the issuance of debt, $288,841 in proceeds from the issuance of stock and offset by ~~$1,068,150~~$1,944,294 in debt payments made.

During the ~~three~~six months ended ~~December~~March 31, ~~2020,~~2021, financing activities provided ~~$4,652,308,~~$11,030,929, consisting of ~~$5,791,225~~$12,959,808 in proceeds from the issuance of stock and proceeds from the issuance of convertible debt of $1,355,000 and offset by ~~$1,138,917~~$3,283,879 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.

2330

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 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-half of one warrant. We are also in ~~discussion~~discussions 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. 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.

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. Critical accounting policies and estimates in these condensed consolidated financial statements are those related to revenue recognition, valuation of options, warrants and debt discounts, carrying value of intangible assets subject to amortization, infinite life intangible assets and goodwill, stock-based compensation, and 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, 2021. Management believes that there have been no material changes in our critical accounting policies during the three months ended ~~December~~March 31, ~~2021.~~2022.

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.

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.

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.

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 ~~December~~March 31, ~~2021.~~2022.

Identified Material Weaknesses

A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Management identified the following material weaknesses during its assessment of internal controls over financial reporting, which are primarily due to the size of the Company and available resources:

lack of properly controlled segregation of duties

lack of risk assessment procedures on internal control to detect financial reporting risks in a timely manner; and

lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives.

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, 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.

2532

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.

Quarterly Issuances:

The Company issued ~~142,365~~69,892 shares for a business acquisition, 300,000 shares for an asset purchase, 25,000 shares related to the issuance of debt, ~~16,666 of~~335,159 shares issued for services ~~received~~ and ~~9,896~~18,033 shares related to the exercise of stock options during the three months ended ~~December~~March 31, ~~2021.~~2022.

Subsequent Issuances:

Subsequent to ~~December~~March 31, ~~2021, the Company issued 97,840 shares~~2022, there have been no issuances of ~~common stock related to the Co-Management Agreement and for other services received.~~unregistered equity securities.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

N/A.

ITEM 5.

OTHER INFORMATION

N/A.

2633

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	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	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	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	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	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	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	AZ 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.
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	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 Committee Charter	Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
99.2	Compensation 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*	Inline XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.
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.

2734

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

Date: ~~February 14,~~May 16, 2022

By:

/s/ Robert Mikkelsen

Name:

Title:

Robert Mikkelsen

Chief Financial Officer

(Principal Financial Officer)

2835