UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the
OR
| 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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
1-
(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.
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).
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 ☐
As of February 14, 2022, there were 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 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 24 | |
| Item 4. | Controls and Procedures | 25 | |
| Part II - Other Information | |||
| Item 1. | Legal Proceedings | 26 | |
| Item 1A. | Risk Factors | 26 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | |
| Item 3. | Defaults Upon Senior Securities | 26 | |
| Item 4. | Mine Safety Disclosures | 26 | |
| Item 5. | Other Information | 26 | |
| Item 6. | Exhibits | 27 | |
| Signatures | 28 | ||
| Certifications | |||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
| INDEX | F-1 |
| Condensed Consolidated Balance Sheets as of December 31, 2021 (Unaudited) and September 30, 2021 | F-2 |
| Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2021 and 2020 | F-3 |
| Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2021 and 2020 | F-4 |
| Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2021 and 2020 | F-5 |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | F-6 |
| F-1 |
| ITEM 9 LABS CORP. AND SUBSIDIARIES | ||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset | ||||||||
| Deferred commissions | ||||||||
| Escrow deposits | ||||||||
| Other deposits | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and payroll taxes | ||||||||
| Accrued interest | ||||||||
| Accrued expenses | ||||||||
| Deferred revenue, current portion | ||||||||
| Notes payable, current portion | ||||||||
| Operating lease liability, current portion | ||||||||
| Convertible notes payable, net of discounts | ||||||||
| Total current liabilities | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Notes payables, net of current portion and discounts | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Common stock, par value $ per share, shares authorized; and shares issued and and shares outstanding at December 31, 2021 and September 30, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ |
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 | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Professional fees and outside services | ||||||||
| Payroll and employee related expenses | ||||||||
| Sales and marketing | ||||||||
| Depreciation and amortization | ||||||||
| Other operating expenses | ||||||||
| Total expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total other income (expense), net | ( | ) | ( | ) | ||||
| Net loss, before income tax provision (benefit) | ( | ) | ( | ) | ||||
| Income tax provision (benefit) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted net loss per common share | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted average common shares outstanding | ||||||||
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 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Stock issued for cash, net | — | |||||||||||||||||||||||||||
| Issuance of shares for services | — | |||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Balance at September 30, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Stock to be issued for debt inducement | — | |||||||||||||||||||||||||||
| Warrants issued with debt | — | — | ||||||||||||||||||||||||||
| Beneficial conversion - convertible notes | — | — | ||||||||||||||||||||||||||
| Issuance of shares for services | — | |||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||
| Stock issued on exercise of options | ( | ) | — | |||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at December 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
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 | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of right of use asset | ||||||||
| Amortization of debt discount | ||||||||
| Common stock issued for services | ||||||||
| Stock based compensation expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued payroll | ( | ) | ( | ) | ||||
| Accrued interest | ||||||||
| Accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Investing Activities: | ||||||||
| Deposit on acquisition | ( | ) | ||||||
| Purchases of property, equipment and construction in progress | ( | ) | ( | ) | ||||
| Cash received from sale of Airware assets | ||||||||
| Cash received from escrow accounts | ||||||||
| Capitalized license fees | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from the sale of common stock | ||||||||
| Payment of debt discount | ( | ) | ||||||
| Proceeds from the issuance of debt | ||||||||
| Payment of debt | ( | ) | ( | ) | ||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Increase (Decrease) in Cash | ( | ) | ||||||
| Cash and cash equivalents- Beginning of Period | ||||||||
| Cash and cash equivalents - End of Period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid in cash | $ | $ | ||||||
| Income taxes paid in cash | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Stock and warrants issued for debt | $ | $ | ||||||
| Fixed assets purchased with debt | $ | $ | ||||||
| Transfer of accrued interest to debt | $ | $ | ||||||
| Land purchased with escrow funds and deposit | $ | $ | ||||||
| Beneficial conversion feature on convertible debt | $ | $ | ||||||
| Escrow funds used to pay construction in progress | $ | $ | ||||||
| Accrued liabilities capitalized in construction in progress | $ | $ | ||||||
| Amortized debt discount capitalized in construction in progress | $ | $ |
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) Unity Rd retail dispensary locations in fourteen (14) states. The majority of the locations are in the licensing process. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to 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 31, 2021 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended December 31, 2021 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.
The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Certain prior period balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on the prior period's 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 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 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 31, 2021 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 31, 2021 and 2020, substantially all of the Company's revenue was generated from performance obligations completed in the state of Arizona.
The Company recognizes revenue 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.
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 $
Basic net loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the losses of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. The following table summarizes the securities outstanding at December 31, 2021 and 2020 that were excluded from the diluted net loss per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss.
| 2021 | 2020 | |||||||
| Potentially dilutive common share equivalents | ||||||||
| Options | ||||||||
| Warrants | ||||||||
| Convertible notes | ||||||||
| Potentially dilutive shares outstanding | ||||||||
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 31, 2021 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.
Segment Reporting
The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three months ended December 31, 2021, the Company has identified two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”) and the sales of Unity Rd. franchises to dispensaries (“Franchising”).
| F-8 |
Recently Issued Accounting Pronouncements
Pending Adoption
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for 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 of this standard on the Company’s condensed consolidated financial statements and disclosures.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.
Note 2 - Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming the continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company's planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company's ability to continue as a going concern.
In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management's plans in regard to these matters are described as follows:
Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company's revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of Arizona, with construction of a cultivation and processing facility nearing completion in Nevada. The Company believes that it will continue reducing the overall costs of revenues and costs of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.
| F-9 |
Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will continue to grow, thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company's overall efforts will be successful.
If the Company is unable to generate additional sales growth in the near term and raise additional capital, there is a risk that the Company could default on its obligations, and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Inventory
Inventory consisted of the following at December 31, 2021 and September 30, 2021.
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Raw materials and work in process | $ | $ | ||||||
| Finished goods | ||||||||
| Packaging and other | ||||||||
| $ | 5,253,327 | $ | 6,391,351 | |||||
Note 4 – Pending Acquisitions
On October 6, 2021, the Company entered into
an Asset Purchase Agreement to purchase certain assets, which include licenses, a lease and certain personal property to operate a licensed
recreational cannabis dispensary. The purchase price is $
Note 5 - Property and Equipment, Net
The following represents a summary of our property and equipment as of December 31, 2021 and September 30, 2021:
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Cultivation and manufacturing equipment | $ | $ | ||||||
| Computer equipment and software | ||||||||
| Buildings and improvements | ||||||||
| Accumulated Depreciation | ( | ) | ( | ) | ||||
| Land | ||||||||
| Construction on progress | ||||||||
| Property and Equipment, Net | $ | $ | ||||||
During the three months ended December 31,
2021, the Company completed the purchase of 44 acres of land from a related party for $
| F-10 |
Construction in progress relates to multiple capital projects ongoing during the three months ended December 31, 2021, including the construction of the Nevada facility, the expansion of the Arizona facility and implementation of an ERP system. 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
31, 2021 and 2020 was $
Note 6 - Debt
| Effective Date | Maturity Date | Annual Interest Rate | Balance at December 31, 2021 | Balance at September 30, 2021 | Conversion Price | |||||||||||||||||||
| C-2 | % | |||||||||||||||||||||||
| C-3 | % | |||||||||||||||||||||||
| C-5 | % | |||||||||||||||||||||||
| C-7 | % | |||||||||||||||||||||||
| C-8 | % | |||||||||||||||||||||||
| C-9 | % | | ||||||||||||||||||||||
| C-10 | | % | | |||||||||||||||||||||
| Less: unamortized discounts | ( | ) | ( | ) | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||
(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 $
(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
(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
| F-11 |
The future minimum payments of the Company’s convertible debt obligations as of December 31, 2021 are as follows. The unamortized discount will be amortized through September 2022.
| Year ended | ||||||
| December 31, | Amount | |||||
| 2022 | $ | |||||
| Less: unamortized discount | ( | ) | ||||
| $ | ||||||
Notes Payable
| Effective Date | Maturity Date | Annual Interest Rate | Balance at December 31, 2021 | Balance at September 30, 2021 | Secured by | |||||||||||||||||
| f | % | 2nd DOT AZ property | ||||||||||||||||||||
| h | % | N/A | ||||||||||||||||||||
| i | % | Secured by licenses | ||||||||||||||||||||
| l | % | Future revenues | ||||||||||||||||||||
| n | % | Secured by vehicles | ||||||||||||||||||||
| o | % | N/A | ||||||||||||||||||||
| p | % | N/A | ||||||||||||||||||||
| q | % | 1st AZ property and other personal property | ||||||||||||||||||||
| r | % | 1st NV property and other personal property | ||||||||||||||||||||
| s | % | Restricted common stock | ||||||||||||||||||||
| t | % | N/A | ||||||||||||||||||||
| Less: unamortized discounts | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | |||||||||||||||||||||
(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 $
On
May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $
| 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.
(h) Viridis (unsecured)
The
Company's subsidiary, BSSD Group, LLC borrowed $
(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.
(p) Stockbridge Amended Debt
In
February 2021, the Company and Stockbridge Enterprises, a related party, under a trouble debt restructuring, agreed to restructure and
settle the outstanding notes. The total outstanding balance of $including accrued interest, were to be repaid under a new promissory note, calling for a
down payment of $
(s) Viridis $500,000
On September 30, 2021, the Company borrowed
$
| F-13 |
The future minimum payments of the Company’s notes payable obligations as of December 31, 2021 are as follows. The unamortized discount will be amortized through November 2023.
| Year ended | ||||||
| December 31, | Amount | |||||
| 2022 | $ | |||||
| 2023 | ||||||
| 2024 | ||||||
| Less: unamortized discount | ( | ) | ||||
| Less: imputed interest | ( | ) | ||||
| Less: current portion | ( | ) | ||||
| $ | ||||||
A summary of interest expense for the three months ended December 31, 2021 and 2020 is as follows.
| Three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Amortization of debt discounts from equity issuances and beneficial conversion features | $ | $ | ||||||
| Amortization of debt discounts from success and other fees | ||||||||
| Stated interest paid or accrued | ||||||||
| Finance charges and other interest | ||||||||
| Less: interest capitalized to construction in progress | ( | ) | ||||||
| $ | $ | |||||||
Note 7 - Concentrations
For the three months ended December 31, 2021 and 2020, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license.
Note 8 - Commitments and Contingencies
The production and possession of marijuana is prohibited on a national level by the 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 $
| Year ended | ||||||
| December 31, | Amount | |||||
| 2022 | $ | |||||
| 2023 | ||||||
| 2024 | ||||||
| Less: imputed interest | ( | ) | ||||
| Less: current portion: | ( | ) | ||||
| $ | ||||||
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 $
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 $
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 $
As of December 31, 2021 and September 30, 2021, the
Company has accrued unpaid payroll taxes and estimated penalties and interest of approximately $
There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company.
| F-15 |
Note 9 - Related Party Transactions
As discussed in Note 5, the Company completed the
purchase of 44 acres of land from a related party for $
As discussed in Note 6, 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, the Company has a loan agreement with Stockbridge Enterprises. Stockbridge Enterprises holds more than 5% of the Company’s common stock.
As discussed in Note 8, 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 31, 2021 and
2020, the Company purchased cultivation supplies from a related party in the amount of $
Included in our accounts
payable at December 31, 2021 and September 30, 2021 is approximately $
Note 10 - Stockholders' Equity
Warrants
The following table summarizes the Company’s warrant activity for the three months ended December 31, 2021:
| Common Shares Issuable Upon Exercise of Warrants | Weighted Average Exercise Price | Weighted Average Contractual Term in Years | Aggregate Intrinsic Value | |||||||||||||
| Balance of warrants at September 30, 2021 | 3.9 | |||||||||||||||
| Warrants granted | 3.0 | — | ||||||||||||||
| Balance of warrants at December 31, 2021 | $ | $ | 3.7 | $ | ||||||||||||
| (1) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock as of December 31, 2021, for those awards that have an exercise price currently below the closing price as of December 31, 2021. Awards with an exercise price above the closing prices as of December 31, 2021 are considered to have no intrinsic value. |
The Company estimates the fair value of warrants issued using the Black-Scholes option-pricing model. The following range of assumptions were used during the three months ended December 31, 2021. No warrants were issued, exercised or forfeited during the three months ended December 31, 2020.
Three months ended December 31, | ||||
| 2021 | ||||
| Expected stock price volatility | % - % | |||
| Risk-free interest rate | % - % | |||
| Expected term (years) | - | |||
| Expected dividend yield | % | |||
| Black-scholes value | $ - $ | |||
| F-16 |
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 have 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 31, 2021 ranges from 6 months to four years.
| 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 | 8.9 | |||||||||||||||
| Options granted | 9.7 | |||||||||||||||
| Forfeited/Cancelled | ( | ) | — | — | ||||||||||||
| Balance of Options at December 31, 2021 | $ | 8.7 | $ | |||||||||||||
| Exercisable at December 31, 2021 | $ | 7.9 | $ | |||||||||||||
| Unvested at December 31, 2021 | $ | |||||||||||||||
| Number of Options | Weighted Average Grant Date Fair Value | |||||||||||||||
| Unvested at December 31, 2021 | $ | |||||||||||||||
| Granted during the three months ended December 31, 2021 | $ | |||||||||||||||
| Forfeited during the three months ended December 31, 2021 | $ | |||||||||||||||
| (1) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock as of December 31, 2021, for those awards that have an exercise price currently below the closing price as of December 31, 2021. Awards with an exercise price above the closing prices as of December 31, 2021 are considered to have no intrinsic value. |
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The following range of assumptions were used during the three months ended December 31, 2021. No options were granted, exercised or forfeited during the three months ended December 31, 2020.
| Three months ended December 31, | ||||
| 2021 | ||||
| Expected stock price volatility | % - % | |||
| Risk-free interest rate | % - % | |||
| Expected term (years) | - | |||
| Expected dividend yield | % | |||
| Black-scholes value | $ - $ | |||
During the three months
ended December 31, 2021 and 2020, the Company recognized compensation expense of $ and $, respectively. At December 31,
2021, there was $
| F-17 |
Note 11 – 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 presents segment information for the three months ended December 31, 2021. Segment information for the three months ended December 31, 2020 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 | $ | $ | $ | $ | ||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Additions to property, equipment and construction in progress | ||||||||||||||||
| Property, equipment and construction in progress, net | ||||||||||||||||
| Total assets (after intercompany eliminations) | ||||||||||||||||
Note 12 - Subsequent Events
Subsequent to December 31, 2021 the following events have occurred.
In January 2022, the Company executed on a short-term financing arrangement. The net proceeds of $2.45 million were used to repay the outstanding principal and interest of note payable (l) in Note 6 - Debt above in the amount of approximately $1.84 million. The remaining approximately $610,000 of proceeds will be used for general working capital purposes. Payments of $66,468 are due weekly until $3.35 million is repaid. This results in an effective interest rate of approximately 34%.
The Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially all of the assets of the dispensary, excluding cannabis and cannabis related products, and assumed the dispensary’s lease. The purchase price is $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company will pay the seller $65,000 in the Company’s common stock at a 10% discount to the stock’s 10-day volume weighted average.
The Company has issued 97,840 shares of common stock related to the Co-Management Agreement discussed above and for other services received.
| F-18 |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended September 30, 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. has agreements with more than twenty (20) partners for such partners to open more than thirty-five (35) Unity Rd. retail dispensary locations in fourteen (14) states. The majority of the locations are in the licensing process. 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.
| 19 |
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% 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), as to which one million dollars ($1,000,000) will be paid to an escrow account upon conditional approvals of the change of ownership from state and local licensing authorities concerning the transfer of ownership. At closing, that amount will be released to the Seller along with an 18-month promissory note in the principal amount of $200,000 and the balance payable in 300,000 shares of Company common stock. For additional terms of the APA, please see the Company’s filing on Form 8-K filed with the Securities and Exchange Commission on October 7, 2021. The Company intends to obtain financing to consummate this transaction. There can be no assurance that the Company can consummate this transaction. The existing dispensary license has never been operational.
If completed, this will be the first corporate-owned shop under its cannabis dispensary franchise brand, Unity Rd., and is anticipated to open in early fiscal year 2022. Currently, the Company is awaiting regulatory approval by Colorado's Marijuana Enforcement Division (“MED”). This APA is part of an overarching acquisition strategy that is intended to accelerate national expansion by creating turnkey investment opportunities for Unity Rd. franchisees. The Company plans to convert acquired dispensaries into Unity Rd. shops, operate them internally and sell them to an existing or future franchise partner. This offers an expedited solution for entrepreneurs seeking immediate entry into cannabis. The Company is targeting numerous similar transactions in the next 12 months to gain a deeper market penetration in select markets. Subsequently and/or concurrently, the Company plans to introduce the Item 9 Labs suite of products to the same markets through the acquisition of cultivation and production licenses or through joint ventures with qualified local, licensed operators.
Results of Operations
| Three months ended December 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Revenues, net | $ | 6,186,011 | $ | 3,039,564 | $ | 3,146,447 | 104 | % | ||||||||
| Cost of revenues | 3,787,245 | 1,608,131 | 2,179,114 | 136 | % | |||||||||||
| Gross profit | 2,398,766 | 1,431,433 | 967,333 | 68 | % | |||||||||||
| Operating expenses | ||||||||||||||||
| Professional fees and outside services | 657,445 | 293,955 | 363,490 | 124 | % | |||||||||||
| Payroll and employee related expenses | 2,150,706 | 1,103,304 | 1,047,402 | 95 | % | |||||||||||
| Sales and marketing | 439,436 | 43,181 | 396,255 | 918 | % | |||||||||||
| Depreciation and amortization | 439,135 | 142,545 | 296,590 | 208 | % | |||||||||||
| Other operating expenses | 846,668 | 214,537 | 632,131 | 295 | % | |||||||||||
| Total operating expenses | 4,533,390 | 1,797,522 | 2,735,868 | 152 | % | |||||||||||
| Loss from operations | (2,134,624 | ) | (366,089 | ) | (1,768,535 | ) | 483 | % | ||||||||
| Other expense, net | (1,210,390 | ) | (708,367 | ) | (502,023 | ) | 71 | % | ||||||||
| Net loss, before income tax provision (benefit) | (3,345,014 | ) | (1,074,456 | ) | (2,270,558 | ) | 211 | % | ||||||||
| Income tax provision (benefit) | — | — | — | 0 | % | |||||||||||
| Net loss | $ | (3,345,014 | ) | $ | (1,074,456 | ) | $ | (2,270,558 | ) | 211 | % | |||||
| 20 |
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 61% for the three months ended December 31, 2021 compared to 53% for the same period ended December 31, 2020. 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 was due to increases in revenue offset 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 going forward.
Operating Expenses
Professional fees and outside services increased primarily due to the amortization of prepaid consulting agreements that were entered into subsequent to the three months ended December 31, 2020 and additional expenses incurred for corporate advisory services, and investor and public relations services. The increase in payroll expenses was primarily due to the scheduled amortization of stock-based compensation expense for stock options granted subsequent to the three months ended December 31, 2020. Further, payroll expenses increased due to an increase in employee headcount during fiscal year 2021 and the three months ended December 31, 2021. Sales and marketing expenses increased due to increased spending on marketing and branding initiatives during the three months ended December 31, 2021. The increase in depreciation and amortization is due to the scheduled amortization of intangible assets acquired in the OCG Inc. acquisition in March 2021. Other operating expenses increased primarily due to increases in insurance expenses, travel related expenses and additional IT support for the increase in employees. Total operating expenses as a percentage of gross profit increased from 126% for the three months ended December 31, 2020 to 189% for the three month periods ended December 31, 2021. Management believes this ratio will decrease for the Cultivation segment going forward as the expectation is that revenues will continue to grow at a higher rate than operating expenses, however, management believes that operating expenses will outpace revenues for the Franchising segment as the Franchising segment continues to perform on its growth initiatives.
Other Expense, net
Other expenses consist of interest expense of $1,210,390 and $708,367 for the three months ended December 31, 2021 and 2020, respectively. The increase in interest expense was primarily the result of the continued interest and amortization of debt discounts for debt outstanding at December 31, 2020 and the additional interest and amortization of debt discounts for debt incurred subsequent to December 31, 2020. 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.”
| 21 |
The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three months ended December 31, 2021 and 2020:
| Three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | (3,345,014 | ) | $ | (1,074,456 | ) | ||
| Depreciation and amortization | 439,135 | 142,545 | ||||||
| Interest expense | 1,210,390 | 708,367 | ||||||
| Stock-based expense | 507,294 | 467,908 | ||||||
| Acquisition related costs | — | 179,677 | ||||||
| Adjusted EBITDA | $ | (1,188,195 | ) | $ | 424,041 | |||
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
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.
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 cost of revenues and cost of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.
Financing. 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 additional obligations and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.
| 22 |
As of December 31, 2021, the Company had $160,711 of cash and cash equivalents and negative working capital of ($7,351,332) (current assets minus current liabilities), compared with $1,454,460 of cash and cash equivalents and negative working capital of ($4,393,385) as of September 30, 2021. The decrease of $2,957,947 in the Company’s working capital was primarily due to decreases in cash and inventory. Additionally, the Company’s working capital decreased due to increases in accounts payable and accrued expenses. The $1,293,749 decrease in cash and cash equivalents was primarily due to the purchases of property, equipment and construction in progress related to the Company’s capital projects. The Company is an early-stage growth company. It is generating cash from sales and is investing its capital reserves in current operations 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, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Net cash used in operating activities | $ | (267,694 | ) | $ | (1,932,533 | ) | $ | 1,664,839 | -86 | % | ||||||
| Net cash used in investing activities | (1,439,155 | ) | (1,190,875 | ) | (248,280 | ) | 21 | % | ||||||||
| Net cash provided by financing activities | 413,100 | 4,652,308 | (4,239,208 | ) | -91 | % | ||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (1,293,749 | ) | $ | 1,528,900 | $ | (2,822,649 | ) | -185 | % | ||||||
Operating Activities
During the three months ended December 31, 2021, operating activities used $267,694 of cash and cash equivalent, primarily resulting from a net loss of $3,345,041 which was offset by net cash provided by operating assets and liabilities of $1,137,981. There was significant non-cash activity that contributed to the net loss totaling $1,939,339 including depreciation and amortization of $441,764, amortization of debt discount of $990,281, and stock based compensation of $507,294.
During the three months ended December 31, 2020, operating activities used $1,932,533 of cash, primarily resulting from a net loss of $1,074,456 which was extended by net cash used in operating assets and liabilities of $1,603,964. There was significant non-cash activity that contributed to the net loss totaling $745,887 including depreciation and amortization of $158,681, amortization of debt discount of $119,298, and compensation paid in the form of stock of $467,908.
Investing Activities
During the three months ended December 31, 2021, investing activities used $1,439,155 of cash and cash equivalents, consisting primarily of $2,492,445 in purchases of property, equipment and construction in progress, offset by $1,053,290 of cash received from the escrow deposit accounts.
During the three months ended December 31, 2020, investing activities used $1,190,875 of cash, consisting primarily of $499,452 in purchase of property and equipment and $696,293 of deposits paid on an acquisition.
Financing Activities
During the three months ended December 31, 2021, financing activities provided $413,100, consisting of $1,500,000 in proceeds from the issuance of debt and offset by $1,068,150 in debt payments made.
During the three months ended December 31, 2020, financing activities provided $4,652,308, consisting of $5,791,225 in proceeds from the issuance of stock offset by $1,138,917 in debt payments made.
Given that our cash needs are strongly driven by our growth requirements, we also intend to maintain a cash reserve for other risk contingencies that may arise.
| 23 |
We intend to meet our cash requirements for the next 12 months through the use of the cash we have on hand and through business operations, future equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. We have filed an offering document on Form 1-A with the Securities and Exchange Commission in order to sell units comprising of one share of common stock and one warrant. We are also in discussion with various potential capital partners to provide additional debt capital for accretive acquisitions. We do not have any other arrangements in place to complete any private placement financings of debt and equity. 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 changes in our critical accounting policies during the three months ended December 31, 2021.
Recently Issued Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements, included in Part I, Item 1, Financial Information for this quarterly report on Form 10-Q.
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.
| 24 |
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2021.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting subsequent to the fiscal year ended September 30, 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.
| 25 |
PART II - OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.
| ITEM 1A. | RISK FACTORS |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.
| 1. | Quarterly Issuances: |
The Company issued 142,365 shares related to the issuance of debt, 16,666 of shares issued for services received and 9,896 related to the exercise of stock options during the three months ended December 31, 2021.
| 2. | Subsequent Issuances: |
Subsequent to December 31, 2021, the Company issued 97,840 shares of common stock related to the Co-Management Agreement and for other services received.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
N/A.
| ITEM 5. | OTHER INFORMATION |
N/A.
| 26 |
| 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.
| 27 |
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, 2022 | By: | /s/ Andrew Bowden | |
|
Name: Title: |
Andrew Bowden Chief Executive Officer (Principal Executive Officer) | ||
| Date: February 14, 2022 | By: | /s/ Robert Mikkelsen | |
|
Name: Title: |
Robert Mikkelsen Chief Financial Officer (Principal Financial Officer) | ||
28
EXHIBIT 31.1
SECTION 302 CERTIFICATIONS
I, Andrew Bowden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Item 9 Labs Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer(a) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 14, 2022
/s/ Andrew Bowden
Andrew Bowden
Chief Executive Officer
EXHIBIT 31.2
SECTION 302 CERTIFICATIONS
I, Robert Mikkelsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Item 9 Labs Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer(a) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 14, 2022
/s/ Robert Mikkelsen
Robert Mikkelsen
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Item 9 Labs Corp. (the "Company") on Form 10-Q for the quarter ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Andrew Bowden, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and periods covered by the Report.
This certificate is being made for the exclusive purpose of compliance by the Principal Executive and Financial and Accounting Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law.
/s/ Andrew Bowden
Andrew Bowden
Chief Executive Officer
February 14, 2022
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Item 9 Labs Corp. (the "Company") on Form 10-Q for the quarter ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert Mikkelsen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and periods covered by the Report.
This certificate is being made for the exclusive purpose of compliance by the Principal Executive and Financial and Accounting Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law.
/s/ Robert Mikkelsen
Robert Mikkelsen
Chief Financial Officer
February 14, 2022
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares |
Dec. 31, 2021 |
Sep. 30, 2021 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common Stock, Par or Stated Value Per Share | $ 0.0001 | $ 0.0001 |
| Common Stock, Shares Authorized | 2,000,000,000 | 2,000,000,000 |
| Common Stock, Shares, Issued | 107,243,344 | 107,074,417 |
| Common Stock, Shares, Outstanding | 94,943,344 | 94,774,417 |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) |
3 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Income Statement [Abstract] | ||
| 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 |
Note 1 - Description of Business and Summary of Significant Accounting Policies |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 1 - Description of Business and Summary of Significant Accounting Policies | 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) Unity Rd retail dispensary locations in fourteen (14) states. The majority of the locations are in the licensing process. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to 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 31, 2021 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended December 31, 2021 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.
The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Certain prior period balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on the prior period's net loss or accumulated deficit. Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, 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 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 31, 2021 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 31, 2021 and 2020, substantially all of the Company's revenue was generated from performance obligations completed in the state of Arizona.
The Company recognizes revenue 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.
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.
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 and $775,843 at December 31, 2021 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 31, 2021 and 2020 that was included in deferred revenue at September 30, 2021 and 2020 was $4,998 and $0, respectively.
Basic net loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the losses of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. The following table summarizes the securities outstanding at December 31, 2021 and 2020 that were excluded from the diluted net loss per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss.
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 31, 2021 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.
Segment Reporting
The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three months ended December 31, 2021, the Company has identified two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”) and the sales of Unity Rd. franchises to dispensaries (“Franchising”).
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 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 |
3 Months Ended |
|---|---|
Dec. 31, 2021 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Note 2 - Going Concern | 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.
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 |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 3 – Inventory | Note 3 – Inventory
Inventory consisted of the following at December 31, 2021 and September 30, 2021.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 4 – Pending Acquisitions |
3 Months Ended |
|---|---|
Dec. 31, 2021 | |
| Business Combination and Asset Acquisition [Abstract] | |
| Note 4 – Pending Acquisitions | Note 4 – Pending Acquisitions
On October 6, 2021, the Company entered into an Asset Purchase Agreement to purchase certain assets, which include licenses, a lease and certain personal property to operate a licensed recreational cannabis dispensary. The purchase price is $2.0 million comprised of $1.0 million of cash, a $200,000 note, and shares of the Company’s common stock. The note has an interest rate of 5% per annum and a term of 18 months and payable in six installments on the last day of each three month period following the Closing Date. At December 31, 2021, this acquisition had not yet been finalized. As such, the effects of this acquisition have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three months ended December 31, 2021. |
Note 5 - Property and Equipment, Net |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 5 - Property and Equipment, Net | Note 5 - Property and Equipment, Net
The following represents a summary of our property and equipment as of December 31, 2021 and September 30, 2021:
During the three months ended December 31, 2021, the Company completed the purchase of 44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.
Construction in progress relates to multiple capital projects ongoing during the three months ended December 31, 2021, including the construction of the Nevada facility, the expansion of the Arizona facility and implementation of an ERP system. 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 31, 2021 and 2020 was $71,368 and $32,484, respectively. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 6 - Debt |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 6 - Debt | Note 6 - Debt
(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 million. All principal and interest were due on the maturity date. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 15% per annum, will be paid at maturity, which has been postponed to a date that has not yet been determined. At December 31, 2021 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.
(C-9) Convertible Tysadco Note
On October 1, 2021, the Company entered into a convertible note agreement. Up to fifty percent (50%) of the outstanding and unpaid principal amount is convertible into common stock. The note included warrants to purchase a total of 825,000 shares of the Company’s common stock for $3 per share, with a 4 year term. Further, the Company issued shares of common stock, valued at $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 and an additional $75,000 discount related to a one-time interest charge of 10% of the original principal amount, is amortized to interest expense over the term of the debt. The one-time interest charge was accrued at December 31, 2021.
(C-10) Convertible Gaines Note
On October 29, 2021, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s common stock for $3 per share, with a 2 year term. Further, the Company issued shares of common stock, valued at $116,250 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $561,272, which also included debt issuance costs of $44,582, is amortized to interest expense over the term of the debt.
The future minimum payments of the Company’s convertible debt obligations as of December 31, 2021 are as follows. The unamortized discount will be amortized through September 2022.
Notes Payable
(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 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 2nd 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 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 and a term of 5 years. Accrued interest in the amount of $186,370 was added to the principal balance of the note, making the total principal $1,386,370. Interest only payments of $11,553 shall be paid monthly until November 1, 2020 at which time monthly principal and interest payments of $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.
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.
(h) Viridis (unsecured)
The Company's subsidiary, BSSD Group, LLC borrowed $269,000 from Viridis, a related party, in December 2019. This note bears annualized interest at 15%. On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $269,000 note payable. Accrued interest in the amount of $14,666 was added to the principal balance of the note, making the total principal $283,666. As part of the restructuring, the Company issued 400,000 warrants exercisable into the Company's common stock. The warrants have an exercise price of $.05 and a term of 5 years. Payments of principal and interest in the amount of $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.
(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.
(p) Stockbridge Amended Debt
In February 2021, the Company and Stockbridge Enterprises, a related party, under a trouble debt restructuring, agreed to restructure and settle the outstanding notes. The total outstanding balance of $including accrued interest, were to be repaid under a new promissory note, calling for a down payment of $300,000 (paid at time of signing), $120,000 monthly payments for 11 months with the remaining balance of $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% per annum until January 25, 2022. Principal payments in the amount of $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, 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 period and an exercise price of $1.00. The resulting discount of $58,352 was fully amortized to interest expense during the three months ended December 31, 2021.
(s) Viridis $500,000
On September 30, 2021, the Company borrowed $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 per share, with a 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.
The future minimum payments of the Company’s notes payable obligations as of December 31, 2021 are as follows. The unamortized discount will be amortized through November 2023.
A summary of interest expense for the three months ended December 31, 2021 and 2020 is as follows.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 7 - Concentrations |
3 Months Ended |
|---|---|
Dec. 31, 2021 | |
| Risks and Uncertainties [Abstract] | |
| Note 7 - Concentrations | Note 7 - Concentrations
For the three months ended December 31, 2021 and 2020, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license. |
Note 8 - Commitments and Contingencies |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 8 - Commitments and Contingencies | Note 8 - Commitments and Contingencies
The production and possession of marijuana 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.
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 31, 2021 and 2020 on this lease was $23,200 and $20,710, respectively. Interest was imputed using a discount rate of 20%. The lease does not include renewal options. The future lease payments are as follows.
In August 2021, the Company signed a ten-year lease to rent approximately 7,000 square feet of retail space in Broomfield, Colorado. The lease will call for base rent payments of $12,097, plus a prorated share of taxes and operating expenses, per month for the first year and escalate each year to $15,786 per month in year 10. The commencement of this lease is contingent upon the Company obtaining a license for the retail sale of recreational and medical marijuana. The Company shall pay $3,500 per month as consideration to the landlord for keeping the premises available until the contingency is met. The agreement will terminate if the contingency is not met. At December 31, 2021, the contingency has not been met. As such, the future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at December 31, 2021 or the future lease payments schedule above.
In September 2021, the Company signed a seven-year lease to rent approximately 3,000 square feet of retail space in Biddeford, Maine. The lease will call for base rent payments of $6,604, plus taxes and operating expenses, per month for the first year and escalate each year to $7,886 per month in year seven. The commencement of this lease is contingent upon the issuance and receipt of a license and city approval. The Company shall pay $4,500 per month, plus utilities and operating expenses as consideration to the landlord for keeping the premises available until the contingency is met. The agreement will terminate if the contingency is not met. At December 31, 2021, the contingency has not been met. As such, the future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at December 31, 2021 or the future lease payments schedule above.
In October 2021, the Company entered into a commercial lease agreement to rent 12,000 square feet located in Denver, Colorado. The lease has a term of five years with escalating monthly base rent beginning at $6,354 and escalating each year to $7,295 in year five. Commencement of the lease is contingent upon the Company receiving an approved retail license within 120 days from October 22, 2021. The agreement will terminate if the contingency is not met. At December 31, 2021, the contingency has not been met. As such, the future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at December 31, 2021 or the future lease payments schedule above.
As of December 31, 2021 and September 30, 2021, the Company has accrued unpaid payroll taxes and estimated penalties and interest of approximately $2,000,000 and $2,400,000, respectively, and is included in accrued expenses in the accompanying condensed consolidated balance sheets.
There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 9 - Related Party Transactions |
3 Months Ended |
|---|---|
Dec. 31, 2021 | |
| Related Party Transactions [Abstract] | |
| Note 9 - Related Party Transactions | Note 9 - Related Party Transactions
As discussed in Note 5, 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, 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, the Company has a loan agreement with Stockbridge Enterprises. Stockbridge Enterprises holds more than 5% of the Company’s common stock.
As discussed in Note 8, 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 31, 2021 and 2020, the Company purchased cultivation supplies from a related party in the amount of $12,993 and $10,089, respectively. This related party is 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 31, 2021 and September 30, 2021 is approximately $158,000, and $138,000, respectively in amounts due to related parties. |
Note 10 - Stockholders' Equity |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 10 - Stockholders' Equity | Note 10 - Stockholders' Equity
Warrants
The following table summarizes the Company’s warrant activity for the three months ended December 31, 2021:
The Company estimates the fair value of warrants issued using the Black-Scholes option-pricing model. The following range of assumptions were used during the three months ended December 31, 2021. No warrants were issued, exercised or forfeited during the three months ended December 31, 2020.
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 have 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 31, 2021 ranges from 6 months to four years.
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The following range of assumptions were used during the three months ended December 31, 2021. No options were granted, exercised or forfeited during the three months ended December 31, 2020.
During the three months ended December 31, 2021 and 2020, the Company recognized compensation expense of $ and $, respectively. At December 31, 2021, there was $2,798,762 of total unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average vesting period of 1.4 years.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 11 – Segment Information |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 11 – Segment Information | Note 11 – 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 presents segment information for the three months ended December 31, 2021. Segment information for the three months ended December 31, 2020 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.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 12 - Subsequent Events |
3 Months Ended |
|---|---|
Dec. 31, 2021 | |
| Subsequent Events [Abstract] | |
| Note 12 - Subsequent Events | Note 12 - Subsequent Events
Subsequent to December 31, 2021 the following events have occurred.
In January 2022, the Company executed on a short-term financing arrangement. The net proceeds of $2.45 million were used to repay the outstanding principal and interest of note payable (l) in Note 6 - Debt above in the amount of approximately $1.84 million. The remaining approximately $610,000 of proceeds will be used for general working capital purposes. Payments of $66,468 are due weekly until $3.35 million is repaid. This results in an effective interest rate of approximately 34%. The Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially all of the assets of the dispensary, excluding cannabis and cannabis related products, and assumed the dispensary’s lease. The purchase price is $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company will pay the seller $65,000 in the Company’s common stock at a 10% discount to the stock’s 10-day volume weighted average.
The Company has issued 97,840 shares of common stock related to the Co-Management Agreement discussed above and for other services received. |
Note 1 - Description of Business and Summary of Significant Accounting Policies (Policies) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles of Consolidation | Principles of Consolidation
The accompanying condensed consolidated financial statements of the Company as of December 31, 2021 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended December 31, 2021 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.
The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Certain prior period balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on the prior period's net loss or accumulated deficit. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Estimates | Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, 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
Inventory is stated at the lower of cost or net realizable value with cost being determined on the first in first out method. Inventory 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 31, 2021 and September 30, 2021.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue Recognition | 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 31, 2021 and 2020, substantially all of the Company's revenue was generated from performance obligations completed in the state of Arizona.
The Company recognizes revenue 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.
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.
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 and $775,843 at December 31, 2021 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 31, 2021 and 2020 that was included in deferred revenue at September 30, 2021 and 2020 was $4,998 and $0, respectively. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss Per Share |
Basic net loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the losses of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. The following table summarizes the securities outstanding at December 31, 2021 and 2020 that were excluded from the diluted net loss per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants, Conversion Options and Debt Discounts | 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 31, 2021 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting | Segment Reporting
The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three months ended December 31, 2021, the Company has identified two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”) and the sales of Unity Rd. franchises to dispensaries (“Franchising”). |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recently Issued Accounting Pronouncements | 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 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 1 - Description of Business and Summary of Significant Accounting Policies (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Antidilutive shares excluded from calculation of diluted net loss per share |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 3 – Inventory (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 5 - Property and Equipment, Net (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| property and equipment | The following represents a summary of our property and equipment as of December 31, 2021 and September 30, 2021:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 6 - Debt (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Debt [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| [custom:ScheduleOfFutureMinimumPaymentsOfConvertibleDebtObligationsTableTextBlock] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Debt [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| [custom:ScheduleOfFutureMinimumPaymentsOfNotesPayableObligationsTableTextBlock] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| [custom:ScheduleOfDebtInterestExpenseSummaryTableTextBlock] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 8 - Commitments and Contingencies (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block] |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 10 - Stockholders' Equity (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Defined Benefit Plan, Assumptions [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| stock option activity |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| [custom:ScheduleOfAssumptionsUsed1TableTextBlock] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 11 – Segment Information (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Segment Reporting Information, by Segment [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 1 - Description of Business and Summary of Significant Accounting Policies (Details Narrative) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
Sep. 30, 2021 |
|
| Accounting Policies [Abstract] | |||
| Deferred Revenue | $ 770,845 | $ 775,843 | |
| Deferred Revenue, Revenue Recognized | $ 4,998 | $ 0 | |
Antidilutive shares excluded from calculation of diluted net loss per share - shares |
3 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Potentially dilutive common share equivalents | ||
| Options | 5,206,251 | 3,211,709 |
| Warrants | 47,834,744 | 16,500,000 |
| Convertible notes | 2,350,969 | 2,526,969 |
| Potentially dilutive shares outstanding | 55,391,964 | 22,238,678 |
Inventory - USD ($) |
Dec. 31, 2021 |
Sep. 30, 2021 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Raw materials and work in process | $ 3,062,686 | $ 4,291,095 |
| Finished goods | 955,789 | 1,052,375 |
| Packaging and other | $ 1,234,852 | $ 1,047,881 |
Note 4 – Pending Acquisitions (Details Narrative) - Acquisition 1 [Member] |
3 Months Ended |
|---|---|
|
Dec. 31, 2021
USD ($)
shares
| |
| Business Acquisition [Line Items] | |
| Asset Acquisition, Price of Acquisition, Expected | $ 2.0 |
| Payments to Acquire Businesses, Gross | 1.0 |
| [custom:NoteIssuedDuringAcquisitionAsPartOfPurchasePrice-0] | $ 200,000 |
| Stock Issued During Period, Shares, Acquisitions | shares | 300,000 |
| Debt Instrument, Interest Rate During Period | 5.00% |
| Debt Instrument, Term | 18 months |
Note 5 - Property and Equipment, Net (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Property, Plant and Equipment [Abstract] | ||
| [custom:LandPurchasedWithEscrowFundsAndDeposit] | $ 3,000,000 | |
| Depreciation | $ 71,368 | $ 32,484 |
Future minimum payments of Company's convertible debt obligations |
Dec. 31, 2021
USD ($)
|
|---|---|
| Future Minimum Payments Of Companys Convertible Debt Obligations | |
| [custom:FutureMinimumPaymentsConvertibleDebtObligationDueNextTwelveMonths-0] | $ 3,370,000 |
| [custom:FutureMinimumPaymentsConvertibleDebtObligationDue-0] | 3,370,000 |
| [custom:FutureMinimumPaymentsConvertibleDebtObligationDueUnamortizedDiscount-0] | (1,381,960) |
| [custom:FutureMinimumPaymentsConvertibleDebtObligationDueNet-0] | $ 1,988,040 |
Future minimum payments of Company's notes payable obligations |
Dec. 31, 2021
USD ($)
|
|---|---|
| Future Minimum Payments Of Companys Notes Payable Obligations | |
| [custom:FutureMinimumPaymentsNotesPayableObligationDueNextTwelveMonths-0] | $ 4,074,783 |
| [custom:FutureMinimumPaymentsNotesPayableObligationDueYearTwo-0] | 20,631,773 |
| [custom:FutureMinimumPaymentsNotesPayableObligationDueYearThree-0] | 351,937 |
| [custom:FutureMinimumPaymentsNotesPayableObligationDue-0] | 25,058,493 |
| [custom:FutureMinimumPaymentsNotesPayableObligationDueUnamortizedDiscount-0] | (4,719,209) |
| [custom:FutureMinimumPaymentsNotesPayableObligationDueImputedInterest-0] | (552,960) |
| [custom:FutureMinimumPaymentsNotesPayableObligationDueNet-0] | 19,786,324 |
| [custom:FutureMinimumPaymentsNotesPayableObligationCurrentPortion-0] | (3,521,822) |
| [custom:FutureMinimumPaymentsNotesPayableObligationDueNetLessCurrentPortion-0] | $ 16,264,502 |
Summary of interest expense - USD ($) |
3 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Summary Of Interest Expense | ||
| Amortization of debt discounts from equity issuances and beneficial conversion features | $ 1,559,401 | $ 126,264 |
| Amortization of debt discounts from success and other fees | 306,310 | |
| Stated interest paid or accrued | 1,203,932 | 569,444 |
| Finance charges and other interest | 817 | 12,659 |
| 3,070,460 | 708,367 | |
| Less: interest capitalized to construction in progress | (1,860,070) | |
| $ 1,210,390 | $ 708,367 | |
Note 8 - Commitments and Contingencies (Details Narrative) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
May 31, 2024 |
May 31, 2023 |
May 31, 2022 |
May 31, 2021 |
May 31, 2020 |
Sep. 30, 2021 |
|
| Accrued Payroll Taxes, Current | $ 2,000,000 | $ 2,400,000 | ||||||
| Operating Lease 1 [Member] | ||||||||
| Operating Lease, Payments | $ 7,178 | $ 7,003 | $ 6,828 | $ 6,653 | $ 6,478 | |||
| Operating Leases, Rent Expense | 23,200 | $ 20,710 | ||||||
| Operating Lease 2 [Member] | ||||||||
| Operating Lease, Payments | 12,097 | |||||||
| [custom:OperatingLeasePaymentsMaximumMonthlyRentAmount] | 15,786 | |||||||
| [custom:MonthlyConsiderationPaidUntilLeaseContingencyMet] | 3,500 | |||||||
| Operating Lease 3 [Member] | ||||||||
| Operating Lease, Payments | 6,604 | |||||||
| [custom:OperatingLeasePaymentsMaximumMonthlyRentAmount] | 7,886 | |||||||
| [custom:MonthlyConsiderationPaidUntilLeaseContingencyMet] | 4,500 | |||||||
| Operating Lease 4 [Member] | ||||||||
| Operating Lease, Payments | 6,354 | |||||||
| [custom:OperatingLeasePaymentsMaximumMonthlyRentAmount] | $ 7,295 | |||||||
Note 9 - Related Party Transactions (Details Narrative) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
Sep. 30, 2021 |
|
| Related Party Transactions [Abstract] | |||
| [custom:LandPurchasedWithEscrowFundsAndDeposit] | $ 3,000,000 | ||
| [custom:PurchasesOfSuppliesFromRelatedParty] | 12,993 | $ 10,089 | |
| [custom:AmountsDueToRelatedPartiesIncludedInAccountsPayable-0] | $ 158,000 | $ 138,000 | |
Warrant Activity - Warrants 1 [Member] - USD ($) |
3 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Sep. 30, 2021 |
|
| Class of Warrant or Right [Line Items] | ||
| Class of Warrant or Right, Outstanding | 47,834,744 | 46,095,000 |
| Class of Warrant or Right, Exercise Price of Warrants or Rights | $ 2.10 | $ 2.08 |
| Warrants and Rights Outstanding | $ 5,932,122 | $ 14,243,000 |
| Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Granted | 1,739,744 | |
| Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value | $ 2.81 |
Note 10 - Stockholders' Equity (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Equity [Abstract] | ||
| [custom:SharesAvailableForIssuanceUnderEquityIncentivePlan] | 4,141,021 | |
| Share-based Payment Arrangement, Noncash Expense | $ 507,294 | $ 304,672 |
| [custom:UnrecognizedStockCompensationCost-0] | $ 2,798,762 | |