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 | ☐ |
| ☑ | 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 August 15, 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
JUNE 30, 2022
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 | 25 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 31 | |
| Item 4. | Controls and Procedures | 31 | |
| Part II - Other Information | 33 | ||
| Item 1. | Legal Proceedings | 33 | |
| Item 1A. | Risk Factors | 33 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 | |
| Item 3. | Defaults Upon Senior Securities | 33 | |
| Item 4. | Mine Safety Disclosures | 33 | |
| Item 5. | Other Information | 33 | |
| Item 6. | Exhibits | 34 | |
| Signatures | 35 | ||
| Certifications | |||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
| INDEX | F-1 | |
| Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and September 30, 2021 | F-2 | |
| Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2022 and 2021 | F-3 | |
| Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended June 30, 2022 and 2021 | F-4 | |
| Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2022 and 2021 | F-5 | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | F-6 |
| F-1 |
ITEM 9 LABS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | Se`ptember 30, | |||||||
| 2022 | 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 | ||||||||
| Construction escrow deposits | ||||||||
| Deposits | ||||||||
| Other assets | ||||||||
| 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, net of discounts | ||||||||
| Income tax payable | ||||||||
| 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 June 30, 2022 and September 30, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock | ( | ) | ( | ) | ||||
| Total Item 9 Labs Corp. Stockholders' Equity | ||||||||
| Non-controlling interest | ||||||||
| 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 SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended | For the three months ended | For the nine months ended | For the nine months ended | |||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| 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 | ||||||||||||||||
| Provision for (recovery of) bad debt | ( | ) | ||||||||||||||
| Total expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss, before income tax provision (benefit) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax provision (benefit) | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Net loss attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to Item 9 Labs Corp. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic net income (loss) per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Diluted net income (loss) per common share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 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 AND NINE MONTHS ENDED JUNE 30, 2022 AND 2021
| Item 9 Labs Corp. Equity | ||||||||||||||||||||||||||||||||
| Additional | Non- | |||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury Stock | Accumulated | Controlling | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Amount | (Deficit) | Interest | Total | |||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Stock issued for cash, net | — | |||||||||||||||||||||||||||||||
| Issuance of shares for services | — | |||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock issued for cash, net | — | |||||||||||||||||||||||||||||||
| Stock issued for acquisition | — | |||||||||||||||||||||||||||||||
| Warrants issued for acquisition | — | — | ||||||||||||||||||||||||||||||
| Stock to be issued for convertible notes | ( | ) | — | |||||||||||||||||||||||||||||
| Warrants issued with convertible notes | — | — | ||||||||||||||||||||||||||||||
| Beneficial conversion features | — | — | ||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock issued for cash, net | — | |||||||||||||||||||||||||||||||
| Adjustment to acquisition price, warrants | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Stock issued for debt inducement | — | |||||||||||||||||||||||||||||||
| Warrants issued with debt | — | — | ||||||||||||||||||||||||||||||
| Beneficial conversion feature | — | — | ||||||||||||||||||||||||||||||
| Issuance of shares for services | — | |||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Stock issued on exercise of options | ( | ) | — | |||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock issued for cash, net | — | |||||||||||||||||||||||||||||||
| Stock issued for acquisition | — | |||||||||||||||||||||||||||||||
| Stock issued for licenses | — | |||||||||||||||||||||||||||||||
| Stock issued for debt inducement | — | |||||||||||||||||||||||||||||||
| Beneficial conversion feature | — | — | ||||||||||||||||||||||||||||||
| Issuance of shares for services | — | |||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Stock issued on exercise of options | ( | ) | — | |||||||||||||||||||||||||||||
| Non-controlling interest | — | — | ||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock issued for cash, net | — | |||||||||||||||||||||||||||||||
| Issuance of shares for services | — | |||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
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 nine months ended | For the nine months ended | |||||||
| June 30, 2022 | June 30, 2021 | |||||||
| 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 discounts | ||||||||
| Common stock issued for services | ||||||||
| Stock based compensation expense | ||||||||
| Recovery of bad debt | ( | ) | ||||||
| Loss on disposal of fixed assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Deposits | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued payroll and payroll taxes | ( | ) | ( | ) | ||||
| Income tax payable | ||||||||
| Accrued interest | ||||||||
| Accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Investing Activities: | ||||||||
| Deposit on acquisition | ( | ) | ||||||
| Cash paid for acquisition | ( | ) | ||||||
| Purchases of property, equipment and construction in progress | ( | ) | ( | ) | ||||
| Cash received for note receivable | ||||||||
| Cash received from construction escrow accounts | ||||||||
| Cash acquired in acquisition | ||||||||
| Cash paid to acquisition escrow accounts | ( | ) | ||||||
| Capitalized license fees | ( | ) | ||||||
| Purchase of license | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from the sale of common stock | ||||||||
| Costs for 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 issued for acquisitions | $ | $ | ||||||
| Stock issued for acquisition of a license | $ | $ | ||||||
| Accrued interest transferred to debt | $ | $ | ||||||
| Warrants issued for debt and acquisition | $ | $ | ||||||
| Stock issued for debt | $ | $ | ||||||
| Non-controlling interest | $ | $ | ||||||
| Stock issuance costs paid in stock | $ | $ | ||||||
| Fixed assets purchased with debt | $ | $ | ||||||
| Debt issued for acquisition of a license | $ | $ | ||||||
| Debt proceeds used to pay debt discounts | $ | $ | ||||||
| Land purchased with escrow funds and deposit | $ | $ | ||||||
| Stock issued to pay accounts payable and prepay expenses | $ | $ | ||||||
| Operating lease right of use asset and liability | $ | $ | ||||||
| Beneficial conversion feature on convertible debt | $ | $ | ||||||
| Construction in progress paid with escrow funds | $ | $ | ||||||
| Accrued debt discount fees | $ | $ | ||||||
| Debt discount amortization capitalized to 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 is a holding company, investing in cannabis and cannabis-related businesses. Its subsidiaries currently compete in two different market segments: (1) production of 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) sale of 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 (30) Unity Rd retail dispensary locations in twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating in Boulder, Colorado. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to operate their business and contribute to their local communities. As the Unity Rd dispensaries achieve sufficient market penetration, Item 9 Labs aims to offer its products in those locations to expand the distribution footprint of its premium product offerings.
In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
Principles of Consolidation
The accompanying condensed consolidated financial statements of the Company as of June 30, 2022 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.
The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries and a consolidated variable interest entity (“VIE”). Intercompany balances and transactions have been eliminated.
Item 9 Labs consolidates a VIE in which the Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company makes significant judgments in determining whether an entity is a VIE and, for each reporting period, the Company assesses whether it is the primary beneficiary of the VIE. Effective February 1, 2022, the Company was deemed the primary beneficiary of Elevated Connections, Inc. The equity in Elevated Connections, Inc. held by its stockholder has been presented on the balance sheet and the statement of operations as a non-controlling interest.
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 periods’ net income, net loss or accumulated deficit.
| F-6 |
Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, inventory, accruals and contingencies, carrying value of goodwill and intangible assets, the fair value of common stock and the estimated fair value of stock options and warrants. Due to the uncertainties in the formation of accounting estimates, and the significance of these items, it is reasonably possible that these estimates could be materially changed in the near term.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on the first in first out method. Inventory primarily consists of the costs directly related to the production and cultivation of cannabis crops, cannabis oils, and cannabis concentrate products. Inventory is relieved to cost of revenues as products are delivered to dispensaries. Inventory consists primarily of labor, utilities, costs of raw materials, packaging, nutrients and overhead.
The Company routinely evaluates the carrying value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce inventory to its estimated net realizable value. There were no inventory reserves recorded at June 30, 2022 and September 30, 2021.
Licenses
Cannabis licenses vary in term for each jurisdiction. The Company capitalizes all costs associated with the acquisition of cannabis licenses in the year the license is obtained. Subsequent measurement is determined by the length of the term of the license. The Company acquired licenses during the nine months ended June 30, 2022 that have indefinite useful lives, subject to annual renewals. Costs associated with maintaining licenses (annual fees) are expensed as incurred. The anticipated maintenance fees are not expected to be material to the condensed consolidated financial statements. Licenses are included on the balance sheet under the heading Intangible assets, net at June 30, 2022 and September 30, 2021.
Revenue Recognition
Cultivation revenue
The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, including estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and recognizing revenue when (or as) the performance obligation is satisfied.
Substantially all of the Company's revenue is associated with a customer contract that represents an obligation to provide cannabis products that are delivered at a single point in time. Any costs incurred prior to the period in which the products are delivered are recorded to inventory and recognized as cost of revenues in the period in which the performance obligation is completed. For the three and nine months ended June 30, 2022 and 2021, all of the Company's cultivation revenue was generated from performance obligations completed in the state of Arizona.
The Company recognizes revenue once the products are delivered. Revenue is considered earned upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is reasonably assured. The Company records revenue at the amount it expects to collect, 100% of the wholesale sales revenue. The fees paid for operating under the contract are expensed to cost of revenues.
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 net loss 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 June 30, 2022 and 2021 that were excluded from the diluted net loss per share calculation for the three and nine months ended June 30, 2022 and 2021 because the effect of including these potential shares was antidilutive due to the Company’s net loss.
| 2022 | 2021 | |||||||
| Potentially dilutive common share equivalents | ||||||||
| Options | ||||||||
| Warrants | ||||||||
| Convertible notes | ||||||||
| Potentially dilutive shares outstanding | ||||||||
| F-8 |
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 June 30, 2022 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.
Segment Reporting
The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three and nine months ended June 30, 2022 and 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”).
Business Combination
The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
| F-9 |
Recently Issued Accounting Pronouncements
Pending Adoption
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for the Company on October 1, 2023, with early adoption permitted on October 1, 2019. We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our condensed consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic 606 as if the acquirer had originated the contracts. For public business entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years and early adoption is permitted. We are currently evaluating the impact of adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.
Note 2 - Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming the continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company's planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company's ability to continue as a going concern.
In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management's plans in regard to these matters are described as follows:
Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company's revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of Arizona, with construction of a cultivation and processing facility nearing completion in Nevada. The Company believes that it will reduce 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 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.
| F-10 |
Note 3 – Inventory
Inventory consisted of the following at June 30, 2022 and September 30, 2021.
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Raw materials and work in process | $ | $ | ||||||
| Finished goods | ||||||||
| Packaging and other | ||||||||
| $ | 4,130,779 | $ | 6,391,351 | |||||
Note 4 – Acquisitions
Oklahoma City dispensary acquisition
In January 2022, the Company signed a Co-Management
Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially
all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease.
The purchase price was $
As of June 30, 2022, the consideration paid or accrued for this acquisition was as follows:
| Cash | $ | 190,000 | ||
| Common stock | ||||
| $ |
| F-11 |
The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired as of the transaction date:
| Tangible assets acquired | ||||
| Cash | $ | |||
| Fixed assets | ||||
| Tangible net assets acquired | ||||
| Goodwill | ||||
| Consideration paid | $ |
Adams County acquisition
On October 6, 2021, the Company entered into an Asset
Purchase Agreement with Nebrina Adams County LLC to purchase certain assets, which include licenses, a lease and certain personal property
to operate a licensed recreational cannabis dispensary (the “Adams County Acquisition”). The purchase price is $
As of June 30, 2022, the consideration paid in this asset acquisition was as follows:
| Cash | $ | 1,000,000 | ||
| Debt | ||||
| Common stock | ||||
| Direct costs of acquisition | ||||
| $ |
The Herbal Cure pending acquisition
On March 11, 2022, the Company entered into an Asset
Purchase Agreement with The Herbal Cure LLC (“Seller”), pursuant to which, the Company is purchasing certain assets from the
Seller. The total purchase price for the assets to be acquired is $
(i) Upon
mutual execution and delivery of the Asset Purchase Agreement, the Company shall convey to the Seller a down payment in the amount of
$
(ii)
At the Closing, the Company shall pay to Seller $
(iii)
$
(iv)
the Company shall pay the remainder of the purchase price in shares of its common stock on the Closing Date, in such amount of Shares
as is the quotient of $
At June 30, 2022, the $
Sessions pending acquisition
On May 18, 2022, the Company and its wholly owned subsidiary, OCG Management Ontario, Inc., a corporation formed under the laws of the Province of Ontario (“Purchaser”) solely for the purpose of completing this transaction, entered into a Share Purchase Agreement pursuant to which the Purchaser is purchasing all, but not less than all, of the issued and outstanding shares in the capital of Wild Card Cannabis Incorporated, a corporation formed under the laws of the Province of Ontario free and clear of all Liens from the Shareholders.
The total purchase price for
the Shares is Twelve Million Eight Hundred Thousand Dollars ($
(i) The
Company has delivered the Exclusivity Deposit in the amount of $
(ii) At
the Closing, Purchaser shall pay to Shareholders the Estimated Purchase Price of Twelve Million Eight Hundred Thousand Dollars ($
(iii) Four
Million One Hundred Thousand Dollars ($
(iv) Four
Million One Hundred Thousand Dollars ($
At June 30, 2022, the $
| F-12 |
Note 5 – Variable Interest Entity
In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. Under the terms of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease (see Note 4). Further, under the Co-Management Agreement, the Company is to operate, staff, and otherwise manage the day-to-day operations of the dispensary. The Company shall also pay all claims, costs and liabilities associated with operating the dispensary.
The terms of the Co-Management Agreement provide the Company with, in its judgment, the ability to manage and make decisions that most significantly affect the operations of Elevated Connections and to absorb losses that could potentially be significant to Elevated Connections. As such, the Company has consolidated Elevated Connections effective February 1, 2022. The purpose of Elevated Connections, as a licensed dispensary, is to hold the cannabis and cannabis related products and licenses of the dispensary.
The assets of the VIE cannot be used to settle obligations of the Company or its wholly owned subsidiaries. However, liabilities recognized as a result of consolidating the VIE does represent additional claims on the Company’s general assets.
The following table presents the carrying values of the assets and liabilities of the entity that is a VIE and consolidated by the Company at June 30, 2022.
| June 30, | ||||
| Assets | 2022 | |||
| Current assets | ||||
| Inventory | $ | |||
| Total assets | $ | |||
| Liabilities | ||||
| Current liabilities | ||||
| Income tax payable | $ | |||
| Total liabilities | $ | |||
The following table presents the operations (after intercompany eliminations) of the entity that is a VIE and consolidated by the Company for the three and nine months ended June 30, 2022.
| Three months ended June 30, | Nine months ended June 30, | |||||||
| 2022 | 2022 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| F-13 |
Note 6 – Goodwill and Intangible Assets
Goodwill and identifiable intangible assets, including licenses, consist of the following as of June 30, 2022 and September 30, 2021:
| Gross Carrying | Accumulated | Accumulated | ||||||||||||||
| Amount | Amortization | Impairment | Net | |||||||||||||
| June 30, 2022 | ||||||||||||||||
| Finite lived intangible assets: | ||||||||||||||||
| Trade names and trademarks | $ | $ | $ | $ | ||||||||||||
| Customer relationships | ||||||||||||||||
| Websites and other intellectual property | ||||||||||||||||
| Franchise and consulting agreements | ||||||||||||||||
| Total finite lived intangible assets | ||||||||||||||||
| Indefinite lived intangible assets: | ||||||||||||||||
| Licenses | ||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | ||||||||||||
| Gross Carrying | Accumulated | Accumulated | ||||||||||||||
| Amount | Amortization | Impairment | Net | |||||||||||||
| September 30, 2021 | ||||||||||||||||
| Finite lived intangible assets: | ||||||||||||||||
| Trade names and trademarks | $ | $ | $ | $ | ||||||||||||
| Customer relationships | ||||||||||||||||
| Websites and other intellectual property | ||||||||||||||||
| Franchise and consulting agreements | ||||||||||||||||
| Total finite lived intangible assets | ||||||||||||||||
| Indefinite lived intangible assets: | ||||||||||||||||
| Licenses | ||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | ||||||||||||
| Gross Carrying | ||||||||
| Gross Carrying | Amount | |||||||
| Amount | Goodwill | |||||||
| Goodwill | Impairment | |||||||
| Changes in goodwill and indefinite lived intangibles: | ||||||||
| Balance at September 30, 2021 | $ | $ | ||||||
| Additional goodwill related to Oklahoma City dispensary acquisition | ||||||||
| Balance at June 30, 2022 | $ | $ | ||||||
As of June 30, 2022, the cultivation and processing licenses from the state of Nevada, included above, have not been transferred to the Company as the transfer is awaiting regulatory approval.
During the three months ended June 30, 2022, the Company has noted indicators of the possible impairment of its goodwill and intangible assets. The Company will analyze these indicators during the fourth quarter of the year ended September 30, 2022 and determine if any impairment has occurred. Given the carrying value of the Company’s goodwill and intangible assets at June 30, 2022, the occurrence of an impairment may be material to the Company’s financial position and results of operations.
| F-14 |
Note 7 - Property and Equipment, Net
The following represents a summary of our property and equipment as of June 30, 2022 and September 30, 2021:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Cultivation and manufacturing equipment | $ | $ | ||||||
| Computer equipment and software | ||||||||
| Leasehold improvements | ||||||||
| Buildings and improvements | ||||||||
| 3,678,479 | 3,558,479 | |||||||
| Accumulated Depreciation | ( | ) | ( | ) | ||||
| 2,982,427 | 3,079,159 | |||||||
| Land | ||||||||
| Construction on progress | ||||||||
| Property and Equipment, Net | $ | $ | ||||||
During the nine months ended June 30, 2022, the Company
completed the purchase of 44 acres of land from a related party for $
Construction in progress relates to multiple capital projects ongoing during the three and nine months ended June 30, 2022, including the construction of the Nevada facility and the expansion of the Arizona facility. Construction in progress also includes interest and fees on debt that is directly related to the financing of the Company’s capital projects.
Depreciation expense for the three months ended June
30, 2022 and 2021 was $
Note 8 – Debt
| Convertible Notes | ||||||||||||||||||||||||
| Effective | Maturity | Annual Interest | Balance at | Balance at | Conversion | |||||||||||||||||||
| Date | Date | Rate | June 30, 2022 | September 30, 2021 | Price | |||||||||||||||||||
| C-2 | % | See C-2 | ||||||||||||||||||||||
| C-3 | % | |||||||||||||||||||||||
| C-5 | % | |||||||||||||||||||||||
| C-7 | % | |||||||||||||||||||||||
| C-8 | % | |||||||||||||||||||||||
| C-9 | % | | ||||||||||||||||||||||
| C-10 | | % | | |||||||||||||||||||||
| C-11 | % | |||||||||||||||||||||||
| 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 $1.1 million. The note is convertible at the lesser of a) $1.00 per share or, b) 20% discount to the ten day average closing price of the Company’s common stock, immediately prior to the conversion date. All principal and interest were due on the maturity date. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 15% per annum, will be paid at maturity, which has been postponed to a date that has not yet been determined. At June 30, 2022 the Viridis note was in default. The Viridis note remains in default as of this filing, though the parties are negotiating a long-term arrangement.
| F-15 |
(C-9) Convertible Tysadco Note
On October 1, 2021, the Company entered into a convertible note agreement. Up to fifty percent (50%) of the outstanding and unpaid principal amount is convertible into common stock. The note included warrants to purchase a total of 825,000 shares of the Company’s common stock for $3 per share, with a 4 year term. Further, the Company issued 67,365 shares of common stock, valued at $112,500 as an inducement to the lenders to enter into the note agreements. The debt included a 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 June 30, 2022.
(C-10) Convertible Gaines Note
On October 29, 2021, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s common stock for $3 per share, with a 2 year term. Further, the Company issued 75,000 shares of common stock, valued at $116,250 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $561,272, which also included debt issuance costs of $44,582, is amortized to interest expense over the term of the debt. This convertible note is currently due on demand and interest is paid monthly.
(C-11) Convertible Goldstein Note
On February 21, 2022, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The Company issued 25,000 shares of common stock, valued at $25,000 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair value of the shares of common stock. The debt and shares of common stock were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $50,000 is amortized to interest expense over the term of the debt.
The future minimum payments of the Company’s convertible debt obligations as of June 30, 2022 are as follows. The unamortized discount will be amortized through September 2022.
| Year ended | ||||||
| June 30, | Amount | |||||
| 2023 | $ | |||||
| Less: unamortized discount | ( | ) | ||||
| $ | ||||||
| F-16 |
| Notes Payable | ||||||||||||||||||||
| Effective | Maturity | Annual Interest | Balance at | Balance at | ||||||||||||||||
| Date | Date | Rate | June 30, 2022 | 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 | ||||||||||||||||||
| u | % | — | Future revenues | |||||||||||||||||
| v | % | — | Future revenues | |||||||||||||||||
| w | On demand | % | — | |||||||||||||||||
| x | % | — | N/A | |||||||||||||||||
| y | % | — | 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 $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 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.
| F-17 |
(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.
(l) Upwise Capital
In August 2021, the Company executed on a short-term financing arrangement. The proceeds of $2.5 million are being utilized to further expand the production capabilities of the operations in Arizona and to complete the Nevada facility. Payments of $64,762 are due weekly until $3.264 million is repaid. This results in an effective interest rate of approximately 36%.
On January 26, 2022, the Company executed a second short-term financing arrangement. The proceeds of $2.5 million were used to repay the first short-term financing arrangement, discussed above, in the amount of approximately $1.839 million, and the remainder of the proceeds was used for working capital purposes. Payments of $66,468 are due weekly until $3.35 million has been repaid. This results in an effective interest rate of 36%. The repayment of the first short-term financing was accounted for as an extinguishment. As such, all previously unamortized discount in the amount of $46,588 and imputed interest in the amount of $483,840 was capitalized to construction in progress during January 2022. Fees paid for the second short-term financing arrangement in the amount of $91,000 have been recorded as a discount and will be amortized to interest expense over the term of the arrangement. See Note 14.
(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 its outstanding notes. The total outstanding balance of $1,660,590, 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 two-year period and an exercise price of $1.00. The resulting discount of $58,352 was fully amortized to interest expense during the six months ended March 31, 2022.
Effective March 31, 2022, the debt was amended to extend the maturity date to June 30, 2022, interest payments are due on April 1, May 1 and June 1, 2022. Principal payments in the amount of $50,000 are due on April 15, May 15 and June 15, 2022 and a final balloon payment of outstanding principal and interest in the amount of $223,972 is due on June 30, 2022. This note is currently due on demand and interest is paid monthly.
(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 five-year term. As of the date of these condensed consolidated financial statements, the terms of these warrants have not been finalized. The debt and anticipated warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 18% per annum beginning January 1, 2022, will be paid at maturity, which has been postponed to a date that has not yet been determined.
| F-18 |
(t) Chessler note
Prior to the acquisition, OCG entered into a settlement agreement with its former landlord, which included a note agreement for $500,000. During March 2022, this note agreement was modified to extend the maturity date to July 19, 2022 and add an interest rate of 18% per annum. The modified note also calls for principal payments of $75,000 on the effective date of the note, $75,000 on April 10, 2022, $100,000 on May 22, 2022 and $250,000 at maturity, plus accrued and unpaid interest. The principal balance of this note plus accrued and unpaid interest was paid subsequent to June 30, 2022.
(u) Lendspark
In February 2022, the Company executed on a short-term financing arrangement for proceeds of $750,000. Payments of $20,400 are due weekly until approximately $1.02 million is repaid. This results in an effective interest rate of approximately 36%. Fees in the amount of $48,765 have been recorded as a discount and are being amortized to interest expense over the term of the arrangement. See Note 14.
(v) Upwise Capital 2
In February 2022, the Company executed on a third short-term financing arrangement with Upwise Capital for proceeds of $250,000. Payments of $6,746 are due weekly until $340,000 is repaid. This results in an effective interest rate of approximately 36%. Fees in the amount of $16,255 have been recorded as a discount and are being amortized to interest expense over the term of the arrangement. See Note 14.
(w) Viridis working capital loans
During the nine months ended June 30, 2022, the Company received several short-term working capital loans from Viridis, a related party, in the amount of $3,702,000. The terms of these short term loans are still being determined, however, an interest rate of 15% has been estimated.
(x) Non-convertible Gaines Note
On March 10, 2022, the Company entered into a short-term promissory note for $250,000. The short-term promissory note is due and payable in monthly payments of interest only, with all principal and any accrued and unpaid interest due at maturity. This convertible note is currently due on demand and interest is paid monthly.
(y) Nebrina Adams County Note
Effective with the close of the Adams County acquisition (see Note 4), the Company entered into a note for $200,000 with the seller as part of the purchase price. The note is payable in six installments on the last day of each three-month period following the Closing Date.
The future minimum payments of the Company’s notes payable obligations as of March 31, 2022 are as follows. The unamortized discount will be amortized through November 2023.
| Year ended | ||||||
| June 30, | Amount | |||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| Less: unamortized discount | ( | ) | ||||
| Less: imputed interest | ( | ) | ||||
| Less: current portion | ( | ) | ||||
| $ | ||||||
| F-19 |
A summary of interest expense for the three and nine months ended June 30, 2022 and 2021 is as follows.
Three months ended June 30, | Nine months ended June 30, 2022 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Amortization of debt discounts | $ | $ | $ | $ | ||||||||||||
| Stated interest paid or accrued | ||||||||||||||||
| Finance charges and other interest | ||||||||||||||||
| Less: interest capitalized to construction in progress | ( | ) | ( | ) | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
Note 9 - Concentrations
For the three and nine months ended June 30, 2022 and 2021, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license. One of our license holder’s customers that the Company’s products are distributed to accounts for 33% of our cultivation revenue for the nine months ended June 30, 2022. Should our products no longer be distributed to this customer of our license holder, it would have a material adverse effect on our operations.
Note 10 - Commitments and Contingencies
The production and possession of cannabis is prohibited on a national level by the Controlled Substances Act, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. If the federal government decides to change its policy on the enforcement of the Controlled Substances Act, it would have a material adverse effect on our business.
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 $
In February 2022, the Company assumed a lease to rent
approximately 3,100 square feet of retail space in Oklahoma City, Oklahoma as part of the Oklahoma City acquisition disclosed in Note
4. The lease calls for base rent payments of $21 per square foot ($
In March 2022, the Company assumed a lease to rent
approximately 2,650 square feet of retail space in Adams County, Colorado as part of the Adams County acquisition disclosed in Note 4.
The lease calls for base rent payments of $
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 calls for base rent payments of $
| F-20 |
The future lease payments are as follows.
| Year ended | ||||||
| June 30, | Amount | |||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Thereafter | ||||||
| Less: imputed interest | ( | ) | ||||
| Less: current portion: | ( | ) | ||||
| $ | ||||||
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 June 30, 2022 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.
Note 11 - Related Party Transactions
As discussed in Note 7, the Company completed the purchase
of 44 acres of land from a related party for $
As discussed in Note 8, the Company has entered into various loan agreements with Viridis or its related entities. Two members of Viridis serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.
As discussed in Note 8, the Company has a loan agreement with Stockbridge Enterprises. Stockbridge Enterprises holds more than 5% of the Company’s common stock.
| F-21 |
As discussed in Note 10, the Company has a lease agreement with VGI Capital LLC. Two members of VGI Capital LLC serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.
During the three months ended June 30, 2022 and 2021,
the Company purchased cultivation supplies from a related party in the amount of $
Included in our accounts payable at June 30, 2022 and
September 30, 2021 is approximately $
Note 12 - Stockholders' Equity
Unit Offering
Prior to the three months ended June 30, 2022, the Company began offering up to 28,000,000 units of the Company for $1.40 per Unit on a “best-efforts/no minimum” basis pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. Each Unit is comprised of one share of common stock and one-half of one warrant to purchase a share of common stock. Only whole warrants are exercisable. Each whole warrant entitles the holder to purchase one share of common stock for $2.00 per share, subject to certain adjustments, from the date of issuance until the second anniversary of the date of issuance and is redeemable by the Company under certain conditions. Effective May 4, 2022, the Company repriced the offering to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company has incurred approximately $922,000 in fees related to this offering. These fees are included in Other assets on the condensed consolidated balance sheet at June 30, 2022 and will be netted against the proceeds received in the offering.
Warrants
The following table summarizes the Company’s warrant activity for the nine months ended June 30, 2022:
| Common Shares Issuable Upon Exercise of | Weighted Average | Weighted Average Contractual | Aggregate | |||||||||||||
| Warrants | Exercise Price | Term in Years | Intrinsic Value | |||||||||||||
| Balance of warrants at September 30, 2021 | 3.9 | |||||||||||||||
| Warrants granted | 2.8 | — | ||||||||||||||
| Exercised | — | — | — | — | ||||||||||||
| Forfeited/Cancelled | — | — | — | — | ||||||||||||
| Balance of warrants at June 30, 2022 | $ | $ | 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 June 30, 2022, for those awards that have an exercise price currently below the closing price as of June 30, 2022. Awards with an exercise price above the closing prices as of June 30, 2022 are considered to have no intrinsic value. |
The following range of assumptions were used to estimate the fair value of warrants issued during the nine months ended June 30, 2022, using the Black-Scholes option-pricing model, excluding the 234,943 whole warrants issued as part of the Company’s unit offering.
Nine months ended | ||||
| June 30, 2022 | ||||
| Expected stock price volatility | % - % | |||
| Risk-free interest rate | % - % | |||
| Expected term (years) | - | |||
| Expected dividend yield | % | |||
| Black-scholes value | $- $ | |||
| F-22 |
Stock Options
On June 21, 2019, the Company’s 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. The maximum contractual term of the award is 10 years. The vesting period for options outstanding at June 30, 2022 ranges from vesting immediately to three years.
The following table summarizes the Company’s stock option activity for the nine months ended June 30, 2022:
| Common Shares Issuable Upon Exercise of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Aggregate Intrinsic Value (1) | |||||||||||||
| Balance of Options at September 30, 2021 | 8.9 | |||||||||||||||
| Options granted | 6.7 | |||||||||||||||
| Exercised | ( | ) | 8.3 | |||||||||||||
| Forfeited/Cancelled | ( | ) | — | — | ||||||||||||
| Balance of Options at June 30, 2022 | $ | 7.9 | $ | |||||||||||||
| Exercisable at June 30, 2022 | $ | 7.3 | $ | |||||||||||||
| Unvested at June 30, 2022 | $ | |||||||||||||||
| Number of Options | Weighted Average Grant Date Fair Value | ||||||
| Unvested at June 30, 2022 | $ | ||||||
| Granted during the nine months ended June 30, 2022 | $ | ||||||
| Vested during the nine months ended June 30, 2022 | $ | ||||||
| Forfeited during the nine months ended June 30, 2022 | $ | ||||||
| (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 June 30, 2022, for those awards that have an exercise price currently below the closing price as of June 30, 2022. Awards with an exercise price above the closing prices as of June 30, 2022 are considered to have no intrinsic value. |
The following range of assumptions were used to estimate the fair value of stock options granted during the nine months ended June 30, 2022, using the Black-Scholes option-pricing model.
| Nine months ended | ||||
| June 30, 2022 | ||||
| Expected stock price volatility | % - % | |||
| Risk-free interest rate | % - % | |||
| Expected term (years) | - | |||
| Expected dividend yield | % | |||
| Black-scholes value | $- $ | |||
During the three months ended June 30, 2022 and 2021,
the Company recognized compensation expense of $ and $, respectively. During the nine months ended June 30, 2022 and 2021,
the Company recognized compensation expense of $ and $, respectively. At June 30, 2022, there was $
| F-23 |
Note 13 – 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 tables presents segment information for the three and nine months ended June 30, 2022 and 2021. The Company acquired the Franchising segment at the closing of the acquisition of OCG, Inc. effective March 19, 2021.
| Cultivation | Franchising | Corporate | Total | |||||||||||||
| Nine months ended June 30, 2022 | ||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Additions to property, equipment and construction in progress | ||||||||||||||||
| Three months ended June 30, 2022 | ||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| At June 30, 2022 | ||||||||||||||||
| Property, equipment and construction in progress, net | $ | $ | $ | $ | ||||||||||||
| Total assets (after intercompany eliminations) | ||||||||||||||||
| Three and nine months ended June 30, 2021 | ||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| At June 30, 2021 | ||||||||||||||||
| Property, equipment and construction in progress, net | $ | $ | $ | $ | ||||||||||||
| Total assets (after intercompany eliminations) | ||||||||||||||||
Note 14 - Subsequent Events
Subsequent to June 30, 2022 the following events have occurred.
The Company’s North Denver dispensary location began operations on July 11, 2022, making it the Company’s first corporate-owned shop in Colorado under the Company’s cannabis dispensary brand, Unity Rd.
The Company has sold 1,700 units under its offering pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings for total proceeds of $1,904 subsequent to June 30, 2022.
The Company received short-term loans in the aggregate amount of $1,370,000 from Viridis, a related party. The terms of these short-term loans are being determined as of the date of the filing.
On July 20, 2022, the Company entered into short-term financing arrangement with Capybara Capital. The proceeds of $0.5 million were used for working capital purposes. Payments of $18,889 are due weekly until $0.68 million has been repaid. This results in an effective interest rate of 36%.
On July 22, 2022, the Company entered into a short-term financing arrangement with Upwise Capital. The proceeds of $1.954 million were used to repay the second short-term financing arrangement (see (l) in Note 8 above) and the Upwise Capital 2 financing arrangement (see (v) in Note 8 above). Payments of $55,552 are due weekly until $2.598 million has been repaid. This results in an effective interest rate of 33%.
On July 22, 2022, the Company entered into a short-term financing arrangement with Lendspark. The proceeds of $0.65 million were used to repay the previous Lendspark short-term financing (see (u) in Note 8 above) in the amount of $0.591 million, and the remainder of the proceeds, approximately $0.05 million was used for working capital purposes. Payments of $17,680 are due weekly until $0.884 million has been repaid. This results in an effective interest rate of 36%.
| F-24 |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended September 30, 2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company's Annual Report on Form 10-K for the year ended September 30, 2021, filed with the Securities and Exchange Commission (the "SEC") on January 13, 2022.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the securities Exchange Act of 1934, as amended, (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. The words "anticipated," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "should," "could," "predicts," "potential," "continue," "would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this quarterly report on Form 10-Q. You should carefully consider these risks and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Overview
Item 9 Labs produces premium cannabis and cannabis related products in a rapidly growing market. The Company currently offers over seventy-five (75) active cannabis strains and more than one hundred fifty (150) differentiated cannabis vape products as well as premium concentrates and Orion vape technologies. The Company’s product offerings will continue to grow as they develop new products to meet the needs of the end users. The Company makes its products available to consumers through licensed dispensaries in Arizona. Item 9 Labs’ products are now carried in more than 80 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) entrepreneurial groups to open more than thirty (30) Unity Rd retail dispensary locations in twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating in Boulder, Colorado. Unity Rd. will 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.
| 25 |
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 increased efficiencies have been offset in the current period by certain supply shortages and repair and maintenance delays resulting in longer production lead times.
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 the 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.
The Company estimates that phase 1 of its construction plan will be completed during the third quarter of its fiscal year 2023. The extension of time to complete phase 1 of its construction plan is primarily due to delays in obtaining the necessary construction permits and supply chain shortages of construction materials. Further, given the current level of inflation and the supply chain shortages, the Company estimates that costs will exceed original estimates by 25%-30%. The needed permits were obtained subsequent to June 30, 2022. The Company may experience additional construction delays. The Company can provide no assurance that it will be able to obtain the financing needed to pay the additional construction costs.
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 98% complete. Construction recommenced, after a pause due to Covid-19, in August 2021. The Company aims to commence operations in Nevada in early fiscal year 2023.
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 was $1,536,000, as to which $1,000,000 was paid to an escrow account upon conditional approvals of the change of ownership from state and local licensing authorities concerning the transfer of ownership. At closing, that amount was released to the Seller along with an 18-month promissory note in the principal amount of $200,000 and the balance payable in 300,000 shares of Company common stock, valued at $336,000. The Company obtained financing to consummate this transaction. On March 2, 2022, the Company received the necessary regulatory approvals and completed this transaction. The existing dispensary license had never been operational. This dispensary, known as the Company’s North Denver location, began operations on July 11, 2022, making it the Company’s first corporate-owned shop in Colorado under the Company’s cannabis dispensary brand, Unity Rd.
This license acquisition is part of an overarching acquisition strategy that is intended to accelerate national expansion by creating turnkey investment opportunities for Unity Rd. franchisees. The Company plans to convert acquired dispensaries into Unity Rd. shops, operate them internally and sell them to an existing or future franchise partner. This offers an expedited solution for entrepreneurs seeking immediate entry into cannabis. The Company is targeting numerous similar transactions in the next 12 months to gain a deeper market penetration in select markets. Subsequently and/or concurrently, the Company plans to introduce the Item 9 Labs suite of products to the same markets through the acquisition of cultivation and production licenses or through joint ventures with qualified local, licensed operators.
On March 11, 2022, the Company entered into an Asset Purchase Agreement with The Herbal Cure LLC, a Colorado limited liability company, pursuant to which the Company is purchasing certain assets. Effective upon the completion of the sale, which has not occurred as of the date of this filing, the licenses, contracts and certain personal property to operate a licensed medicinal and recreational cannabis dispensary will be delivered to the Company. The total purchase price is $5,750,000, as to which $250,000 is to be paid upon execution of the Asset Purchase Agreement, $3,700,000 payable at closing, $700,000 shall be financed by seller pursuant to a Secured Promissory Note and the remainder of the purchase prices shall be paid in shares of the Company’s common stock on the closing date. The Secured Promissory Note shall accrue interest at 5% per annum and have a term of 18 months, commencing on the closing date, payable in even monthly installments until paid in full. The shares of the Company’s common stock to be issued shall be in such an amount as is the quotient of $1,100,000 divided by the product of the 10-day volume weighted average price of the shares as of the closing date and 85%. The Company can provide no assurance that it will be successful in finalizing this acquisition.
On May 18, 2022, the Company and its wholly owned subsidiary, OCG Management Ontario, Inc., a corporation formed under the laws of the Province of Ontario (“Purchaser”) solely for the purpose of completing this transaction, entered into a Share Purchase Agreement pursuant to which the Purchaser is purchasing all, but not less than all, of the issued and outstanding shares in the capital of Wild Card Cannabis Incorporated, a corporation formed under the laws of the Province of Ontario free and clear of all Liens from the Shareholders. The Company can provide no assurance that it will be successful in finalizing this acquisition.
The total purchase price for the Shares is Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD) (the "Purchase Price"), as adjusted, plus the Earnout Payment, if any (collectively, the “Purchase Price”) payable as follows:
(i) The Company has delivered the Exclusivity Deposit in the amount of $156,902 to the Escrow Agent on March 4, 2022.
(ii) At the Closing, Purchaser shall pay to Shareholders the Estimated Purchase Price of Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD), as adjusted, in immediately available funds;
(iii) Four Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the First Earnout Period (the date that is 12 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the First Earnout Period is greater than or equal to the Target Net Revenue for the First Earnout Period; and
(iv) Four Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the Second Earnout Period (the date that is 24 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the Second Earnout Period is greater than or equal to the Target Net Revenue for the Second Earnout Period.
| 26 |
Results of Operations
| Nine months ended June 30, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Revenues, net | $ | 17,755,519 | $ | 15,843,256 | $ | 1,912,263 | 12 | % | ||||||||
| Cost of revenues | 11,089,560 | 8,531,623 | 2,557,937 | 30 | % | |||||||||||
| Gross profit | 6,665,959 | 7,311,633 | (645,674 | ) | -9 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| Professional fees and outside services | 2,207,618 | 1,350,196 | 857,422 | 64 | % | |||||||||||
| Payroll and employee related expenses | 7,889,672 | 4,014,819 | 3,874,853 | 97 | % | |||||||||||
| Sales and marketing | 1,260,551 | 389,819 | 870,732 | 223 | % | |||||||||||
| Depreciation and amortization | 1,320,664 | 360,601 | 960,063 | 266 | % | |||||||||||
| Other operating expenses | 2,747,158 | 1,292,154 | 1,455,004 | 113 | % | |||||||||||
| Provision for bad debt | (5,000 | ) | — | (5,000 | ) | 100 | % | |||||||||
| Total operating expenses | 15,420,663 | 7,407,589 | 8,013,074 | 108 | % | |||||||||||
| Income (loss) from operations | (8,754,704 | ) | (95,956 | ) | (8,658,748 | ) | 9024 | % | ||||||||
| Other expense, net | (3,932,600 | ) | (1,763,385 | ) | (2,169,215 | ) | 123 | % | ||||||||
| Net loss, before income tax provision (benefit) | (12,687,304 | ) | (1,859,341 | ) | (10,827,963 | ) | 582 | % | ||||||||
| Income tax provision (benefit) | 7,948 | — | 7,948 | 0 | % | |||||||||||
| Net loss | (12,695,252 | ) | (1,859,341 | ) | (10,835,911 | ) | 583 | % | ||||||||
| Less: Net loss attributable to non-controlling interests | (1,683 | ) | — | (1,683 | ) | 100 | % | |||||||||
| Net loss attributable to Item 9 Labs Corp. | $ | (12,693,569 | ) | $ | (1,859,341 | ) | $ | (10,834,228 | ) | 583 | % | |||||
| Three months ended June 30, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Revenues, net | $ | 4,931,322 | $ | 6,693,061 | $ | (1,761,739 | ) | -26 | % | |||||||
| Cost of revenues | 3,341,367 | 3,802,447 | (461,080 | ) | -12 | % | ||||||||||
| Gross profit | 1,589,955 | 2,890,614 | (1,300,659 | ) | -45 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| Professional fees and outside services | 993,452 | 442,483 | 550,969 | 125 | % | |||||||||||
| Payroll and employee related expenses | 2,683,722 | 1,592,673 | 1,091,049 | 69 | % | |||||||||||
| Sales and marketing | 207,213 | 262,473 | (55,260 | ) | -21 | % | ||||||||||
| Other operating expenses | 1,114,323 | 728,100 | 386,223 | 53 | % | |||||||||||
| Total operating expenses | 5,437,762 | 3,137,888 | 2,299,874 | 73 | % | |||||||||||
| Income (loss) from operations | (3,847,807 | ) | (247,274 | ) | (3,600,533 | ) | 1456 | % | ||||||||
| Other expense, net | (1,625,155 | ) | (586,631 | ) | (1,038,524 | ) | 177 | % | ||||||||
| Net income (loss), before income tax provision (benefit) | (5,472,962 | ) | (833,905 | ) | (4,639,057 | ) | 556 | % | ||||||||
| Income tax provision (benefit) | 4,624 | — | 4,624 | 0 | % | |||||||||||
| Net income (loss) | (5,477,586 | ) | (833,905 | ) | (4,643,681 | ) | 557 | % | ||||||||
| Less: Net loss attributable to non-controlling interests | (7,109 | ) | — | (7,109 | ) | 100 | % | |||||||||
| Net loss attributable to Item 9 Labs Corp. | $ | (5,470,477 | ) | $ | (833,905 | ) | $ | (4,636,572 | ) | 556 | % | |||||
Revenues
The increase in revenue for the nine months ended June 30, 2022 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. Further, during fiscal year 2021, the Company added and reorganized post-production space to more efficiently package its products for sale. These improvements for the nine months ended June 30, 2022 were offset by the following events during the quarter ended June 30, 2022.
The decrease in revenue for the three months ended June 30, 2022 was primarily due to effects of additional competition entering the Company’s market that were not as significant during the same three month period of the prior year. This additional competition resulted in a decrease in units sold and a decrease in unit sales prices. Further, during the three months ended June 30, 2022, the Company experienced supply chain issues that caused a decrease in new orders for the Company’s products and delays in fulfilling existing orders.
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Cost of Revenues
Cost of revenues consist primarily of labor, materials, supplies and utilities. Cost of revenues as a percentage of revenues was 68% and 62% for the three and nine months ended June 30, 2022 compared to 57% and 54% for the three and nine months ended June 30, 2021. The Company was able to increase operational efficiency throughout fiscal year 2021. However, the cost of the purchased inventory materials discussed above and increases in other costs, such as product testing, primarily negated these efficiency gains. Further, cost of revenues as a percentage of revenues decreased due to the reduction in unit sales prices during the quarter. 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 reduce the overall cost of revenues and cost of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.
Gross Profit
The decrease in gross profit as a percentage of revenue for the nine months ended June 30, 2022 was due to increases in revenue offset by price reduction as competition rises and by increases in purchased inventory materials and other costs. Further, the decrease in gross profit as a percentage of revenue of the three months ended June 30, 2022 also decreased due to the decrease in the number of units sold as a result of the increased competition and the supply chain issues experienced. With the Company’s continued efforts to increase capacity and focus on efficiencies and reducing costs, management expects gross profit to increase going forward.
Operating Expenses
Professional fees and outside services increased for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021 primarily due to the amortization of prepaid consulting agreements that were entered into subsequent to June 30, 2021 and additional expenses incurred for corporate advisory services, and investor and public relations services. Further, the Company incurred significant legal expenses during the three and nine months ended June 30, 2022 related to entering into the Share Purchase Agreement for the purchase of all of the issued and outstanding shares of Wild Card Cannabis, Incorporated, a corporation formed under the laws of the Province of Ontario, Canada.
The increase in payroll expenses was primarily due to the amortization of stock-based compensation expense for stock options granted subsequent to June 30, 2021. Further, payroll expenses increased due to an increase in employee headcount during fiscal year 2021 and the nine months ended June 30, 2022, as a result of increased hiring of employees. The increase was offset by approximately $294,000 of Employee Retention Credits ("ERCs") received by the Company.
Sales and marketing expenses increased due to increased spending on promotional items and marketing and branding initiatives during the nine months ended June 30, 2022. The decrease in sales and marketing expenses decreased slightly for the three months ended June 30, 2022 compared to June 30, 2021 as a result of the decrease in promotional items during the quarter.
The increase in depreciation and amortization is due primarily to the scheduled amortization of intangible assets acquired in the OCG Inc. acquisition in March 2021.
Other operating expenses increased primarily due to increases in insurance expenses, facility expenses, such as rent expense, travel related expenses, and additional IT support for the increase in employees.
Total operating expenses as a percentage of gross profit increased from 109% and 101% for the three and nine months ended June 30, 2021, respectively, to 342% and 231% for the three and nine months ended June 30, 2022, respectively. Management believes this ratio will decrease for the Cultivation segment going forward as the expectation is that revenues will grow at a higher rate than operating expenses, however, management believes that operating expenses will outpace revenues for the Franchising and Corporate segments as the Franchising and Corporate segments continue to perform on growth initiatives.
During the three months ended June 30, 2022, the Company has noted indicators of the possible impairment of its goodwill and intangible assets. The Company will analyze these indicators during the fourth quarter of the year ended September 30, 2022 and determine if any impairment has occurred. Given the carrying value of the Company’s goodwill and intangible assets at June 30, 2022, the occurrence of an impairment may be material to the Company’s financial position and results of operations.
Other Expense, net
Other expenses consist primarily of interest expense of $1,625,155 and $3,932,918 for the three and nine months ended June 30, 2022, respectively, and $629,265 and $1,806,019 for the three and nine months ended June 30, 2021, respectively. The increase in interest expense was primarily the result of the continued interest and amortization of debt discounts for debt outstanding at June 30, 2021 and the additional interest and amortization of debt discounts for debt incurred subsequent to June 30, 2021. This increase in interest expense was offset by debt and amortization of debt discounts that were capitalized to construction in progress related to the Company’s capital projects.
Adjusted EBITDA
Management uses the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation expense, acquisition-related costs, and other adjustments, or “Adjusted EBITDA,” to evaluate the Company’s performance. Adjusted EBITDA is a non-GAAP measure that is also frequently used by analysts, investors and other interested parties to evaluate the market value of companies considered to be in similar businesses. The Company suggests that Adjusted EBITDA be viewed in conjunction with its reported financial results or other financial information prepared in accordance with accounting principles generally accepted in the United States, or “US GAAP.”
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The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for the three and nine months ended June 30, 2022 and 2021:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net loss | $ | (5,477,586 | ) | $ | (833,905 | ) | $ | (12,695,252 | ) | $ | (1,859,341 | ) | ||||
| Depreciation and amortization | 439,052 | 112,159 | 1,320,664 | 360,601 | ||||||||||||
| Interest expense | 1,625,155 | 629,265 | 3,932,918 | 1,806,019 | ||||||||||||
| Income tax expense | 4,624 | — | 7,948 | — | ||||||||||||
| Stock-based expense | 1,161,739 | 304,672 | 3,032,518 | 1,077,252 | ||||||||||||
| Acquisition related costs | 479,904 | 5,804 | 499,904 | 272,541 | ||||||||||||
| Adjusted EBITDA | $ | (1,767,112 | ) | $ | 217,995 | $ | (3,901,300 | ) | $ | 1,657,072 | ||||||
The approximately $5.6 million change from prior year is due to the addition of the franchise business, as well as significant investments in human capital and infrastructure to prepare for anticipated growth.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
The Company’s primary need for liquidity is to fund working capital requirements of its business, capital expenditures, acquisitions, debt service, and for general corporate purposes. The Company’s primary source of liquidity is funds generated from revenues, financing activities and from private placements. The Company’s ability to fund its operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on its future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond the Company’s control.
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.
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As of June 30, 2022, the Company had $441,662 of cash and cash equivalents and negative working capital of ($33,778,387) (current assets minus current liabilities), compared with $1,454,460 of cash and cash equivalents and negative working capital of ($4,893,385) as of September 30, 2021. The decrease of $28,885,002 in the Company’s working capital is primarily due to increases in the amount of the Company’s debt maturing within the next 12 months. The decrease is also due to decreases in the Company’s cash, accounts receivable, inventory and prepaid balances and increases in the Company’s accounts payable and other operating liabilities and the current portion of operating lease liabilities. The $1,012,798 decrease in cash and cash equivalents was primarily due to the net cash used in operating activities, purchases of property, equipment and construction in progress related to the Company’s capital projects, and the Company’s acquisition of a dispensary license in Colorado. The Company is an early-stage growth company. It is generating cash from sales and is investing its capital reserves in current operations and new acquisitions that are expected to generate additional earnings in the long term. The Company expects that its cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet its capital requirements and operational needs for the next 12 months, although no assurance can be given that private and/or public financing can be obtained on terms acceptable to the Company, or at all.
Cash Flows
The following table summarizes the sources and uses of cash for each of the periods presented:
| Nine months ended June 30, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Net cash used in operating activities | $ | (2,016,148 | ) | $ | (6,877,259 | ) | $ | 4,861,111 | -71 | % | ||||||
| Net cash used in investing activities | (3,769,744 | ) | (3,851,950 | ) | 82,206 | -2 | % | |||||||||
| Net cash provided by financing activities | 4,773,094 | 10,941,424 | (6,168,330 | ) | -56 | % | ||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (1,012,798 | ) | $ | 212,215 | $ | (1,225,013 | ) | -577 | % | ||||||
Operating Activities
During the nine months ended June 30, 2022, operating activities used $2,016,148 of cash and cash equivalents, primarily resulting from a net loss of $12,695,252 which was offset by net cash provided by operating assets and liabilities of $3,918,454. There was significant non-cash activity that contributed to the net loss totaling $6,760,650 including depreciation and amortization of $1,410,508, amortization of debt discount of $2,311,783, and stock-based compensation of $3,032,518.
During the nine months ended June 30, 2021, operating activities used $6,877,259 of cash, primarily resulting from a net loss of $1,859,341which was extended by net cash used in operating assets and liabilities of $7,060,610. There was significant non-cash activity that contributed to the net loss totaling $2,042,692 including depreciation and amortization of $400,419, amortization of debt discount of $565,021, and stock based compensation of $1,077,252. With the increase in revenues, the Company's receivables increased $1,703,092, deferred costs increased $6,348,573 and prepaid expenses increased $192,292, offset by an increase in current liabilities of $1,183,347.
Investing Activities
During the nine months ended June 30, 2022, investing activities used $3,769,744 of cash and cash equivalents, consisting primarily of $2,918,584 in purchases of property, equipment and construction in progress, the purchase of a dispensary license in the amount of $1,130,872, cash payments for acquisitions of $140,726 and cash paid to acquisition escrow accounts of $406,932, offset by $816,227 of cash received from the escrow deposit accounts.
During the nine months ended June 30, 2021, investing activities used $3,851,950 of cash, consisting primarily of $2,263,388 in purchase of property and equipment and $1,685,368 of deposits paid on an acquisition.
Financing Activities
During the nine months ended June 30, 2022, financing activities provided $4,773,094, consisting of $7,282,763 in proceeds from the issuance of debt, $555,911 in proceeds from the issuance of stock and offset by $3,002,097 of debt payments made.
During the nine months ended June 30, 2021, financing activities provided $10,941,424, consisting of $13,298,965 in proceeds from the issuance of stock and proceeds from the issuance of convertible debt of $1,355,000 and offset by $3,712,541 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.
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We intend to meet our cash requirements for the next 12 months through the use of the cash we have on hand and through business operations, future equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. We have filed an offering document on Form 1-A with the Securities and Exchange Commission in order to sell units comprising of one share of common stock and one-half of one warrant. We are also in discussions with various potential capital partners to provide additional debt capital for accretive acquisitions. We do not have any other arrangements in place to complete any private placement financings of debt and equity. There is no assurance that we will be successful in completing the offering on Form 1-A, or in finding a capital partner to provide additional debt capital or any other such financings on terms that will be acceptable to us.
Off-Balance Sheet Arrangements
We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. Critical accounting policies and estimates in these condensed consolidated financial statements are those related to revenue recognition, valuation of options, warrants and debt discounts, carrying value of intangible assets subject to amortization, infinite life intangible assets and goodwill, stock-based compensation, and income taxes. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. For a discussion of our critical accounting policies, refer to Part I, item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended September 30, 2021. Management believes that there have been no material changes in our critical accounting policies during the three months ended June 30, 2022.
Recently Issued Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements, included in Part I, Item 1, Financial Information for this quarterly report on Form 10-Q.
Contractual Obligations
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2022.
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Identified Material Weaknesses
A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
Management identified the following material weaknesses during its assessment of internal controls over financial reporting, which are primarily due to the size of the Company and available resources:
| · | lack of properly controlled segregation of duties | |
| · | lack of risk assessment procedures on internal control to detect financial reporting risks in a timely manner; and | |
| · | lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives. |
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting subsequent to the fiscal year ended September 30, 2021, which were identified in connection with our management's evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Disclosure Controls and Internal Controls
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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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 29,965 shares for services during the three months ended June 30, 2022.
| 2. | Subsequent Issuances: |
Subsequent to June 30, 2022, there have been no issuances of unregistered equity securities.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
N/A.
| ITEM 5. | OTHER INFORMATION |
N/A.
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| 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:
*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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Item 9 Labs Corp. | |||
| Date: August 15, 2022 | By: | /s/ Andrew Bowden | |
Name: Title: |
Andrew Bowden Chief Executive Officer (Principal Executive Officer) | ||
| Date: August 15, 2022 | By: | /s/ Robert Mikkelsen | |
Name: Title: |
Robert Mikkelsen Chief Financial Officer (Principal Financial Officer) | ||
35
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: August 15, 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: August 15, 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 June 30, 2022 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
August 15, 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 June 30, 2022 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
August 15, 2022
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) - $ / shares |
Jun. 30, 2022 |
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 | 108,562,706 | 107,074,417 |
| Common Stock, Shares, Outstanding | 96,262,706 | 94,774,417 |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
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| Income Statement [Abstract] | ||||
| Revenues, net | $ 4,931,322 | $ 6,693,061 | $ 17,755,519 | $ 15,843,256 |
| Cost of revenues | 3,341,367 | 3,802,447 | 11,089,560 | 8,531,623 |
| Gross profit | 1,589,955 | 2,890,614 | 6,665,959 | 7,311,633 |
| Operating expenses | ||||
| Professional fees and outside services | 993,452 | 442,483 | 2,207,618 | 1,350,196 |
| Payroll and employee related expenses | 2,683,722 | 1,592,673 | 7,889,672 | 4,014,819 |
| Sales and marketing | 207,213 | 262,473 | 1,260,551 | 389,819 |
| Depreciation and amortization | 439,052 | 112,159 | 1,320,664 | 360,601 |
| Other operating expenses | 1,114,323 | 728,100 | 2,747,158 | 1,292,154 |
| Provision for (recovery of) bad debt | (5,000) | |||
| Total expenses | 5,437,762 | 3,137,888 | 15,420,663 | 7,407,589 |
| Loss from operations | (3,847,807) | (247,274) | (8,754,704) | (95,956) |
| Other income (expense) | ||||
| Interest expense | (1,625,155) | (629,265) | (3,932,918) | (1,806,019) |
| Other income | 42,634 | 318 | 42,634 | |
| Total other income (expense), net | (1,625,155) | (586,631) | (3,932,600) | (1,763,385) |
| Net loss, before income tax provision (benefit) | (5,472,962) | (833,905) | (12,687,304) | (1,859,341) |
| Income tax provision (benefit) | 4,624 | 7,948 | ||
| Net loss | (5,477,586) | (833,905) | (12,695,252) | (1,859,341) |
| Less: Net loss attributable to non-controlling interest | (7,109) | (1,683) | ||
| Net loss attributable to Item 9 Labs Corp. | $ (5,470,477) | $ (833,905) | $ (12,693,569) | $ (1,859,341) |
| Basic net income (loss) per common share | $ (0.06) | $ (0.01) | $ (0.13) | $ (0.03) |
| Basic weighted average common shares outstanding | 96,162,616 | 92,209,521 | 95,446,846 | 72,115,022 |
| Diluted net income (loss) per common share | $ (0.06) | $ (0.01) | $ (0.13) | $ (0.03) |
| Diluted weighted average common shares outstanding | 96,162,616 | 92,209,521 | 95,446,846 | 72,115,022 |
Note 1 - Description of Business and Summary of Significant Accounting Policies |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 is a holding company, investing in cannabis and cannabis-related businesses. Its subsidiaries currently compete in two different market segments: (1) production of 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) sale of 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 (30) Unity Rd retail dispensary locations in twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating in Boulder, Colorado. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to operate their business and contribute to their local communities. As the Unity Rd dispensaries achieve sufficient market penetration, Item 9 Labs aims to offer its products in those locations to expand the distribution footprint of its premium product offerings.
In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
Principles of Consolidation
The accompanying condensed consolidated financial statements of the Company as of June 30, 2022 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.
The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries and a consolidated variable interest entity (“VIE”). Intercompany balances and transactions have been eliminated.
Item 9 Labs consolidates a VIE in which the Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company makes significant judgments in determining whether an entity is a VIE and, for each reporting period, the Company assesses whether it is the primary beneficiary of the VIE. Effective February 1, 2022, the Company was deemed the primary beneficiary of Elevated Connections, Inc. The equity in Elevated Connections, Inc. held by its stockholder has been presented on the balance sheet and the statement of operations as a non-controlling interest.
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 periods’ net income, 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 primarily consists of the costs directly related to the production and cultivation of cannabis crops, cannabis oils, and cannabis concentrate products. Inventory is relieved to cost of revenues as products are delivered to dispensaries. Inventory consists primarily of labor, utilities, costs of raw materials, packaging, nutrients and overhead. The Company routinely evaluates the carrying value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce inventory to its estimated net realizable value. There were no inventory reserves recorded at June 30, 2022 and September 30, 2021.
Licenses
Cannabis licenses vary in term for each jurisdiction. The Company capitalizes all costs associated with the acquisition of cannabis licenses in the year the license is obtained. Subsequent measurement is determined by the length of the term of the license. The Company acquired licenses during the nine months ended June 30, 2022 that have indefinite useful lives, subject to annual renewals. Costs associated with maintaining licenses (annual fees) are expensed as incurred. The anticipated maintenance fees are not expected to be material to the condensed consolidated financial statements. Licenses are included on the balance sheet under the heading Intangible assets, net at June 30, 2022 and September 30, 2021.
Revenue Recognition
Cultivation revenue
The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, including estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and recognizing revenue when (or as) the performance obligation is satisfied.
Substantially all of the Company's revenue is associated with a customer contract that represents an obligation to provide cannabis products that are delivered at a single point in time. Any costs incurred prior to the period in which the products are delivered are recorded to inventory and recognized as cost of revenues in the period in which the performance obligation is completed. For the three and nine months ended June 30, 2022 and 2021, all of the Company's cultivation revenue was generated from performance obligations completed in the state of Arizona.
The Company recognizes revenue once the products are delivered. Revenue is considered earned upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is reasonably assured. The Company records revenue at the amount it expects to collect, 100% of the wholesale sales revenue. The fees paid for operating under the contract are expensed to cost of revenues.
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 $560,849 and $775,843 at June 30, 2022 and September 30, 2021, respectively, and is included in deferred revenue on the condensed consolidated balance sheets. Revenue recognized during the three months ended June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $4,998 and $0, respectively. Revenue recognized during the nine months ended June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $214,994 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 net loss 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 June 30, 2022 and 2021 that were excluded from the diluted net loss per share calculation for the three and nine months ended June 30, 2022 and 2021 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 June 30, 2022 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.
Segment Reporting
The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three and nine months ended June 30, 2022 and 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”).
Business Combination
The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss. 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 adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.
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Note 2 - Going Concern |
9 Months Ended |
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Jun. 30, 2022 | |
| 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 reduce 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 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. |
Note 3 – Inventory |
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Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 3 – Inventory | Note 3 – Inventory
Inventory consisted of the following at June 30, 2022 and September 30, 2021.
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Note 4 – Acquisitions |
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Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Combination and Asset Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 4 – Acquisitions | Note 4 – Acquisitions
Oklahoma City dispensary acquisition
In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease. The purchase price was $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company paid the seller $65,000 in the Company’s common stock at a 10% discount to the stock’s 10-day volume weighted average. The Company has issued shares of common stock related to the Co-Management Agreement. The accrued purchase price balance is $49,274 at June 30, 2022 and is included in accrued expenses on the condensed consolidated balance sheet.
As of June 30, 2022, the consideration paid or accrued for this acquisition was as follows:
The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired as of the transaction date:
Adams County acquisition
On October 6, 2021, the Company entered into an Asset Purchase Agreement with Nebrina Adams County LLC to purchase certain assets, which include licenses, a lease and certain personal property to operate a licensed recreational cannabis dispensary (the “Adams County Acquisition”). The purchase price is $1,651,789 comprised of $1.0 million of cash, a $200,000 note, and shares of the Company’s common stock, valued at $ per share. 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. The Adams County Acquisition closed on March 2, 2022. The acquisition is not considered a business combination under ASC 805, Business Combinations, as a substantive process was not acquired. Substantially all of the consideration paid was allocated to the licenses purchased.
As of June 30, 2022, the consideration paid in this asset acquisition was as follows:
The Herbal Cure pending acquisition
On March 11, 2022, the Company entered into an Asset Purchase Agreement with The Herbal Cure LLC (“Seller”), pursuant to which, the Company is purchasing certain assets from the Seller. The total purchase price for the assets to be acquired is $5,750,000, payable as follows:
(i) Upon mutual execution and delivery of the Asset Purchase Agreement, the Company shall convey to the Seller a down payment in the amount of $250,000;
(ii) At the Closing, the Company shall pay to Seller $3,700,000 in immediately available funds;
(iii) $700,000 shall be financed by the Seller and paid pursuant to the terms and conditions of the Secured Promissory Note (the "Herbal Cure Note"), which interest shall accrue at a rate of 5% per annum, for a term of 18 months commencing on the Closing Date, and payable in even monthly installments until paid in full; and
(iv) the Company shall pay the remainder of the purchase price in shares of its common stock on the Closing Date, in such amount of Shares as is the quotient of $1,100,000 divided by the product of the 10 day volume weighted average price of the shares as of the Closing Date, and 85%.
At June 30, 2022, the $250,000 down payment was paid and is included in Other Assets on the condensed consolidated balance sheet. At June 30, 2022, this acquisition has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three and nine months ended June 30, 2022. The Company can provide no assurance that it will be successful in finalizing this acquisition.
Sessions pending acquisition
On May 18, 2022, the Company and its wholly owned subsidiary, OCG Management Ontario, Inc., a corporation formed under the laws of the Province of Ontario (“Purchaser”) solely for the purpose of completing this transaction, entered into a Share Purchase Agreement pursuant to which the Purchaser is purchasing all, but not less than all, of the issued and outstanding shares in the capital of Wild Card Cannabis Incorporated, a corporation formed under the laws of the Province of Ontario free and clear of all Liens from the Shareholders.
The total purchase price for the Shares is Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD) (the "Purchase Price"), as adjusted, plus the Earnout Payment, if any (collectively, the “Purchase Price”) payable as follows:
(i) The Company has delivered the Exclusivity Deposit in the amount of $156,902 to the Escrow Agent on March 4, 2022.
(ii) At the Closing, Purchaser shall pay to Shareholders the Estimated Purchase Price of Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD), as adjusted, in immediately available funds;
(iii) Four Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the First Earnout Period (the date that is 12 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the First Earnout Period is greater than or equal to the Target Net Revenue for the First Earnout Period; and
(iv) Four Million One Hundred Thousand Dollars ($4,100,000.00), as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the Second Earnout Period (the date that is 24 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the Second Earnout Period is greater than or equal to the Target Net Revenue for the Second Earnout Period.
At June 30, 2022, the $156,902 Exclusivity Deposit has been paid and is included in Other Assets on the condensed consolidated balance sheet. At June 30, 2022, this acquisition has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three and nine months ended June 30, 2022. The Company can provide no assurance that it will be successful in finalizing this acquisition. |
Note 5 – Variable Interest Entity |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 5 – Variable Interest Entity | Note 5 – Variable Interest Entity
In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. Under the terms of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease (see Note 4). Further, under the Co-Management Agreement, the Company is to operate, staff, and otherwise manage the day-to-day operations of the dispensary. The Company shall also pay all claims, costs and liabilities associated with operating the dispensary.
The terms of the Co-Management Agreement provide the Company with, in its judgment, the ability to manage and make decisions that most significantly affect the operations of Elevated Connections and to absorb losses that could potentially be significant to Elevated Connections. As such, the Company has consolidated Elevated Connections effective February 1, 2022. The purpose of Elevated Connections, as a licensed dispensary, is to hold the cannabis and cannabis related products and licenses of the dispensary.
The assets of the VIE cannot be used to settle obligations of the Company or its wholly owned subsidiaries. However, liabilities recognized as a result of consolidating the VIE does represent additional claims on the Company’s general assets.
The following table presents the carrying values of the assets and liabilities of the entity that is a VIE and consolidated by the Company at June 30, 2022.
The following table presents the operations (after intercompany eliminations) of the entity that is a VIE and consolidated by the Company for the three and nine months ended June 30, 2022.
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Note 6 – Goodwill and Intangible Assets |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 6 – Goodwill and Intangible Assets | Note 6 – Goodwill and Intangible Assets
Goodwill and identifiable intangible assets, including licenses, consist of the following as of June 30, 2022 and September 30, 2021:
As of June 30, 2022, the cultivation and processing licenses from the state of Nevada, included above, have not been transferred to the Company as the transfer is awaiting regulatory approval.
During the three months ended June 30, 2022, the Company has noted indicators of the possible impairment of its goodwill and intangible assets. The Company will analyze these indicators during the fourth quarter of the year ended September 30, 2022 and determine if any impairment has occurred. Given the carrying value of the Company’s goodwill and intangible assets at June 30, 2022, the occurrence of an impairment may be material to the Company’s financial position and results of operations. |
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Note 7 - Property and Equipment, Net |
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| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 7 - Property and Equipment, Net | Note 7 - Property and Equipment, Net
The following represents a summary of our property and equipment as of June 30, 2022 and September 30, 2021:
During the nine months ended June 30, 2022, 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 and nine months ended June 30, 2022, including the construction of the Nevada facility and the expansion of the Arizona facility. Construction in progress also includes interest and fees on debt that is directly related to the financing of the Company’s capital projects.
Depreciation expense for the three months ended June 30, 2022 and 2021 was $71,285 and $35,965, respectively. Depreciation expense for the nine months ended June 30, 2022 and 2021 was $217,363 and $100,535, respectively. |
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Note 8 – Debt |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 8 – Debt | Note 8 – 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. The note is convertible at the lesser of a) $1.00 per share or, b) 20% discount to the ten day average closing price of the Company’s common stock, immediately prior to the conversion date. All principal and interest were due on the maturity date. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 15% per annum, will be paid at maturity, which has been postponed to a date that has not yet been determined. At June 30, 2022 the Viridis note was in default. The Viridis note remains in default as of this filing, though the parties are negotiating a long-term arrangement.
(C-9) Convertible Tysadco Note
On October 1, 2021, the Company entered into a convertible note agreement. Up to fifty percent (50%) of the outstanding and unpaid principal amount is convertible into common stock. The note included warrants to purchase a total of 825,000 shares of the Company’s common stock for $3 per share, with a 4 year term. Further, the Company issued 67,365 shares of common stock, valued at $112,500 as an inducement to the lenders to enter into the note agreements. The debt included a 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 June 30, 2022.
(C-10) Convertible Gaines Note
On October 29, 2021, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s common stock for $3 per share, with a 2 year term. Further, the Company issued 75,000 shares of common stock, valued at $116,250 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair values of the warrants and shares of common stock. The debt, shares of common stock and warrants were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $561,272, which also included debt issuance costs of $44,582, is amortized to interest expense over the term of the debt. This convertible note is currently due on demand and interest is paid monthly.
(C-11) Convertible Goldstein Note
On February 21, 2022, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The Company issued 25,000 shares of common stock, valued at $25,000 as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair value of the shares of common stock. The debt and shares of common stock were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $50,000 is amortized to interest expense over the term of the debt.
The future minimum payments of the Company’s convertible debt obligations as of June 30, 2022 are as follows. The unamortized discount will be amortized through September 2022.
(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 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.
(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.
(l) Upwise Capital
In August 2021, the Company executed on a short-term financing arrangement. The proceeds of $2.5 million are being utilized to further expand the production capabilities of the operations in Arizona and to complete the Nevada facility. Payments of $64,762 are due weekly until $3.264 million is repaid. This results in an effective interest rate of approximately 36%.
On January 26, 2022, the Company executed a second short-term financing arrangement. The proceeds of $2.5 million were used to repay the first short-term financing arrangement, discussed above, in the amount of approximately $1.839 million, and the remainder of the proceeds was used for working capital purposes. Payments of $66,468 are due weekly until $3.35 million has been repaid. This results in an effective interest rate of 36%. The repayment of the first short-term financing was accounted for as an extinguishment. As such, all previously unamortized discount in the amount of $46,588 and imputed interest in the amount of $483,840 was capitalized to construction in progress during January 2022. Fees paid for the second short-term financing arrangement in the amount of $91,000 have been recorded as a discount and will be amortized to interest expense over the term of the arrangement. See Note 14.
(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 its outstanding notes. The total outstanding balance of $1,660,590, 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 two-year period and an exercise price of $1.00. The resulting discount of $58,352 was fully amortized to interest expense during the six months ended March 31, 2022.
Effective March 31, 2022, the debt was amended to extend the maturity date to June 30, 2022, interest payments are due on April 1, May 1 and June 1, 2022. Principal payments in the amount of $50,000 are due on April 15, May 15 and June 15, 2022 and a final balloon payment of outstanding principal and interest in the amount of $223,972 is due on June 30, 2022. This note is currently due on demand and interest is paid monthly.
(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 five-year term. As of the date of these condensed consolidated financial statements, the terms of these warrants have not been finalized. The debt and anticipated warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 18% per annum beginning January 1, 2022, will be paid at maturity, which has been postponed to a date that has not yet been determined.
(t) Chessler note
Prior to the acquisition, OCG entered into a settlement agreement with its former landlord, which included a note agreement for $500,000. During March 2022, this note agreement was modified to extend the maturity date to July 19, 2022 and add an interest rate of 18% per annum. The modified note also calls for principal payments of $75,000 on the effective date of the note, $75,000 on April 10, 2022, $100,000 on May 22, 2022 and $250,000 at maturity, plus accrued and unpaid interest. The principal balance of this note plus accrued and unpaid interest was paid subsequent to June 30, 2022.
(u) Lendspark
In February 2022, the Company executed on a short-term financing arrangement for proceeds of $750,000. Payments of $20,400 are due weekly until approximately $1.02 million is repaid. This results in an effective interest rate of approximately 36%. Fees in the amount of $48,765 have been recorded as a discount and are being amortized to interest expense over the term of the arrangement. See Note 14.
(v) Upwise Capital 2
In February 2022, the Company executed on a third short-term financing arrangement with Upwise Capital for proceeds of $250,000. Payments of $6,746 are due weekly until $340,000 is repaid. This results in an effective interest rate of approximately 36%. Fees in the amount of $16,255 have been recorded as a discount and are being amortized to interest expense over the term of the arrangement. See Note 14.
(w) Viridis working capital loans
During the nine months ended June 30, 2022, the Company received several short-term working capital loans from Viridis, a related party, in the amount of $3,702,000. The terms of these short term loans are still being determined, however, an interest rate of 15% has been estimated.
(x) Non-convertible Gaines Note
On March 10, 2022, the Company entered into a short-term promissory note for $250,000. The short-term promissory note is due and payable in monthly payments of interest only, with all principal and any accrued and unpaid interest due at maturity. This convertible note is currently due on demand and interest is paid monthly.
(y) Nebrina Adams County Note
Effective with the close of the Adams County acquisition (see Note 4), the Company entered into a note for $200,000 with the seller as part of the purchase price. The note is payable in six installments on the last day of each three-month period following the Closing Date.
The future minimum payments of the Company’s notes payable obligations as of March 31, 2022 are as follows. The unamortized discount will be amortized through November 2023.
A summary of interest expense for the three and nine months ended June 30, 2022 and 2021 is as follows.
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Note 9 - Concentrations |
9 Months Ended |
|---|---|
Jun. 30, 2022 | |
| Risks and Uncertainties [Abstract] | |
| Note 9 - Concentrations | Note 9 - Concentrations
For the three and nine months ended June 30, 2022 and 2021, substantially all of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license. One of our license holder’s customers that the Company’s products are distributed to accounts for 33% of our cultivation revenue for the nine months ended June 30, 2022. Should our products no longer be distributed to this customer of our license holder, it would have a material adverse effect on our operations. |
Note 10 - Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 10 - Commitments and Contingencies | Note 10 - Commitments and Contingencies
The production and possession of cannabis is prohibited on a national level by the Controlled Substances Act, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. If the federal government decides to change its policy on the enforcement of the Controlled Substances Act, it would have a material adverse effect on our business.
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 June 30, 2022 and 2021 on this lease was $20,782 and $20,617, respectively. Rent expense for the nine months ended June 30, 2022 and 2021 on this lease was $64,939 and $61,454, respectively. Interest was imputed using a discount rate of 20%. The lease does not include renewal options.
In February 2022, the Company assumed a lease to rent approximately 3,100 square feet of retail space in Oklahoma City, Oklahoma as part of the Oklahoma City acquisition disclosed in Note 4. The lease calls for base rent payments of $21 per square foot ($5,483), plus a prorated share of taxes, insurance and common area maintenance expenses, per month and increasing each year by 3% through the end of the lease term on February 28, 2029. The lease may be extended for two additional 5 year periods. Rent expense for the three and nine months ended June 30, 2022 on this lease was $22,129 and $36,406, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.
In March 2022, the Company assumed a lease to rent approximately 2,650 square feet of retail space in Adams County, Colorado as part of the Adams County acquisition disclosed in Note 4. The lease calls for base rent payments of $15,450, plus a prorated share of operating costs of the building, per month and escalate each year to $15,913 in the final year which ends on February 1, 2024. The lease may be extended for one additional 3 year period. Rent expense for the three and nine months ended June 30, 2022 on this lease was $52,822 and $68,870, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.
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 calls 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 lease may be extended for two terms of 5 years each. The commencement of this lease is contingent upon the issuance and receipt of a license and city approval. The agreement will terminate if the contingency is not met. At June 30, 2022, the contingency has not been met, however, control over the use of the leased premises has been received by the Company. As such, the Company has recorded the right of use asset and liability to the condensed consolidated balance sheet. Rent expense for the three and nine months ended June 30, 2022 on this lease was $21,781 and $48,197, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%. The future lease payments are as follows.
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. As of June 30, 2022, the contingency has not been met and the Company is currently considering its options in regards to this agreement. The future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at June 30, 2022 or the future lease payments schedule above.
As of June 30, 2022 and September 30, 2021, the Company has accrued unpaid payroll taxes and estimated penalties and interest of approximately $1,350,000 and $2,400,000, respectively, and is included in accrued payroll and payroll taxes in the accompanying condensed consolidated balance sheets. The Company is making monthly payments of $94,278, beginning March 1, 2022, to pay this liability. Further, during the three months ended June 30, 2022, the Company received approximately $294,000 of Employee Retention Credits ("ERCs") that were used to reduce the unpaid payroll taxes liability. The ERCs were recorded to payroll and employee related expenses on the condensed consolidated statement of operations.
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. |
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Note 11 - Related Party Transactions |
9 Months Ended |
|---|---|
Jun. 30, 2022 | |
| Related Party Transactions [Abstract] | |
| Note 11 - Related Party Transactions | Note 11 - Related Party Transactions
As discussed in Note 7, the Company completed the purchase of 44 acres of land from a related party for $3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.
As discussed in Note 8, the Company has entered into various loan agreements with Viridis or its related entities. Two members of Viridis serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.
As discussed in Note 8, 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 10, the Company has a lease agreement with VGI Capital LLC. Two members of VGI Capital LLC serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.
During the three months ended June 30, 2022 and 2021, the Company purchased cultivation supplies from a related party in the amount of $0 and $13,868, respectively. During the nine months ended June 30, 2022 and 2021, the Company purchased cultivation supplies from a related party in the amount of $31,708 and $39,397, respectively. This related party is owned by the parent of a stockholder that holds more than 5% of the Company’s common stock.
Included in our accounts payable at June 30, 2022 and September 30, 2021 is approximately $231,000, and $138,000, respectively in amounts due to related parties. |
Note 12 - Stockholders' Equity |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 12 - Stockholders' Equity | Note 12 - Stockholders' Equity
Unit Offering
Prior to the three months ended June 30, 2022, the Company began offering up to 28,000,000 units of the Company for $1.40 per Unit on a “best-efforts/no minimum” basis pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. Each Unit is comprised of one share of common stock and one-half of one warrant to purchase a share of common stock. Only whole warrants are exercisable. Each whole warrant entitles the holder to purchase one share of common stock for $2.00 per share, subject to certain adjustments, from the date of issuance until the second anniversary of the date of issuance and is redeemable by the Company under certain conditions. Effective May 4, 2022, the Company repriced the offering to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company has incurred approximately $922,000 in fees related to this offering. These fees are included in Other assets on the condensed consolidated balance sheet at June 30, 2022 and will be netted against the proceeds received in the offering.
Warrants
The following table summarizes the Company’s warrant activity for the nine months ended June 30, 2022:
The following range of assumptions were used to estimate the fair value of warrants issued during the nine months ended June 30, 2022, using the Black-Scholes option-pricing model, excluding the 234,943 whole warrants issued as part of the Company’s unit offering.
Stock Options
On June 21, 2019, the Company’s 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. The maximum contractual term of the award is 10 years. The vesting period for options outstanding at June 30, 2022 ranges from vesting immediately to three years.
The following table summarizes the Company’s stock option activity for the nine months ended June 30, 2022:
The following range of assumptions were used to estimate the fair value of stock options granted during the nine months ended June 30, 2022, using the Black-Scholes option-pricing model.
During the three months ended June 30, 2022 and 2021, the Company recognized compensation expense of $ and $, respectively. During the nine months ended June 30, 2022 and 2021, the Company recognized compensation expense of $ and $, respectively. At June 30, 2022, there was $2,299,311 of total unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average vesting period of 1 year. |
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Note 13 – Segment Information |
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| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 13 – Segment Information | Note 13 – 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 tables presents segment information for the three and nine months ended June 30, 2022 and 2021. The Company acquired the Franchising segment at the closing of the acquisition of OCG, Inc. effective March 19, 2021.
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Note 14 - Subsequent Events |
9 Months Ended |
|---|---|
Jun. 30, 2022 | |
| Subsequent Events [Abstract] | |
| Note 14 - Subsequent Events | Note 14 - Subsequent Events
Subsequent to June 30, 2022 the following events have occurred.
The Company’s North Denver dispensary location began operations on July 11, 2022, making it the Company’s first corporate-owned shop in Colorado under the Company’s cannabis dispensary brand, Unity Rd.
The Company has sold 1,700 units under its offering pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings for total proceeds of $1,904 subsequent to June 30, 2022.
The Company received short-term loans in the aggregate amount of $1,370,000 from Viridis, a related party. The terms of these short-term loans are being determined as of the date of the filing.
On July 20, 2022, the Company entered into short-term financing arrangement with Capybara Capital. The proceeds of $0.5 million were used for working capital purposes. Payments of $18,889 are due weekly until $0.68 million has been repaid. This results in an effective interest rate of 36%.
On July 22, 2022, the Company entered into a short-term financing arrangement with Upwise Capital. The proceeds of $1.954 million were used to repay the second short-term financing arrangement (see (l) in Note 8 above) and the Upwise Capital 2 financing arrangement (see (v) in Note 8 above). Payments of $55,552 are due weekly until $2.598 million has been repaid. This results in an effective interest rate of 33%.
On July 22, 2022, the Company entered into a short-term financing arrangement with Lendspark. The proceeds of $0.65 million were used to repay the previous Lendspark short-term financing (see (u) in Note 8 above) in the amount of $0.591 million, and the remainder of the proceeds, approximately $0.05 million was used for working capital purposes. Payments of $17,680 are due weekly until $0.884 million has been repaid. This results in an effective interest rate of 36%. |
Note 1 - Description of Business and Summary of Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles of Consolidation | Principles of Consolidation
The accompanying condensed consolidated financial statements of the Company as of June 30, 2022 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, 2021 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2021 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.
The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned subsidiaries and a consolidated variable interest entity (“VIE”). Intercompany balances and transactions have been eliminated.
Item 9 Labs consolidates a VIE in which the Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company makes significant judgments in determining whether an entity is a VIE and, for each reporting period, the Company assesses whether it is the primary beneficiary of the VIE. Effective February 1, 2022, the Company was deemed the primary beneficiary of Elevated Connections, Inc. The equity in Elevated Connections, Inc. held by its stockholder has been presented on the balance sheet and the statement of operations as a non-controlling interest.
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 periods’ net income, net loss or accumulated deficit. |
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| 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. |
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| 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 primarily consists of the costs directly related to the production and cultivation of cannabis crops, cannabis oils, and cannabis concentrate products. Inventory is relieved to cost of revenues as products are delivered to dispensaries. Inventory consists primarily of labor, utilities, costs of raw materials, packaging, nutrients and overhead. The Company routinely evaluates the carrying value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce inventory to its estimated net realizable value. There were no inventory reserves recorded at June 30, 2022 and September 30, 2021. |
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| Licenses | Licenses
Cannabis licenses vary in term for each jurisdiction. The Company capitalizes all costs associated with the acquisition of cannabis licenses in the year the license is obtained. Subsequent measurement is determined by the length of the term of the license. The Company acquired licenses during the nine months ended June 30, 2022 that have indefinite useful lives, subject to annual renewals. Costs associated with maintaining licenses (annual fees) are expensed as incurred. The anticipated maintenance fees are not expected to be material to the condensed consolidated financial statements. Licenses are included on the balance sheet under the heading Intangible assets, net at June 30, 2022 and September 30, 2021. |
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| 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 and nine months ended June 30, 2022 and 2021, all of the Company's cultivation revenue was generated from performance obligations completed in the state of Arizona.
The Company recognizes revenue once the products are delivered. Revenue is considered earned upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is reasonably assured. The Company records revenue at the amount it expects to collect, 100% of the wholesale sales revenue. The fees paid for operating under the contract are expensed to cost of revenues.
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 $560,849 and $775,843 at June 30, 2022 and September 30, 2021, respectively, and is included in deferred revenue on the condensed consolidated balance sheets. Revenue recognized during the three months ended June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $4,998 and $0, respectively. Revenue recognized during the nine months ended June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $214,994 and $0, respectively. |
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| 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 net loss 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 June 30, 2022 and 2021 that were excluded from the diluted net loss per share calculation for the three and nine months ended June 30, 2022 and 2021 because the effect of including these potential shares was antidilutive due to the Company’s net loss.
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| 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 June 30, 2022 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated. |
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| 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 and nine months ended June 30, 2022 and 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”). |
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| Business Combination | Business Combination
The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss. |
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| 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 adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us. |
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Note 1 - Description of Business and Summary of Significant Accounting Policies (Tables) |
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| Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block] |
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Note 3 – Inventory (Tables) |
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| Schedule of Inventory, Current [Table Text Block] |
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Note 4 – Acquisitions (Tables) |
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| Schedule of Business Acquisitions, by Acquisition [Table Text Block] |
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| Schedule of Noncash or Part Noncash Acquisitions [Table Text Block] |
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Note 5 – Variable Interest Entity (Tables) |
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| Schedule of Variable Interest Entities [Table Text Block] |
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Note 6 – Goodwill and Intangible Assets (Tables) |
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| Schedule of Intangible Assets and Goodwill [Table Text Block] |
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Note 7 - Property and Equipment, Net (Tables) |
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| Property, Plant and Equipment [Table Text Block] |
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Note 8 – Debt (Tables) |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Note 10 - Commitments and Contingencies (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Note 12 - Stockholders' Equity (Tables) |
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Note 13 – Segment Information (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Segment Reporting Information, by Segment [Table Text Block] |
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Antidilutive shares excluded from calculation of diluted net loss per share (Details) - shares |
9 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Potentially dilutive common share equivalents | ||
| Options | 6,223,462 | 3,211,709 |
| Warrants | 48,069,687 | 41,415,000 |
| Convertible notes | 3,510,792 | 2,707,238 |
| Potentially dilutive shares outstanding | 57,803,941 | 47,333,947 |
Note 1 - Description of Business and Summary of Significant Accounting Policies (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Sep. 30, 2021 |
|
| Accounting Policies [Abstract] | |||||
| Deferred Revenue | $ 560,849 | $ 560,849 | $ 775,843 | ||
| Deferred Revenue, Revenue Recognized | $ 4,998 | $ 0 | $ 214,994 | $ 0 | |
Inventory (Details) - USD ($) |
Jun. 30, 2022 |
Sep. 30, 2021 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Raw materials and work in process | $ 1,817,094 | $ 4,291,095 |
| Finished goods | 1,596,924 | 1,052,375 |
| Packaging and other | $ 716,761 | $ 1,047,881 |
Consideration paid or accrued for acquisition (1) (Details) - USD ($) |
9 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Business Acquisition [Line Items] | ||
| Cash | $ 140,726 | |
| Series of Individually Immaterial Business Acquisitions [Member] | ||
| Business Acquisition [Line Items] | ||
| Common stock | 65,000 | |
| $ 255,000 | ||
Allocation of purchase price to estimated fair values of assets acquired (1) (Details) - USD ($) |
9 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Business Acquisition [Line Items] | ||
| Cash | $ 6,143 | $ 94,596 |
| Series Of Individually Immaterial Business Acquisitions 1 [Member] | ||
| Business Acquisition [Line Items] | ||
| Cash | 6,143 | |
| Fixed assets | 80,287 | |
| Tangible net assets acquired | 86,430 | |
| Goodwill | 168,570 | |
| Consideration paid | $ 255,000 | |
Consideration paid or accrued for acquisition (2) (Details) - USD ($) |
9 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Business Acquisition [Line Items] | ||
| Cash | $ 140,726 | |
| Series Of Individually Immaterial Business Acquisitions 2 [Member] | ||
| Business Acquisition [Line Items] | ||
| Cash | 1.0 | |
| Debt | 200,000 | |
| Common stock | 336,000 | |
| Direct costs of acquisition | 130,872 | |
| $ 1,666,872 | ||
Carrying values of assets and liabilities of VIE consolidated by the Company (Details) |
Jun. 30, 2022
USD ($)
|
|---|---|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Inventory | $ 27,773 |
| Total assets | 27,773 |
| Income tax payable | 7,948 |
| Total liabilities | $ 7,948 |
Operations (after intercompany eliminations) of VIE consolidated by the Company (Details) - USD ($) |
3 Months Ended | 9 Months Ended |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2022 |
|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||
| Revenues, net | $ 40,245 | $ 73,582 |
| Cost of revenue | 21,111 | 44,128 |
| Gross profit | 19,134 | 29,454 |
| Income tax expense | 4,624 | 7,948 |
| Net income | $ 14,510 | $ 21,506 |
Property and equipment (Details) - USD ($) |
Jun. 30, 2022 |
Sep. 30, 2021 |
|---|---|---|
| Property, Plant and Equipment [Abstract] | ||
| Cultivation and manufacturing equipment | $ 551,045 | $ 506,271 |
| Computer equipment and software | 266,427 | 266,427 |
| Leasehold improvements | 49,667 | |
| Buildings and improvements | 2,811,340 | 2,785,781 |
| Accumulated Depreciation | (696,052) | (479,320) |
| Land | 3,455,563 | 380,584 |
| Construction on progress | 19,869,222 | 7,418,105 |
| Property and Equipment, Net | $ 26,307,212 | $ 10,877,848 |
Note 7 - Property and Equipment, Net (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Property, Plant and Equipment [Abstract] | ||||
| Payments to Acquire Land Held-for-use | $ 3,000,000.0 | |||
| Depreciation | $ 71,285 | $ 35,965 | $ 217,363 | $ 100,535 |
Future minimum payments of Company's convertible debt obligations (Details) |
Jun. 30, 2022
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| $ 3,620,000 | |
| 3,620,000 | |
| (353,821) | |
| $ 3,266,179 |
Future minimum payments of Company's notes payable obligations (Details) |
Jun. 30, 2022
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| $ 27,563,901 | |
| 1,862,175 | |
| 29,426,076 | |
| (2,886,822) | |
| (557,885) | |
| 25,981,369 | |
| (24,532,509) | |
| $ 1,448,860 |
Summary of interest expense (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Debt Disclosure [Abstract] | ||||
| Amortization of debt discounts | $ 1,440,535 | $ 316,320 | $ 4,932,259 | $ 564,622 |
| Stated interest paid or accrued | 1,508,210 | 301,933 | 4,073,665 | 1,217,726 |
| Finance charges and other interest | 22,021 | 11,012 | 25,016 | 23,671 |
| 2,970,766 | 629,265 | 9,030,940 | 1,806,019 | |
| Less: interest capitalized to construction in progress | (1,345,611) | (5,098,022) | ||
| $ 1,625,155 | $ 629,265 | $ 3,932,918 | $ 1,806,019 | |
Future lease payments (Details) |
Jun. 30, 2022
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| $ 420,720 | |
| 359,998 | |
| 158,342 | |
| 163,093 | |
| 167,985 | |
| 266,399 | |
| 1,536,537 | |
| (523,462) | |
| 1,013,075 | |
| (256,471) | |
| $ 756,604 |
Note 10 - Commitments and Contingencies (Details Narrative) - USD ($) |
3 Months Ended | 4 Months Ended | 9 Months Ended | 12 Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Aug. 31, 2028 |
Sep. 30, 2026 |
May 31, 2024 |
Jan. 31, 2024 |
May 31, 2023 |
May 31, 2022 |
May 31, 2021 |
May 31, 2020 |
Sep. 30, 2021 |
|
| [custom:AccruedAndUnpaidPayrollTaxesAndEstimatedPenaltiesInterest-0] | $ 1,350,000 | $ 1,350,000 | $ 1,350,000 | $ 2,400,000 | ||||||||||
| [custom:UnpaidPayrollTaxesAndEstimatedPenaltiesInterestPeriodicPayment] | $ 94,278 | |||||||||||||
| [custom:EmployeeRetentionCreditsReceivedByCompany] | 294,000 | |||||||||||||
| Operating Lease 1 [Member] | ||||||||||||||
| Operating Lease, Payments | $ 7,178 | $ 7,003 | $ 6,828 | $ 6,653 | $ 6,478 | |||||||||
| Operating Leases, Rent Expense | 20,782 | $ 20,617 | 64,939 | $ 61,454 | ||||||||||
| Operating Lease 2 [Member] | ||||||||||||||
| Operating Lease, Payments | 5,483 | |||||||||||||
| Operating Leases, Rent Expense | 22,129 | 36,406 | ||||||||||||
| Operating Lease 3 [Member] | ||||||||||||||
| Operating Lease, Payments | 15,450 | $ 15,913 | ||||||||||||
| Operating Leases, Rent Expense | 52,822 | 68,870 | ||||||||||||
| Operating Lease 4 [Member] | ||||||||||||||
| Operating Lease, Payments | 6,604 | $ 7,886 | ||||||||||||
| Operating Leases, Rent Expense | $ 21,781 | 48,197 | ||||||||||||
| Operating Lease 5 [Member] | ||||||||||||||
| Operating Lease, Payments | $ 6,354 | $ 7,295 | ||||||||||||
Note 11 - Related Party Transactions (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Sep. 30, 2021 |
|
| Related Party Transactions [Abstract] | |||||
| Payments to Acquire Land Held-for-use | $ 3,000,000.0 | ||||
| [custom:PurchasesOfSuppliesFromRelatedParty] | $ 0 | $ 13,868 | 31,708 | $ 39,397 | |
| Due to Related Parties, Current | $ 231,000 | $ 231,000 | $ 138,000 | ||
Warrant Activity (Details) - Warrants 1 [Member] - USD ($) |
9 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Sep. 30, 2021 |
|
| Class of Warrant or Right [Line Items] | ||
| Class of Warrant or Right, Outstanding | 48,069,687 | 46,095,000 |
| Class of Warrant or Right, Exercise Price of Warrants or Rights | $ 2.10 | $ 2.08 |
| Warrants and Rights Outstanding | $ 1,375,000 | $ 14,243,000 |
| Share-Based Compensation Arrangement by Share-Based Payment Award, Non-Option Equity Instruments, Granted | 1,974,687 | |
| Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value | $ 2.68 |
Note 12 - Stockholders' Equity (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Equity [Abstract] | ||||
| Share-Based Payment Arrangement, Noncash Expense | $ 934,681 | $ 304,672 | $ 2,533,535 | $ 914,016 |
| [custom:UnrecognizedStockCompensationCost-0] | $ 2,299,311 | $ 2,299,311 | ||