Quarterly Report (10-q)

Date : 09/30/2019 @ 6:01PM
Source : Edgar (US Regulatory)
Stock : Evio, Inc. (QB) (EVIO)
Quote : 0.0595  -0.0045 (-7.03%) @ 9:47PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2018

 

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: 000-12350

 

EVIO, INC.

(Exact name of registrant as specified in its charter)

 

Colorado

 

47-1890509

(State of Incorporation)

 

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

 

2340 W. Horizon Ridge Pkwy, Suite 120

Henderson, NV

 

89052

(Address of principal executive offices)

 

(Zip Code)

 

(888) 544-3846

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

N/A

 

N/A

 

N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated filer

¨

Non-accelerated filer

¨

Accelerated filer

¨

Smaller reporting company

x

 

Emerging growth company

x

 

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 in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of September 27, 2019, there were 28,954,418 shares of common stock outstanding, 0 shares of Series A Preferred Stock, 5,000,000 shares of Series B Preferred Stock convertible at any time into 5,000,000 shares of common stock, 500,000 shares of Series C Preferred Stock convertible at any time into 2,500,000 shares of common stock, 514,500 shares of Series D Preferred Stock convertible at any time into 1,286,250 shares of common stock.

 

 
 
 
 

 

EVIO, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED DECEMBER 31, 2018

 

TABLE OF CONTENTS

 

PART I -- FINANCIAL INFORMATION

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

3

 

Consolidated Balance Sheets as of December 31, 2018 (Unaudited) and September 30, 2018

3

 

Consolidated Statements of Operations for the Three Months Ended December 31, 2018 and 2017 (Unaudited)

4

 

Consolidated Statements of Stockholders Equity for the Three Months Ended December 31, 2018 and 2017 (Unaudited)

6

 

Notes to Unaudited Consolidated Financial Statements

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

9

 

Business of Registrant

23

 

Results of Operations

24

 

Liquidity and Capital Resources

26

 

Critical Accounting Policies and Estimates

 

 

 27

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

Item 4.

Control and Procedures

 

29

 

 

 

PART II -- OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

30

 

Item 1A.

Risk Factors

 

30

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

Item 3.

Defaults Upon Senior Securities

 

30

 

Item 4.

Mine Safety Disclosures

 

30

 

Item 5.

Other Information

 

30

 

Item 6.

Exhibits

 

31

 

 
2
 
 

 

PART I -- FINANCIAL INFORMATION

 

ITEM 1 –FINANCIAL STATEMENTS

 

Consolidated Balance Sheets as of December 31, 2018 (Unaudited) and September 30, 2018

 

 

 

December 31,

2018

 

 

September 30,

2018

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$ 210,084

 

 

$ 81,736

 

Accounts receivable, net of allowance of $417,610 and $414,475

 

 

251,654

 

 

 

234,178

 

Prepaid expenses

 

 

173,578

 

 

 

45,940

 

Other current assets

 

 

179,238

 

 

 

146,816

 

Note receivable, current portion

 

 

100,000

 

 

 

100,000

 

Total current assets

 

 

914,554

 

 

 

608,670

 

Right of use assets

 

 

2,781,238

 

 

 

-

 

Capital assets, net of accumulated depreciation of $170,009 and $123,854

 

 

1,086,065

 

 

 

411,241

 

Assets not in service

 

 

-

 

 

 

455,540

 

Land

 

 

212,550

 

 

 

212,550

 

Property and equipment, net of accumulated depreciation of $704,736 and $520,437

 

 

3,814,175

 

 

 

3,525,772

 

Security deposits

 

 

164,101

 

 

 

159,632

 

Note receivable

 

 

1,200,000

 

 

 

1,200,000

 

Prepaid expenses

 

 

-

 

 

 

63,582

 

Intangible assets, net of accumulated amortization, net of accumulated amortization of $411,487 and $318,816

 

 

1,538,582

 

 

 

1,680,569

 

Goodwill

 

 

5,901,607

 

 

 

6,037,404

 

Total assets

 

$ 17,612,872

 

 

$ 14,354,960

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$ 2,460,289

 

 

$ 1,546,617

 

Client deposits

 

 

236,259

 

 

 

363,211

 

Interest payable

 

 

669,595

 

 

 

416,459

 

Capital lease obligation, current

 

 

839,571

 

 

 

677,030

 

Derivative liability

 

 

678,689

 

 

 

1,181,278

 

Convertible notes payable, net of discounts of $578,535 and $753,557, respectively

 

 

2,083,787

 

 

 

1,678,265

 

Loans payable, current, net of discounts $19,833 and $119,000, respectively

 

 

1,268,117

 

 

 

643,927

 

Total current liabilities

 

 

8,236,307

 

 

 

6,506,787

 

Convertible debentures, net of discounts of $3,507,423 and $4,043,836, respectively

 

 

1,675,577

 

 

 

1,153,164

 

Lease liabilities

 

 

2,828,361

 

 

 

-

 

Capital lease obligation, net of current portion

 

 

201,441

 

 

 

148,433

 

Loans payable, net of current portion

 

 

660,811

 

 

 

1,193,781

 

Convertible loans payable, related party, net

 

 

-

 

 

 

61,263

 

Loans payable, related party, net of current portion, net of discounts of $45,567 and $51,971, respectively

 

 

1,458,003

 

 

 

1,348,793

 

Total liabilities

 

 

15,060,500

 

 

 

10,412,221

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Series B convertible preferred stock, $0.0001 par value. 5,000,000 authorized; 5,000,000 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively

 

 

500

 

 

 

500

 

Series C convertible preferred stock, $0.0001 par value. 500,000 authorized; 500,000 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively

 

 

50

 

 

 

50

 

Series D convertible preferred stock, $0.0001 par value. 1,000,000 authorized; 514,500 and 552,500 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively

 

 

51

 

 

 

55

 

Common stock, $0.0001 par value. 1,000,000,000 authorized; 25,309,742 and 23,255,409 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively

 

 

2,531

 

 

 

2,326

 

Additional paid-in capital

 

 

22,936,272

 

 

 

21,495,621

 

Retained earnings (accumulated deficit)

 

 

(21,823,121 )

 

 

(19,226,462 )

Accumulated other comprehensive income

 

 

(443,807 )

 

 

(263,985 )

Total stockholders’ equity

 

 

672,476

 

 

 

2,008,105

 

Noncontrolling interest

 

 

1,879,896

 

 

 

1,934,634

 

Total equity

 

 

2,552,372

 

 

 

3,942,739

 

Total liabilities and equity

 

$ 17,612,872

 

 

$ 14,354,960

 

 

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

 

 
3
 
Table of Contents

 

EVIO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

 

Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Testing revenue

 

$ 1,187,238

 

 

$ 887,349

 

Consulting revenue

 

 

-

 

 

 

59,516

 

Total revenues

 

 

1,187,238

 

 

 

946,865

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

Testing services

 

 

1,013,980

 

 

 

696,658

 

Consulting services

 

 

-

 

 

 

10,492

 

Depreciation and amortization

 

 

290,448

 

 

 

29,113

 

Total cost of revenue

 

 

1,304,428

 

 

 

736,263

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

(117,190 )

 

 

210,602

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

1,496,640

 

 

 

820,275

 

Depreciation and amortization

 

 

58,866

 

 

 

57,387

 

Total operating expenses

 

 

1,555,506

 

 

 

877,662

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(1,672,696 )

 

 

(667,060 )

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

(1,764,878 )

 

 

(284,651 )

Other income (expense)

 

 

(64,095 )

 

 

-

 

Gain (loss) on settlement of debt

 

 

-

 

 

 

(56,093 )

Gain (loss) on change in fair market value of derivative liabilities

 

 

852,658

 

 

 

13,322

 

Total other income (expense)

 

 

(976,345 )

 

 

(327,422 )

Income (loss) before income taxes

 

 

(2,649,041 )

 

 

(994,482 )

 

 

 

 

 

 

 

 

 

Provision for income taxes (benefit)

 

 

2,356

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(2,651,397 )

 

 

(994,482 )

Net income (loss) attributable to noncontrolling interest

 

 

(54,738 )

 

 

(7,890 )

Net income (loss) attributable to EVIO, Inc. shareholders

 

$ (2,596,659 )

 

$ (986,592 )

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per common share

 

$ (0.10 )

 

$ (0.08 )

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

24,753,819

 

 

 

11,713,103

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net income (loss)

 

$ (2,651,397 )

 

$ (994,482 )

Foreign currency translation adjustment

 

 

(179,822 )

 

 

-

 

Comprehensive income (loss)

 

$ (2,831,219 )

 

$ (994,482 )

 

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

 

 
4
 
Table of Contents

 

EVIO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

 

Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

 

Net income (loss)

 

$ (2,651,397 )

 

$ (994,482 )

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Amortization of debt discount

 

 

 1,519,971

 

 

 

231,321

 

Common stock issued in exchange for fees and services

 

 

 143,823

 

 

 

179,552

 

Deferred taxes

 

 

-

 

 

 

-

 

Depreciation and amortization

 

 

349,424

 

 

 

86,500

 

Impairment of goodwill and long lived assets

 

 

-

 

 

 

-

 

Loss on disposal of assets

 

 

64,095

 

 

 

-

 

Loss on settlement of accounts payable

 

 

 

 

 

 

3,750

 

Loss on settlement of debt

 

 

-

 

 

 

52,343

 

Provision for doubtful accounts

 

 

18,310

 

 

 

3,067

 

Provision for excess or obsolete inventory

 

 

-

 

 

 

-

 

Stock based compensation

 

 

205,797

 

 

 

79,151

 

Unrealized (gain) loss on derivative liability

 

 

(852,628 )

 

 

(13,322 )

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(39,437 )

 

 

23,854

 

Prepaid expenses

 

 

(64,142 )

 

 

81,477

 

Other current assets

 

 

(32,422 )

 

 

(26,514 )

Security deposits

 

 

(4,470 )

 

 

-

 

Operating lease right of use assets

 

 

47,123

 

 

 

-

 

Other assets

 

 

-

 

 

 

-

 

Accounts payable and accrued liabilities

 

 

918,795

 

 

 

77,932

 

Customer deposits and deferred revenues

 

 

(126,668 )

 

 

(48,204 )

Income taxes payable

 

 

-

 

 

 

-

 

Interest payable

 

 

256,126

 

 

 

71,189

 

Net cash provided by (used in) operating activities

 

 

(247,720 )

 

 

(192,386 )

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Cash consideration for acquisition of business

 

 

-

 

 

 

-

 

Notes receivable

 

 

-

 

 

 

-

 

Purchase of fixed assets

 

 

(554,731 )

 

 

(6,952 )

Purchase of intangible assets

 

 

 

 

 

 

-

 

Net cash provided by (used in) investing activities

 

 

(554,731 )

 

 

(6,952 )

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of preferred stock, net of issuance costs

 

 

 

 

 

 

-

 

Proceeds from issuance of common stock, net of issuance costs

 

 

103,000

 

 

 

350,000

 

Proceeds from issuance of convertible debentures

 

 

910,413

 

 

 

-

 

Proceeds from issuance of convertible notes, net of issuance costs

 

 

(61,595 )

 

 

-

 

Proceeds from loans payable

 

 

-

 

 

 

-

 

Proceeds from related party advances

 

 

53,325

 

 

 

-

 

Repayments of capital leases

 

 

(61,379 )

 

 

(9,391 )

Repayments of convertible debentures

 

 

-

 

 

 

-

 

Repayments of loans payable

 

 

(7,947 )

 

 

(2,636 )

Repayments of related party loans payable

 

 

(1,941 )

 

 

(37,828 )

Net cash provided by (used in) financing activities

 

 

933,876

 

 

 

300,145

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

 

(3,076 )

 

 

-

 

Net increase (decrease) in cash and cash equivalents

 

 

128,349

 

 

 

100,807

 

Cash and cash equivalents at beginning of period

 

 

81,735

 

 

 

121,013

 

Cash and cash equivalents at end of period

 

$ 210,084

 

 

$ 221,820

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

-

 

 

 

-

 

Cash paid for income taxes

 

 

-

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of convertible note and accrued interest into common stock

 

$ 708,089

 

 

$ 336,884

 

Reclassification of derivative liability to additional paid in capital

 

 

-

 

 

$ 281,315

 

Settlement of account payable for common stock

 

 

-

 

 

$ 18,750

 

Common stock issued for settlement of note payable

 

 

-

 

 

$ 162,000

 

Common stock issued for settlement of related party note payable

 

 

-

 

 

$ 62,500

 

Common stock issued for subscription receivable

 

 

-

 

 

$ 148,000

 

Conversion of Series D Preferred stock to common stock

 

 

-

 

 

 

-

 

Debt discount recorded on convertible notes and debentures payable upon initial measurement of derivative liability

 

$ 350,039

 

 

 

-

 

Debt discounts recorded for original issue discounts on convertible debentures

 

$ 280,144

 

 

 

 

 

Vehicles financed through notes payable

 

 

-

 

 

 

 

 

Equipment financed through capital leases

 

$ 308,613

 

 

 

 

 

 

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

 

 
5
 
Table of Contents

  

EVIO, INC.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Preferred Stock

 

 

Series C Preferred Stock

 

 

Series D Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Capital

 

 

Earnings

 

 

Income

 

 

Equity

 

 

Interest

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

 

5,000,000

 

 

$ 500

 

 

 

500,000

 

 

$ 50

 

 

 

832,500

 

 

$ 83

 

 

 

10,732,922

 

 

$ 1,073

 

 

$ 7,657,982

 

 

$ (7,592,371 )

 

$ -

 

 

$ 67,317

 

 

$ 158,124

 

 

$ 225,441

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(986,592 )

 

 

-

 

 

 

(986,592 )

 

 

(7,890 )

 

 

(994,482 )

Issuance of common stock in connection with the conversion of

Series D preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(87,728 )

 

 

(9 )

 

 

219,320

 

 

 

22

 

 

 

(13 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock in connection with sales made under

private offerings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,245,000

 

 

 

125

 

 

 

497,875

 

 

 

-

 

 

 

-

 

 

 

498,000

 

 

 

-

 

 

 

498,000

 

Issuance of common stock as compensation to employees, officers

and/or directors

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,000

 

 

 

2

 

 

 

6,562

 

 

 

-

 

 

 

-

 

 

 

6,564

 

 

 

-

 

 

 

6,564

 

Issuance of common stock in exchange for consulting, professional

and other services provided

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

239,750

 

 

 

24

 

 

 

241,133

 

 

 

-

 

 

 

-

 

 

 

241,157

 

 

 

-

 

 

 

241,157

 

Issuance of common stock in connection with the settlement

of accounts payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37,500

 

 

 

4

 

 

 

18,746

 

 

 

-

 

 

 

-

 

 

 

18,750

 

 

 

-

 

 

 

18,750

 

Issuance of common stock in connection with the settlement

of notes payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

324,000

 

 

 

32

 

 

 

161,968

 

 

 

-

 

 

 

-

 

 

 

162,000

 

 

 

-

 

 

 

162,000

 

Issuance of common stock in connection with the conversion

of loans payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

900,793

 

 

 

90

 

 

 

318,910

 

 

 

-

 

 

 

-

 

 

 

319,000

 

 

 

-

 

 

 

319,000

 

Issuance of common stock in connection with the conversion

of related party notes payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

125,000

 

 

 

12

 

 

 

62,488

 

 

 

-

 

 

 

-

 

 

 

62,500

 

 

 

-

 

 

 

62,500

 

Issuance of common stock in connection with the conversion

of interest payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

50,743

 

 

 

5

 

 

 

17,879

 

 

 

-

 

 

 

-

 

 

 

17,884

 

 

 

-

 

 

 

17,884

 

Common stock options issued under employee equity incentive plan

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

72,587

 

 

 

-

 

 

 

-

 

 

 

72,587

 

 

 

-

 

 

 

72,587

 

Reclassifcation of derivative liability to additional paid-in capital

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

281,315

 

 

 

-

 

 

 

-

 

 

 

281,315

 

 

 

-

 

 

 

281,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

 

5,000,000

 

 

$ 500

 

 

 

500,000

 

 

$ 50

 

 

 

744,772

 

 

$ 74

 

 

 

13,890,028

 

 

$ 1,389

 

 

$ 9,337,432

 

 

$ (8,578,963 )

 

$ -

 

 

$ 760,482

 

 

$ 150,234

 

 

$ 910,716

 

 

 
6
 
Table of Contents

 

 

 

Preferred

Stock

 

 

 

 

 Preferred

Stock

 

 

 

  Preferred

Stock

 

 

 

 

Common

Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Capital

 

 

Earnings

 

 

Income

 

 

Equity

 

 

Interest

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

 

5,000,000

 

 

$ 500

 

 

 

500,000

 

 

$ 50

 

 

 

552,500

 

 

$ 55

 

 

 

23,255,409

 

 

$ 2,326

 

 

$ 21,495,621

 

 

$ (19,226,462 )

 

$ (263,985 )

 

$ 2,008,105

 

 

$ 1,934,634

 

 

$ 3,942,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,596,659 )

 

 

-

 

 

 

(2,596,659 )

 

 

(54,738 )

 

 

(2,651,397 )

Change in foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(179,822 )

 

 

(179,822 )

 

 

-

 

 

 

(179,822 )

Issuance of common stock in connection with the conversion of

Series D preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(38,000 )

 

 

(4 )

 

 

95,000

 

 

 

10

 

 

 

(6 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock for cash

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

200,000

 

 

 

20

 

 

 

105,980

 

 

 

-

 

 

 

-

 

 

 

106,000

 

 

 

-

 

 

 

106,000

 

Issuance of common stock as compensation to employees, officers

and/or directors

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

50,000

 

 

 

5

 

 

 

35,870

 

 

 

-

 

 

 

-

 

 

 

35,875

 

 

 

-

 

 

 

35,875

 

Issuance of common stock in exchange for consulting, professional

and other services provided

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

250,000

 

 

 

25

 

 

 

128,375

 

 

 

-

 

 

 

-

 

 

 

128,400

 

 

 

-

 

 

 

128,400

 

Issuance of common stock in connection with the conversion

of loans payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

779,808

 

 

 

78

 

 

 

317,022

 

 

 

-

 

 

 

-

 

 

 

317,100

 

 

 

-

 

 

 

317,100

 

Issuance of common stock in connection with the conversion

of debentures

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

669,362

 

 

 

67

 

 

 

387,933

 

 

 

-

 

 

 

-

 

 

 

388,000

 

 

 

-

 

 

 

388,000

 

Issuance of common stock in connection with the conversion

of interest payable

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,163

 

 

 

1

 

 

 

2,987

 

 

 

-

 

 

 

-

 

 

 

2,988

 

 

 

-

 

 

 

2,988

 

Issuance of common stock purchase warrants in satisfaction of

debt issuances costs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,423

 

 

 

-

 

 

 

-

 

 

 

12,423

 

 

 

-

 

 

 

12,423

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

169,922

 

 

 

-

 

 

 

-

 

 

 

169,922

 

 

 

-

 

 

 

169,922

 

Recognition of beneficial conversion features related to

convertible debt instruments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

280,144

 

 

 

-

 

 

 

-

 

 

 

280,144

 

 

 

-

 

 

 

280,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

 

5,000,000

 

 

$ 500

 

 

 

500,000

 

 

$ 50

 

 

 

514,500

 

 

$ 51

 

 

 

25,309,742

 

 

$ 2,531

 

 

$ 22,936,272

 

 

$ (21,823,121 )

 

$ (443,807 )

 

$ 672,476

 

 

$ 1,879,896

 

 

$ 2,552,372

 

 

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

 

 
7
 
Table of Contents

 

EVIO, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018

 

NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

EVIO, Inc., a Colorado corporation and its subsidiaries (“the Company”, “EVIO”, “EVIO Labs”, “we”, “us”, or “our”) provide analytical testing and advisory services to the developing legalized cannabis and hemp industries. The Company operates both corporate owned and licensed laboratories through-out North America. Our laboratories provide testing for both cannabis and hemp products at all our labs.

 

Oregon: The Company operates two OLCC licensed and ORELAP accredited laboratories in Oregon. EVIO Labs Portland, located in Tigard, OR, is 100% owned by EVIO. EVIO Labs Medford, located in Central Point, OR is 80% owned by EVIO.

 

California: The Company operates one BCC licensed and ISO 17025 accredited laboratory in Berkeley serving both the cannabis and hemp markets in the state and the hemp market nationwide. EVIO owns 90% of this company.

 

Massachusetts: The Company is completing the relocation and re-accreditation of our laboratory in the state.

 

Florida: The Company licenses its brand to Kaycha Holdings, which operates two ISO 17025 accredited laboratories in the state.

 

Colorado: The Company licenses its brand to Kaycha Holdings, which operates one ISO 17025 accredited laboratory in the state.

 

Canada: The Company operates one Health Canada licensed, GMP certified laboratory, in Edmonton, Alberta. EVIO owns 50% of this company.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should 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. The following five steps are applied to achieve that core principle:

 

 

· Step 1: Identify the contract with the customer

 

· Step 2: Identify the performance obligations in the contract

 

· Step 3: Determine the transaction price

 

· Step 4: Allocate the transaction price to the performance obligations in the contract

 

· Step 5: Recognize revenue when the company satisfies a performance obligation

 

The Company generates revenue from consulting services, licensing agreements and testing of cannabis and hemp products for medicinal and adult-use consumption.

 

The Company accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

The Company evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The Company’s services included in its contracts are distinct from one another.

 

The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.

 

 
8
 
Table of Contents

 

The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the services provided. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the service.

 

The Company recognizes revenue from testing services upon delivery of its testing results to the client. Customer orders for testing services are generally completed within two weeks of receiving the order.

 

Consulting engagements may vary in length and scope, but will generally include the review and/or preparation of regulatory filings, business plans and financial models, operating plans, and technology support to customers within the same industry. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting agreement.

 

The Company recognizes revenue from right of use license agreements upon transfer of control of the functional intellectual property. In certain licensing agreements, the Company may receive royalty revenues based upon performance metrics which are recognized as earned over time.

 

Foreign Currency Translation

 

The functional currency of the Company’s subsidiary in Canada is the Canadian Dollar. The subsidiary’s assets and liabilities have been translated to U.S. Dollars using the exchange rates in effect at the balance sheet dates. Statements of operations amounts have been translated using the average exchange rate for each period. Resulting gains or losses from translating foreign currency financial statements are recorded as other comprehensive income (loss).

 

Fair Value of Financial Instruments

 

The Company has adopted the guidance under ASC Topic 820 for financial instruments measured on a fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Net Income (Loss) Per Share

 

Basic loss per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. There were 13,666,226 and 10,071,182 potentially dilutive common shares outstanding as of December 31, 2018 and 2017, respectively. Because of the net losses incurred during the three months ended December 31, 2018 and 2017, the impacts of dilutive instruments would have been anti-dilutive for the period presented and have been excluded from the diluted loss per share calculations.

 

Accounting Pronouncements – Current Fiscal Quarter Adoption

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to account for leases as either finance or operating leases and generally requires all lease to be recorded on the balance sheet, through the recognition of right-of-use assets and corresponding lease liabilities. In addition, in July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provide an additional (and optional) transition method whereby the new lease standard is applied at the adoption and recognized as an adjustment to retained earnings.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. ASU 2016-02 was further clarified and amended within ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20 which included provisions that would provide us with the option to adopt the provisions of the new guidance using a modified retrospective transition approach, without adjusting the comparative periods presented. The Company is currently evaluating ASU 2016-02 and its impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption

 

 
9
 
Table of Contents

 

NOTE 2 – GOING CONCERN

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have an established source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

 

In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.

 

Historically, it has mostly relied upon convertible debentures, convertible promissory notes, internally generated funds such as shareholder loans and advances to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.

 

NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

ASC Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

 

· Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

· Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

· Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The Company’s financial instruments consist principally cash, accounts payable, and accrued liabilities. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair value of freestanding derivative instruments such as warrant and option derivatives are valued using the Monte Carlo simulation model.

 

The Company’s derivative liabilities were adjusted to fair market value at the end of each reporting period, using Level 3 inputs.

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on December 31, 2018:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$ -

 

 

$ -

 

 

$ 678,689

 

 

$ 678,689

 

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on September 30, 2018:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$ -

 

 

$ -

 

 

$ 1,181,278

 

 

$ 1,181,278

 

 

 
10
 
Table of Contents

 

NOTE 4 –LEASES

 

The Company determines if an arrangement is a lease at inception and has lease agreements for warehouses, office facilities, and equipment. These commitments have remaining non-cancelable lease terms, with lease expirations which range from 2020 to 2024.

 

As a result of the adoption of ASC 842, certain real estate and equipment operating leases have been recorded on the balance sheet with a lease liability and right-of-use asset (“ROU”). Application of this standard resulted in the recognition of ROU assets of $2,781,238, net of accumulated amortization, and a corresponding lease liability of $2,828,361 at the October 1, 2018, date of adoption. Accounting for finance leases is substantially unchanged.

 

Operating leases are included in operating lease ROU assets, operating lease obligations, current, and operating lease obligations, long term on the condensed consolidated balance sheets. Finance leases are included in property and equipment, finance lease obligations, short term, and finance lease obligations, long term, on the condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available.

 

Amortization of lease assets is included in general and administrative expenses. The future minimum lease payments of lease liabilities as of December 31, 2018, are as follows:

 

Year ended September 30,

 

Operating

Leases

 

 

Financing

Leases

 

2019

 

 

658,479

 

 

$ 474,666

 

2020

 

 

736,261

 

 

 

370,083

 

2021

 

 

503,364

 

 

 

350,669

 

2022

 

 

483,596

 

 

 

156,351

 

2023

 

 

323,356

 

 

 

166,856

 

Thereafter

 

 

27,911

 

 

 

55,004

 

Total lease payments

 

 

2,732,967

 

 

 

1,573,629

 

Less: Payments Made

 

 

(166,897 )

 

 

(270,326 )

Total Lease Liabilities

 

$ 2,566,070

 

 

$ 1,303,303

 

 

NOTE 5 – INTANGIBLE ASSETS

 

The Company’s intangible assets consist of customer lists, testing licenses, favorable leases and websites. The components of intangible assets as of December 31, 2018 and September 30, 2018 consist of:

 

 

 

December 31,

2018

 

 

September 30,

2018

 

Customer list

 

$ 839,207

 

 

$ 865,672

 

License

 

 

503,000

 

 

 

503,000

 

Favorable lease

 

 

3,100

 

 

 

3,100

 

Websites

 

 

49,295

 

 

 

49,690

 

Non-compete agreements

 

 

179,625

 

 

 

184,563

 

Assembled Workforce

 

 

50,750

 

 

 

50,750

 

Intellectual Property

 

 

325,092

 

 

 

342,610

 

Total

 

 

1,950,069

 

 

 

1,999,385

 

Accumulated amortization

 

 

(411,487 )

 

 

(318,815 )

Net value

 

$ 1,538,582

 

 

$ 1,680,570

 

 

 
11
 
Table of Contents

 

The Company estimates amortization to be recorded on existing intangible assets from December 31, 2018 through the estimated lives to be:

 

 

 

Amortization

 

2019

 

$ 282,818

 

2020

 

 

343,273

 

2021

 

 

304,689

 

2022

 

 

235,509

 

2023

 

 

195,533

 

2024

 

 

123,382

 

2025

 

 

43,243

 

2026

 

 

2,317

 

2027

 

 

2,317

 

2028

 

 

2,317

 

2029

 

 

2,317

 

2030

 

 

868

 

Total

 

$ 1,538,582

 

 

NOTE 6 – CONCENTRATION OF CREDIT RISK

 

Instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits, notes receivable and accounts receivable. As of December 31, 2018, the Company did not hold cash at any financial institution in excess of the amount insured by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000. As of December 31, 2018 and September 30, 2018, the Company had a note receivable totaling $1,300,000 and $1,300,000 due from a single entity.

 

As of December 31, 2018, the Company had total accounts receivable net of allowances of $251,655. Three separate clients comprised a total of 36% of this balance as follows:

 

 

 

Balance

 

 

Percent of

Total

 

Customer 1

 

$ 180,000

 

 

 

27 %

Customer 2

 

 

34,268

 

 

 

5 %

Customer 3

 

 

27,317

 

 

 

4 %

All others

 

 

427,680

 

 

 

64 %

Total

 

 

669,265

 

 

 

100 %

Allowance for doubtful accounts

 

 

(417,610 )

 

 

 

 

Net accounts receivable

 

$ 251,655

 

 

 

 

 

 

As of September 30, 2018, the Company had total accounts receivable, net of allowances, of $234,178. Three separate clients comprised a total of 38% of this balance as follows:

 

 

 

Balance

 

 

Percent of

Total

 

Customer 1

 

$ 180,000

 

 

 

28 %

Customer 2

 

 

32,750

 

 

 

5 %

Customer 3

 

 

30,000

 

 

 

5 %

All others

 

 

405,903

 

 

 

62 %

Total

 

 

648,653

 

 

 

100 %

Allowance for doubtful accounts

 

 

(414,475 )

 

 

 

 

Net accounts receivable

 

$ 234,178

 

 

 

 

 

 

NOTE 7 – PROPERTY AND EQUIPMENT

 

Property and equipment are carried at cost. Expenditures for maintenance and repairs are expensed in the period incurred. Renewals and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period.

 

 
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Depreciation is computed for financial statement purposes on a straight-line basis over estimated useful lives of the related assets and the modified accelerated cost recovery system for federal income tax purposes. The estimated useful lives of depreciable assets are:

 

 

Estimated

 

Useful Lives

Building

 

39 years

Laboratory and Computer Equipment

 

5 years

Furniture and Fixtures

 

7 years

Software

 

3 years

Domains

 

15 years

 

The Company’s property and equipment consisted of the following as of December 31, 2018 and September 30, 2018:

 

 

 

December 31,

2018

 

 

September 30,

2018

 

Assets Not-In-Service

 

$ -

 

 

$ 455,540

 

Capital Assets

 

 

1,256,073

 

 

 

535,095

 

Land

 

 

212,550

 

 

 

212,550

 

Buildings & Real Estate

 

 

941,857

 

 

 

937,450

 

Furniture and Equipment

 

 

182,463

 

 

 

189,459

 

Laboratory Equipment

 

 

2,798,429

 

 

 

2,468,141

 

Software

 

 

78,848

 

 

 

63,913

 

Leasehold Improvements

 

 

433,400

 

 

 

303,331

 

Vehicles

 

 

83,915

 

 

 

83,915

 

Total

 

 

5,987,535

 

 

 

5,249,394

 

Accumulated depreciation

 

 

(874,745 )

 

 

(644,291 )

Net value

 

$ 5,112,790

 

 

$ 4,605,103

 

 

During the three months ended December 31, 2018, the Company capitalized a total of $738,141 of equipment and depreciation expense of $230,454.

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

During the three months ended December 31, 2018, the Company received loans from its Chief Operating Officer totaling $10,000 and made repayments totaling $0 leaving a balance due as of December 31, 2018 of $10,000. The advances are non-interest bearing and due on demand. There was $10,000 and $0 due as of December 31, 2018 and September 30, 2018 and is included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties.

 

During the three months ended December 31, 2018 the Company made no payments to Sara Lausmann, associated with the asset purchase of Oregon Analytical Services, LLC. There was $580,299 of principal due as of December 31, 2018 and September 30, 2018. The note carries interest at a rate of 5% per annum and had accrued interest totaling $86,609 and $79,295 due as of December 31, 2018 and September 30, 2018, respectively.

 

During the three months ended December 31, 2018, the Company made no payments to Anthony Smith, our Chief Science Officer, associated with the purchase of 80% of Smith Scientific Industries. There was $236,000 of principal due as of December 31, 2018 and September 30, 2018. The note carries interest at a rate of 5% per annum and had accrued interest totaling $33,935 and $30,960 due as of December 31, 2018 and September 30, 2018, respectively.

 

During the three months ended December 31, 2018, the Company made repayments to Henry Grimmett, prior Company Director (retired April 2018), on an outstanding loan from member assumed by the Company, totaling a note payable of Greenhaus Analytical Services, LLC, totaling $3,858.85. There was $113,554 and $117,412 of principal due as of December 31, 2018 and September 30, 2018, respectively. The note bears interest at 0% per annum and requires repayments of $25,000 quarterly.

 

During the three months ended December 31, 2018, the Company made no payments to Henry Grimmett, prior Company Director (retired April 2018), associated with the acquisition of Greenhaus Analytical Services, LLC. The Company entered into a $340,000 note payable as part of its acquisition of Greenhaus Analytical Services, LLC. The note carries interest at a rate of 6% per annum and matures on October 16, 2020. There was $340,000 of principal, an unamortized debt discount of $45,567 and $51,971 as of December 31, 2018 and September 30, 2018, respectively and $45,048 and $39,905 of accrued interest due as of December 31, 2018 and September 30, 2018, respectively.

 

During the three months ended December 31, 2018, the Company received $59,254 from a related party associate with Keystone Labs and made repayment of $1,941, leaving balances due of $210,498 and $153,177 as of December 31, 2018 and September 30, 2018, respectively. Amounts have been adjusted for USD. The advances are non-interest bearing and due on demand and is included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties.

 

 
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NOTE 9 – STOCKHOLDERS’ EQUITY

 

Series A Convertible Preferred Stock

 

The Company has 0 shares of Series A Convertible Stock issued and outstanding as of December 31, 2018 and 2017.

 

Series B Convertible Preferred Stock

 

The Company designated 5,000,000 shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with a par value of $0.0001 per share. The Company has 5,000,000 shares of Series B Convertible Stock issued and outstanding as of December 31, 2018 and 2017. These shares converted to common stock at a rate of 1 common share per each shares of Series B Convertible Preferred Stock.

 

Series C Convertible Preferred Stock

 

The Company designated 500,000 shares of Series C Convertible Preferred Stock (“Series C Preferred Stock”) with a par value of $0.0001 per share. There were 500,000 shares of Series C Convertible Stock issued and outstanding as of December 31, 2018 and 2017. These shares converted to common stock at a rate of 5 common shares per each shares of Series C Convertible Preferred Stock.

 

Series D Convertible Preferred Stock

 

The Company designated 1,000,000 shares of Series D Convertible Preferred Stock (“Series D Preferred Stock”) with a par value of $0.0001 per share. These shares converted to common stock at a rate of 2.5 common shares per each shares of Series D Convertible Preferred Stock.

 

During the three months ended December 31, 2018, the Company accepted two separate conversion notices from Series D Preferred Stockholders resulting in a total of 95,000 shares of common stock being issued for the conversion of 38,000 shares of Series D Preferred Stock.

 

During the three months ended December 31, 2017, the Company accepted two separate conversion notices from Series D Preferred Stockholders resulting in a total of 219,320 shares of common stock being issued for the conversion of 87,728 shares of Series D Preferred Stock.

 

There were 514,500 and 744,772 shares of Series D Convertible Stock issued and outstanding as December 31, 2018 and December 31, 2017, respectively.

 

Common Stock

 

During the quarter ended December 31, 2018, the Company issued 250,000 common shares valued at $128,400 for services; 200,000 common shares for cash proceeds of $106,000; 50,000 common shares valued at $35,875 under its employee equity incentive plan; 779,808 common shares for the conversion of $317,100 of outstanding principal on convertible notes payable; 669,362 common shares for the conversion of $388,000 of convertible debentures; 10,163 common shares for conversion of interest payable of $2,988, and 95,000 common shares for the conversion of Preferred Series D stock. All conversions of outstanding principal and accrued interest on convertible notes payable were done so at contractual terms.

 

During the quarter ended December 31, 2017, the Company issued 239,759 common shares valued at $241,527 for services; 1,245,000 common shares for cash proceeds of $498,000; 15,000 common shares valued at $6,564 under its employee equity incentive plan; 900,793 common shares for the conversion of $319,000 of outstanding principal on convertible notes payable; 324,000 common shares for the settlement of $162,000 of notes payable; 37,500 common shares for the settlement of $18,750 of notes payable; 125,000 common shares for conversion of related party notes payable of $62,500, 50,743 common shares for conversion of interest payable of $17,884, and 219,320 common shares for the conversion of Preferred Series D stock. All conversions of outstanding principal and accrued interest on convertible notes payable were done so at contractual terms.

 

There were 25,309,725 and 13,890,028 shares of common stock issued and outstanding at December 31, 2018 and December 31, 2017, respectively.

 

 
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NOTE 10 – LOANS PAYABLE

 

The Company had the following loans payable outstanding as of December 31, 2018 and September 30, 2018:

 

 

 

December 31,

2018

 

 

September 30,

2018

 

On March 16, 2017, the Company executed notes payable for the purchase of three vehicles. The notes carry interest at 6.637% annually and mature on March 31, 2023.

 

 

58,280

 

 

 

60,477

 

On September 6, 2017, the Company entered into a note payable totaling $1,000,000 for the purchase of an outstanding note receivable. The note carries interest at 8% annually and is due on July 6, 2018.

 

 

500,000

 

 

 

500,000

 

On June 28, 2018, the Company executed a note payable for $650,000 for the purchase of the building at 14775 SW 74th Ave, Tigard, OR. The note carries interest at 8% annually and is due on June 28, 2021.

 

 

640,482

 

 

 

646,231

 

On July 5, 2018, the Company executed a note payable for $750,000 for the asset purchase of MRX Labs. The note carries interest at 8% annually and is due on January 5, 2019.

 

 

750,000

 

 

 

750,000

 

 

 

 

1,948,762

 

 

 

1,956,708

 

Less: unamortized original issue discounts

 

 

-

 

 

 

-

 

Total loans payable

 

 

1,948,762

 

 

 

1,956,708

 

Less: current portion of loans payable

 

 

1,287,951

 

 

 

762,927

 

 

 

 

 

 

 

 

 

 

Long-term portion of loans payable

 

$ 660,811

 

 

$ 1,193,781

 

 

As of December 31, 2018 and September 30, 2018, the Company accrued interest of $98,472 and $47,767 respectively

 

NOTE 11 – CONVERTIBLE NOTES PAYABLE

 

The Company has entered into convertible notes payable that convert to common stock of the Company at variable conversion prices. As further discussed in Note 13 – Derivative Liability, the Company analyzed the conversion features of the agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

The following table summarizes all convertible notes outstanding as of September 30, 2018:

 

Holder

 

Issue Date

 

Due Date

 

Principal

 

 

Unamortized Debt Discount

 

 

Carrying

Value

 

 

Accrued

Interest

 

Noteholder 2

 

7/2/18

 

10/1/18

 

 

220,000

 

 

 

(220 )

 

 

219,780

 

 

 

4,340

 

Noteholder 3

 

7/2/18

 

10/1/18

 

 

220,000

 

 

 

(220 )

 

 

219,780

 

 

 

4,340

 

Noteholder 4

 

8/1/18

 

10/1/18

 

 

330,000

 

 

 

(492 )

 

 

329,508

 

 

 

-

 

Noteholder 1

 

8/14/18

 

8/14/19

 

 

167,100

 

 

 

(13,591 )

 

 

153,509

 

 

 

2,839

 

Noteholder 5

 

8/29/18

 

2/28/19

 

 

222,222

 

 

 

(78,670 )

 

 

143,552

 

 

 

-

 

Noteholder 6

 

9/6/18

 

9/6/19

 

 

125,000

 

 

 

(89,921 )

 

 

35,079

 

 

 

-

 

Noteholder 3

 

9/13/18

 

3/11/19

 

 

585,000

 

 

 

(513,062 )

 

 

71,938

 

 

 

-

 

Noteholder 7

 

9/17/18

 

9/17/19

 

 

62,500

 

 

 

(57,381 )

 

 

5,119

 

 

 

-

 

Noteholder 10

 

4/24/18

 

4/24/19

 

 

500,000

 

 

 

0

 

 

 

500,000

 

 

 

-

 

 

 

 

 

 

 

$ 2,431,822

 

 

$ (753,557 )

 

$ 1,678,265

 

 

$ 11,519

 

 

 
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The following table summarizes all convertible notes outstanding as of December 31, 2018:

 

Holder

 

Issue Date

 

Due Date

 

Principal

 

 

Unamortized Debt Discount

 

 

Carrying

Value

 

 

Accrued

Interest

 

Noteholder 2

 

7/2/18

 

10/1/18

 

 

220,000

 

 

 

0

 

 

 

220,000

 

 

 

8,776

 

Noteholder 3

 

7/2/18

 

10/1/18

 

 

220,000

 

 

 

0

 

 

 

220,000

 

 

 

8,776

 

Noteholder 4

 

8/1/18

 

10/1/18

 

 

330,000

 

 

 

0

 

 

 

330,000

 

 

 

10,994

 

Noteholder 5

 

8/29/18

 

2/28/19

 

 

222,222

 

 

 

(14,067 )

 

 

208,155

 

 

 

3,775

 

Noteholder 6

 

9/6/18

 

9/6/19

 

 

125,000

 

 

 

(59,332 )

 

 

65,668

 

 

 

3,972

 

Noteholder 3

 

9/13/18

 

3/11/19

 

 

435,000

 

 

 

(163,770 )

 

 

271,230

 

 

 

0

 

Noteholder 7

 

9/17/18

 

9/17/19

 

 

62,500

 

 

 

(40,264 )

 

 

22,236

 

 

 

1,798

 

Noteholder 4

 

10/02/18

 

1/1/19

 

 

220,000

 

 

 

(2,418 )

 

 

217,582

 

 

 

4,340

 

Noteholder 8

 

11/15/18

 

11/15/19

 

 

222,600

 

 

 

(194,546 )

 

 

28,054

 

 

 

2,244

 

Noteholder 9

 

12/27/18

 

12/27/10

 

 

105,000

 

 

 

(104,136 )

 

 

863

 

 

 

69

 

Noteholder 10

 

4/24/18

 

4/24/19

 

 

500,000

 

 

 

 

 

 

 

500,000

 

 

 

0

 

 

 

 

 

 

 

$ 2,662,322

 

 

$ (578,535 )

 

$ 2,083,787

 

 

$ 44,744

 

 

Noteholder 1

 

On August 14, 2017, the Company sold and issued a Convertible Promissory Note to an unrelated party, for the principal amount of $275,600 of which $15,600 was an original issue discount and $10,000 was paid directly to third parties resulting in cash proceeds to the Company of $250,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on August 14, 2018. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 75% of the lowest trade price of the Company’s common stock for the fifteen prior trading days including the date of conversion. During the year ended September 30, 2018, the holder elected to convert $167,100 of principal due in exchange for 479,848 shares of common stock and the holder elected to convert $2,988 of interest due in exchange for 10,163 shares of common stock. There was $0 and $167,100 of principal and $0 and $2,839 of accrued interest due at December 31, 2018 and September 30, 2018, respectively.

 

Noteholder 2

 

On July 2, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount and $17,000 was paid directly to third parties resulting in cash proceeds to the Company of $183,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on October 1, 2018. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share. There was $220,000 and $220,000 of principal and $8,776 and $4,340 of accrued interest due December 31, 2018 and September 30, 2018, respectively.

 

Noteholder 3

 

On July 2, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount resulting in cash proceeds to the Company of $200,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on October 1, 2018. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share. There was $220,000 and $220,000 of principal and $8,776 and $4,340 of accrued interest due December 31, 2018 and September 30, 2018, respectively.

 

On September 17, 2018, the Company entered into an exchange agreement with an unrelated party for the principal amount $585,000, of which the loan payable to Palliatech, Dated August 1, 2017, outstanding and principal of $549,652 would be assumed by the new note holder, with difference of $35,348 to be treated as an original issue discount. The new convertible note payable carries an interest rate of 0% per annum is convertible into common stock of the Company at the option of the noteholder immediately at 80% of the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days. There was $435,000 of principal and $0 accrued interest due on both December 31, 2018 and September 30, 2018.

 

Noteholder 4

 

On August 1, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $330,000 of which $30,000 was an original issue discount resulting in cash proceeds to the Company of $300,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, was due on October 1, 2018. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share. There was $330,000 and $330,000 of principal and $10,994 and $0 of accrued interest due at December 31, 2018 and September 30, 2018, respectively.

 

On October 2, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount resulting in cash proceeds to the Company of $200,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on January 1, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share. There was $220,000 of principal and $4,340 of accrued interest due at December 31, 2018.

 

 
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Noteholder 5

 

On August 29, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $222,222 of which $22,222 was an original issue discount and $5,500 was paid directly to third parties resulting in cash proceeds to the Company of $194,500 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 5%, is due on February 28, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.70 per share. There was $222,222 and $222,222 of principal and $3,775 and $0 of accrued interest due at December 31, 2018 and September 30, 2018, respectively. The holder has issued a notice of default on this promissory note.

 

Noteholder 6

 

On September 6, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $125,000 of which $15,000 was an original issue discount parties resulting in cash proceeds to the Company of $110,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 10%, is due on September 6, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.50 per share. There was $125,000 and $125,000 of principal and $3,972 and $0 of accrued interest due at December 31, 2018 and September 30, 2018, respectively.

 

Noteholder 7

 

On September 6, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $62,500 of which $6,250 was an original issue discount resulting in cash proceeds to the Company of $56,250 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 10%, is due on September 6, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.50 per share. There was $62,500 and $62,500 of principal and $1,798 and $0 of accrued interest due at December 31, 2018 and September 30, 2018, respectively.

 

Noteholder 8

 

On November 15, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $222,600 of which $12,600 was an original issue discount resulting in cash proceeds to the Company of $210,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on November 15, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.55 per share. There was $222,600 of principal and $2,244 of accrued interest due at December 31, 2018.

 

Noteholder 9

 

On December 27, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $105,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on December 27, 2019. The Note is convertible into the Company’s common stock commencing 180 days from the date of issuance at a conversion price equal to 65% of the lowest trade price of the Company’s common stock for the fifteen prior trading days including the date of conversion. There was $105,000 of principal and $69 of accrued interest due at December 31, 2018.

 

Noteholder 10

 

On April 24, 2018, the Company entered into a convertible note payable totaling $500,000 in exchange for 100% of the assets of Leaf Detective LLC. The note bears no interest, matures on April 24, 2019 and automatically converted to common stock at $1.25 per share on the maturity date. In the event the average lowest trading price of the Company’s common stock during the five days prior to maturity is less than $1.25 per share, the Company will pay the noteholder the difference between $1.25 and the average lowest trading price during the preceding five days per share converted in cash. There was $500,000 principal and $0 interest due on both December 31, 2018 and September 30, 2018.

 

 
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NOTE 12 – CONVERTIBLE DEBENTURES

 

On January 29, 2018, the Company issued a total of 5,973 units of 8% unsecured convertible debentures. Each unit consists of one convertible debenture with a principal face value of $1,000 and 250 warrants. The gross proceeds were $5,973,000. Each warrant entitles the holder thereof to purchase one additional common share of the Company at an exercise price of $0.80 per warrant for a period of 24 months. The convertible debentures have a maturity date of 36 months from issuance. Simple interest will be paid at a rate of 8% per annum in arrears until maturity or until conversion. The principal amount of the debentures and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share.

 

In addition to the warrants associated with the convertible debentures, the Company issued an additional 597,300 warrants to purchase common stock of the Company as offering costs representing an equivalent of 6% of the fully converted debentures. The warrants are exercisable at $0.60 per share for a period of two years.

 

During the fiscal year ended September 30, 2018, the Company issued three separate debentures under the same terms for additional cash proceeds of $610,000. The additional debentures carry an additional 152,500 warrants to purchase additional common shares of the Company at $0.80 per share. Additionally, the outstanding principal and interest may be converted to common stock of the Company at $0.60 per share.

 

During the quarter ended December 31, 2018, the Company also issued nineteen additional debentures under the same terms for additional cash proceeds of $374,000. The additional debentures carry an additional 187,000 warrants to purchase additional common shares of the Company at $0.80 per share. Additionally, the outstanding principal and interest may be converted to common stock of the Company at $0.60 per share.

 

Associated with the issuance of the convertible debentures, the Company incurred cash-based issuance costs of $702,963, issued common shares valued at $1,414,907 and warrants to purchase additional shares of common stock valued at $1,265,385 for total debt issuance costs of $3,383,255. The debt issuance costs were recorded as a discount to the carrying value of the convertible debentures. The warrants associated with the debt issue costs were valued using a Black-Scholes model with the following assumptions:

 

Expected term of options granted

 

2 years

 

Expected volatility

 

 

223 %

Risk-free interest rate

 

 

2.49 %

Expected dividend yield

 

 

0 %

 

The Company separately assessed the value of the detachable warrants and conversion features of the convertible debentures. The Company separately initially valued the detachable warrants issued with the convertible debentures at $3,351,160 using a Black-Scholes model with the following assumptions:

 

Expected term of options granted

 

2 years

 

Expected volatility

 

211-223

%

Risk-free interest rate

 

2.09-2.25

%

Expected dividend yield

 

 

0 %

 

Additionally, the outstanding principal on convertible debentures totaling $6,957,000 may be converted into common stock of the Company at $0.60 per share for a total of 11,595,000 shares. Due to the variable conversion features of the outstanding convertible notes payable as discussed in Note 7 – Convertible Notes Payable, the Company cannot ascertain there will be adequate unissued authorized common shares to fulfill all share-based obligations. As a result, the warrants issued in connection with the convertible debentures are not afforded equity treatment and were recorded as a derivative liability upon initial measurement. The total initial measurement of warrants issued with the convertible debentures was $4,616,545 of which $4,465,131 was recorded as a debt discount and, when combined with debt issuance costs, represents a total debt discount of $6,583,000.

 

As of December 31, 2018 the Company has amortized $684,401 of the total outstanding debt discount leaving an unamortized debt discount of $3,507,423. The remaining debt discount will be amortized to interest expense over the expected life of the note. There was $5,183,000 of principal and accrued interest totaling $343,051 outstanding as of December 31, 2018.

 

NOTE 13 – DERIVATIVE LIABILITY

 

As of December 31, 2018 and September 30, 2018, Company had a derivative liability balance of $678,689 and $1,181,278 on the balance sheets and recorded a gain of $852,628 from derivative liability fair value adjustments during the three months ended December 31, 2018.

 

On November 15, 2018, the Company issued a $222,600 convertible promissory note to an unrelated party that matures on November 15, 2019. Refer to Noteholder 8 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15, Derivatives and Hedging and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

 
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The embedded derivative for the note is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the embedded derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the note was $220,463 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $184,957 which was up to the face value of the convertible note with the excess fair value at initial measurement of $35,506 being recognized as a loss on derivative fair value measurement.

 

On December 27, 2018, the Company issued a $105,000 convertible promissory note to an unrelated party that matures on December 27, 2019. Refer to Noteholder 9 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

 

The aggregate fair value of the derivative at the issuance date of the note was $98,091 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $38,365 which was up to the face value of the convertible note with the excess fair value at initial measurement of $59,725 being recognized as a loss on derivative fair value measurement.

 

At December 31, 2018, the Company marked-to-market the fair value of the derivative liabilities related to conversion features and determined an aggregate fair value of $319,004 and recorded a $450 loss from change in fair value for the three months ended December 31, 2018. The fair value of the embedded derivatives was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 115%, (2) risk-free interest rate of 2.63%, (3) exercise prices of $0.60 - $0.80, and (4) expected lives of 1.08 – 1.81 years.

 

On October 2, 2018, the Company issued a total of $220,000 convertible debenture to an unrelated party that matures on January 1, 2019. The Company issued a total of 100,000 warrants to purchase additional shares of common stock of the Company in connection with the convertible debenture. The Company analyzed the issued warrants for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the warrants should be classified as a derivative because the Company is unable to ascertain there will be adequate unissued authorized shares of common stock to fulfill its obligations should the warrants be exercised. In accordance with AC 815, the Company has recorded a derivative liability related to the warrants.

 

The derivative for the warrants is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the warrants was $57,014 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $53,333 which was up to the face value of the convertible debentures with the excess fair value at initial measurement of $3,681 being recognized as a loss on derivative fair value measurement.

 

As discussed in “Note 12 – Convertible Debentures”, the Company issued a total of $374,000 of convertible debentures to unrelated parties that mature on dates ranging from October 17, 2020 to October 23, 2020. The Company issued a total of 187,000 warrants to purchase additional shares of common stock of the Company in connection with the convertible debentures. The Company analyzed the issued warrants for derivative accounting consideration and determined that the warrants should be classified as a derivative. The aggregate fair value of the derivative at the issuance date of the warrants was $73,383 which was recorded as a derivative liability on the balance sheet, for which the Company recorded an equivalent debt discount to the convertible debentures.

 

At December 31, 2018, the Company marked-to-market the fair value of the derivative liabilities related to warrants and determined an aggregate fair value of $359,685 and recorded a $951,990 gain from change in fair value for the three months ended December 31, 2018. The fair value of the derivatives was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 115%, (2) risk-free interest rate of 2.63%, (3) exercise prices of $0.21, and (4) expected lives of 0.87 – 0.99 of a year.

 

The following table summarizes the derivative liabilities included in the balance sheet at December 31, 2018:

 

Fair Value of Derivative Liabilities:

 

 

 

Balance, September 30, 2018

 

$ 1,181,278

 

Initial measurement of derivative liabilities

 

 

448,951

 

Change in fair market value

 

 

(951,540 )

Write off due to conversion

 

 

-

 

Balance, December 31, 2018

 

$ 678,689

 

 

The following table summarizes the gain (loss) on derivative liability included in the income statement for the three months ended December 31, 2018 and 2017, respectively.

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Day one loss due to derivatives on convertible debt

 

$ (98,912 )

 

$ -

 

Change in fair value of derivatives

 

 

951,540

 

 

 

13,322

 

Total derivative gain (loss)

 

$ 852,628

 

 

$ 13,322

 

 

 
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NOTE 14 – STOCK OPTIONS AND WARRANTS

 

The following table summarizes all stock option and warrant activity for the three months ended December 31, 2018:

 

 

 

Shares

 

 

Weighted-

Average

Exercise Price

Per Share

 

Outstanding, September 30, 2018

 

 

4,638,050

 

 

$ 0.784

 

Granted

 

 

316,920

 

 

 

0.781

 

Exercised

 

 

-

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

Expired

 

 

-

 

 

 

-

 

Outstanding, December 31, 2018

 

 

4,954,970

 

 

$ 0.784

 

 

The following table discloses information regarding outstanding and exercisable options and warrants at December 31, 2018:

 

 

 

 

Outstanding

 

 

Exercisable

 

Exercise Prices

 

 

Number of

Option Shares

 

 

Weighted Average

Exercise Price

 

 

Weighted Average

Remaining Life

(Years)

 

 

Number of

Option Shares

 

 

Weighted Average

Exercise Price

 

$

0.400

 

 

 

110,000

 

 

$ 0.400

 

 

 

2.62

 

 

 

110,000

 

 

$ 0.400

 

$

0.500

 

 

 

165,000

 

 

$ 0.500

 

 

 

2.70

 

 

 

162,500

 

 

$ 0.500

 

$

0.600

 

 

 

627,220

 

 

$ 0.600

 

 

 

1.11

 

 

 

627,220

 

 

$ 0.600

 

$

0.650

 

 

 

145,000

 

 

$ 0.650

 

 

 

3.82

 

 

 

36,250

 

 

$ 0.650

 

$

0.800

 

 

 

3,482,750

 

 

$ 0.800

 

 

 

2.43

 

 

 

3,095,250

 

 

$ 0.800

 

$

0.850

 

 

 

100,000

 

 

$ 0.850

 

 

 

4.29

 

 

 

-

 

 

$ 0.850

 

$

1.050

 

 

 

25,000

 

 

$ 1.050

 

 

 

4.79

 

 

 

-

 

 

$ 1.050

 

$

1.260

 

 

 

220,000

 

 

$ 1.260

 

 

 

3.50

 

 

 

110,000

 

 

$ 1.260

 

$

1.300

 

 

 

10,000

 

 

$ 1.300

 

 

 

2.80

 

 

 

7,500

 

 

$ 1.300

 

$

1.386

 

 

 

60,000

 

 

$ 1.386

 

 

 

3.50

 

 

 

30,000

 

 

$ 1.386

 

$

1.666

 

 

 

10,000

 

 

$ 1.666

 

 

 

3.59

 

 

 

5,000

 

 

 

1.666

 

Total

 

 

 

4,954,970

 

 

$ 0.784

 

 

 

3.07

 

 

 

4,183,720

 

 

$ 0.765

 

 

In determining the compensation cost of the stock options granted, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in these calculations are summarized as follows:

 

 

 

December 31,

2018

 

Expected term of options granted

 

1.1 – 2.00 years

 

Expected volatility

 

114.92-122.49

%

Risk-free interest rate

 

2.63–2.625

%

Expected dividend yield

 

 

0 %

 

The Company recognized stock option expense of $169,922 and $72,587 during the three months ended December 31, 2018 and 2017, respectively. There was $787,907 of unrecognized stock-based compensation expense as of December 31, 2018.

 

 
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NOTE 15 – SUBSEQUENT EVENTS

 

Common Stock Issuances

 

The Company made the following issuances of common stock subsequent to December 31, 2018:

 

 

· 1,215,000 common shares issued for cash resulting in total cash proceeds of $485,879.

 

· 437,500 common shares for the conversion of 175,000 shares of Series D Preferred Stock.

 

· 31,579 common shares for the settlement of $15,000 of accounts payable.

 

· 20,000 common shares associated with debt issue costs.

 

· 12,500 common shares valued at $6,624 for the vesting of restricted stock grants for officers and directors

 

· 788,017 common shares for services valued at $245,311

 

· 99,255 common shares for the conversion of $30,000 of outstanding principal on notes payable. All conversions were performed at contractual terms.

 

· 1,000,000 common shares for the settlement of $222,222 plus interest and penalties of notes payable.

 

Equity Raise with Warrants

 

On April 8, 2019, the Company raised an aggregate amount of $586,000, in accordance with Regulation S under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) and may not be offered or sold in the United States or to a U.S. persons (as defined in Regulation S under the U.S. Securities Act) absent registration or an applicable exemption from registration requirements. A portion of the Offering was completed on a best efforts basis through lead agent and bookrunner Dominick Capital Corporation of Toronto, Canada.

 

A total of 1,465,000 Units were sold in this transaction, each Unit consists of one share of EVIO common stock (“Stock”) at a price of $0.40, and a share purchase warrant (each, a “Warrant”) in the amount of one full Warrant per Unit. Each whole Warrant shall entitle the holder thereof to purchase one additional common share of the Offeror (each a “Warrant Share”) at an exercise price of US $0.65 per Warrant Share for a period of 24 months after the closing of the Offering

 

Convertible Notes Payable

 

On January 14, 2019, the Company entered into a convertible note payable with an unrelated party for $131,250 of which included $6,250 in third party fees resulting in net cash proceeds to the Company of $125,000. The convertible note payable carries interest at a rate of 8% per annum, is due on January 14, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On February 4, 2019, the Company entered into a convertible note payable with an unrelated party for $131,250 of which included $6,250 in third party fees resulting in net cash proceeds to the Company of $125,000. The convertible note payable carries interest at a rate of 8% per annum, is due on February 4, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On February 4, 2019, the Company entered into a convertible note payable with an unrelated party for $265,600 of which $16,500 was an original issue discount and $10,000 in third party fees resulting in net cash proceeds to the Company of $240,000. The convertible note payable carries interest at a rate of 8% per annum, is due on February 4, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On August 8, 2019, the Company entered into a convertible note payable with an unrelated party for $33,092 which included $1,575 third party fees resulting in net cash proceeds to the Company of $31,517. The convertible note payable carries interest at a rate of 8% per annum, is due on August 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

 
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On August 8, 2019, the Company entered into a convertible note payable with an unrelated party for $33,092 which included $1,575 third party fees resulting in net cash proceeds to the Company of $31,517. The convertible note payable carries interest at a rate of 8% per annum, is due on August 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On August 30, 2019, the Company entered into a convertible note payable with an unrelated party for $110,000 which included $10,000 original issue discount resulting in net cash proceeds to the Company of $100,000. The convertible note payable carries interest at a rate of 8% per annum, is due on May 30, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

Convertible Notes Payable – Exchanged Note

 

On February 8, 2019, the Company entered into an exchange agreement with an unrelated party for $580,536.60, of which the loan payable to Palliatech, dated September 1, 2017, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 10% per annum, with one year interest guaranteed, is due on February 8, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 30% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On August 29, 2019, the Company entered into an exchange agreement with an unrelated party for $199,203, of which the loan payable to Henry Grimmett, dated October 16, 2016, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum, is due on May 29, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

Debenture Holders Offer

 

On June 16, 2019 the Company offered current Debenture Holders a one-time opportunity to lower the Conversion Price of the Debenture to US$0.40 per share (the “Amended Conversion Price”); provided, however, that Investor agrees to defer interest under the Debenture until the Maturity Date identified in the Debenture, and further agrees to have any and all accrued and unpaid interest automatically converted into Common Shares of the Company at the Amended Conversion Price on the Maturity Date The original debenture had a conversion rate of US$0.60 per share.

 

At the time of the offer there were $5,183,000 in outstanding debentures. To date a total of $4,654,000 of have opted for the offer, and $529,000 have yet to accept the offer. The additional shares to be issued related to accepted offers is 3,878,333.

 

Equipment Financing

 

On April 24, 2019 the Company entered into an equipment lease arrangement with Sweet Leaf Capital. The term of the lease is 30 months, commencing June 1, 2019. The capital cost of the equipment financed is $467,837.00. The agreement calls for an initial payment of $67,459, followed by 30 payments in the amount of $18,226.00. The Company will record this as a capital lease obligation in Q3, 2019.

 

Legal Proceedings

 

On May 9, 2019, Stephanie Head, a former part-time lab administrator for EVIO Labs Eugene, LLC, filed a wrongful termination lawsuit with the US District Court - District of Oregon, Eugene Division, Case No. 6:19-CV-00681, against EVIO Labs Eugene, LLC, EVIO, Inc. and Lori Glauser. This case is still in process.

 

On August 29, 2018, the Company issued FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC (“Creditor”) a Promissory Note in the original principal amount of $220,000.00 (the “Note”). The Company failed to timely pay certain sums under the Note and, as a result of the Breach, on or about August 7, 2019, Creditor filed a Complaint - Breach of Promissory Note in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Since such filing, the Company and Creditor have entered into a Settlement Agreement and Stipulation, pursuant to which the Company has agreed to issue the Creditor 1,000,000 shares of its common stock under 3(a)(10) of the Securities Act of 1933 in settlement for all claims. The settlement was approved by the court on August 27, 2019. The shares were issued on September 6, 2019.

 

 
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained herein involve risks and uncertainties, including statements as to:

 

 

·

our future operating results;

 

·

our business prospects;

 

·

our contractual arrangements and relationships with third parties;

 

·

the dependence of our future success on the general economy;

 

·

our possible financings; and

 

·

the adequacy of our cash resources and working capital.

 

These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto, included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this report, particularly in the “Risk Factors” section.

 

Critical Accounting Policies and Estimates.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

 

Business of Registrant

 

EVIO, Inc., a Colorado corporation and its subsidiaries provide analytical testing and advisory services to the emerging legalized cannabis industry. EVIO, Inc. was originally incorporated in the State of New York, December 12, 1977 under the name 3171 Holding Corporation. On February 22, 1979, the name was changed to Electronomic Industries Corp. and on February 23, 1983 the name was changed to Quantech Electronics Corp. The Company was reincorporated in the State of Colorado on December 15, 2003. On August 29, 2014, the Company completed a reverse merger with Signal Bay Research, Inc., a Nevada Corporation, and assumed its operations. In September 2014, the Company changed its name from Quantech Electronics Corp. to Signal Bay, Inc. then to EVIO, INC. in August 2017. The Company has selected September 30 as its fiscal year end. The Company is domiciled in the State of Colorado, and its corporate headquarters are located in Henderson, Nevada.

 

As a part of and prior to the consummation of the reverse merger, William Waldrop and Lori Glauser, principals of Signal Bay Research, Inc., purchased 80% of the issued and outstanding common stock from WB Partners. The merger between the Company and Signal Bay Research was finalized and closed contemporaneously with the share purchase. As part of this share purchase, Mr. Waldrop and Ms. Glauser became the officers and directors of the Company. Immediately after the reverse, WB Partners owned less than 5% of the common stock. The company filed a Form 10-12G on November 25, 2014 and was determined to be a shell company by the SEC as per the Form 10-12G/A which went effective on January 24, 2015. On January 29, 2015, the company filed an 8-K stating it entered into a material agreement and was no longer a shell company.

 

 
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On September 17, 2015, EVIO entered into a share exchange agreement with CR Labs, Inc., an Oregon Corporation, pursuant to which the Company acquired 80% of the outstanding common stock of CR Labs, Inc. CR Labs, Inc. ceased operations in December, 2018 and operations were consolidated into Greenhaus Analytical Labs at its new location in Tigard, OR..

 

EVIO Labs Oregon, Inc. was formed on April 4, 2016 to become the holding company for Oregon laboratory operations.

 

EVIO Labs Eugene was formed on May 23, 2016, as a wholly owned subsidiary of EVIO Inc. Subsequently on May 24, 2016, EVIO Labs Eugene acquired all of the assets of Oregon Analytical Services, LLC, inclusive of client lists, equipment, trade names and personnel. EVIO Labs Eugene ceased operations in December, 2018 and operations were consolidated into Greenhaus Analytical Labs at its new location in Tigard, OR.

 

On June 1, 2016, EVIO Inc. entered into a share purchase agreement to purchase 80% of the outstanding common stock of Smith Scientific Industries, Inc. in Medford, OR.

 

On October 19, 2016, the Company entered into a Membership Interest Purchase Agreement to purchase 100% of the ownership of Greenhaus Analytical Labs, LLC.

 

On August 1, 2017, the Company entered into a Membership Interest Purchase Agreement with Viridis Analytics MA, LLC.

 

On December 29, 2017, the Company entered into a Membership Purchase Agreement to purchase 60% of the outstanding shares of C3 Labs, LLC on January 1, 2018. In August, 2018, the company exercised its option to increase its ownership to 90%.

 

On April 29, 2018, the Company entered into an Asset Purchase Agreement with Leaf Detective, LLC which was closed on the same date.

 

On May 2, 2018, the Company entered into a Stock Purchase Agreement with Keystone, Labs, Inc. to purchase 50% of the outstanding shares of Keystone Labs.

 

On June 27, 2018, Greenhaus Analytical Labs, LLC, a wholly-owned subsidiary of EVIO, Inc., entered into an Asset Purchase Agreement with MRX Labs LLC which completed on July 5, 2018.

 

The active subsidiaries of EVIO, Inc. are as follows:

 

Trade Name (dba)

Company Name

State of Incorporation

Ownership %

Acquisition Month

EVIO Labs Medford

Smith Scientific Industries, LLC

Oregon

80%

June 2016

EVIO Labs Portland

Greenhaus Analytical Labs

Oregon

100%

October 2016

EVIO Labs MA

Viridis Analytics

Massachusetts

100%

August 2017

EVIO Labs Berkeley

 

C3 Labs, LLC

 

California

 

60%

 

January 2018

Keystone Labs

 

Keystone Labs, Inc.

 

Ontario, Canada

 

50%

 

May 2018

EVIO Labs Humboldt

 

Leaf Detective, LLC

 

California

 

100%

 

April 2018

 

In addition to the wholly owned subsidiaries, the Company has entered into license agreements with independent testing laboratories in Florida and Colorado. Under the terms of the agreements, the independent laboratories are granted non-transferable and non-exclusive rights to use the Company’s trademarks and trade name.

 

RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and Costs of Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of Revenue

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

Testing services

 

$ 1,187,238

 

 

$ 887,349

 

 

$ 299,889

 

 

 

100 %

 

 

94 %

Consulting services

 

 

-

 

 

 

59,516

 

 

 

(59,516 )

 

 

0 %

 

 

6 %

Total revenue

 

 

1,187,239

 

 

 

946,865

 

 

 

240,373

 

 

 

100 %

 

 

100 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Testing services

 

$ 1,013,980

 

 

$ 696,658

 

 

$ 317,322

 

 

 

85 %

 

 

74 %

Consulting services

 

 

-

 

 

 

10,492

 

 

 

(10,492 )

 

 

0 %

 

 

1 %

Depreciation

 

 

290,448

 

 

 

29,113

 

 

 

261,335

 

 

 

24 %

 

 

3 %

Total cost of revenue

 

 

1,304,428

 

 

 

736,263

 

 

 

568,166

 

 

 

109 %

 

 

78 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$ (117,190 )

 

$ 210,602

 

 

$ (327,792 )

 

 

-10%

 

 

 

22 %

 

 
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Revenues for the three months ended December 31, 2018 were $1,187,238 compared to $946,865 for the three months ended December 31, 2017. The increase in revenues during the three months ended December 31, 2018 was the result of an increase in testing services testing services completed during the current period of $317,322, offset by a reduction in consulting services of $10,492.

 

The increase in testing revenue was primarily attributable to increase in the Company’s testing revenue from its Berkeley and Edmonton locations, partially offset by decreased revenues in the Company’s locations in Oregon and Massachusetts.

 

The Oregon locations realized a decrease in sales of $451,359 or 50% compared to the same quarter prior year. This decrease was partially offset by increased revenues in its California locations during the three months ending December 31, 2018, representing increases of $394,480 or 1,044% versus the three months ending December 31, 2017. The addition of Keystone Labs Canada attributed for $198,916 in revenue for the three months ending December 31, 2018. EVIO Inc. recognized $82,649 in licensing revenue during the period.

 

Cost of revenues for the three months ended December 31, 2018 were $1,013,980 compared to $696,658 for the three months ended December 31, 2017. The increase in the cost of revenues during the three months ended December 31, 2018 is the result of the increased costs included increased personnel costs at the Company’s new locations such as Canada, Massachusetts and California. In addition, the Company incurred increased costs for additional equipment required in California. Cost of revenues for depreciation and amortization increased to $290,448 for the three months ending December 31, 2018 from $29,113 for the three months ending December 31, 2017, an increase of $261,335 or 898%. The increase in depreciation and amortization correlates to the increase in property and equipment. As of December 31, 2018, the company had net property and equipment of $3,814,175 compared to December 31, 2017 of $3,525,772, an increase of $288,403 or 8.2%.

 

Gross loss for the three months ended December 31, 2018 was $117,190 compared to a gross profit of $210,602 during the three months ended December 31, 2017. This decrease in gross profit is the result of decreased revenues in the Oregon and Massachusetts markets and increased costs of revenue attributable to increased costs from the Company’s new locations such as headcount and depreciation from new equipment.

 

Operating Expenses

 

 

 

2018

 

 

2017

 

 

Change

 

 

Change

 

 

Percent of

Revenue

 

Selling, general and administrative

 

$ 1,496,640

 

 

 

820,275

 

 

$ 676,365

 

 

 

82 %

 

 

126 %

Depreciation and amortization

 

 

58,866

 

 

 

57,387

 

 

 

1,479

 

 

 

2.6 %

 

 

5 %

 

 

$ 1,555,506

 

 

$ 877,662

 

 

$ 677,844

 

 

 

77 %

 

 

131 %

 

Total operating expenses during the three months ended December 31, 2018 were $1,555,506 compared to $877,662 during the three months ended December 31, 2017. The Company experienced an increase of $676,365 in selling, general and administrative expenses during the three months ended September 30, 2018 compared to the three months ended September 30, 2017, a 82% increase due to company growth including both acquisitions and organic growth. There was an increase of $1,479 in depreciation and amortization which was driven by the amortization of intangible assets and equipment associated with the acquisition completed during the period. In addition to depreciation and amortization, the increase in selling, general and administration was due to increased spending in marketing and advertising, increased personnel in selling, marketing, corporate and administrative functions, costs associated with the Company’s attendance at industry and trade conferences, and start-up costs for two new locations in California and Massachusetts, travel costs and increased health care premiums.

 

Other Income (Expense)

 

 

 

2018

 

 

2017

 

 

Change

 

Interest expense, net of interest income

 

$ (1,764,878 )

 

 

(284,651 )

 

$ (1,480,227 )

Other income

 

 

(64,095 )

 

 

-

 

 

 

(64,095 )

Gain (loss) on change in fair market value of derivative liabilities

 

 

852,628

 

 

 

13,322

 

 

 

839,306

 

Gain (loss) on settlement of debt

 

 

-

 

 

 

(56,093 )

 

 

56,093

 

 

 

$ (976,345 )

 

$ (327,422 )

 

$ (648,923 )

 

 
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Total other income (expense) was a net expense of $976,345 during the three months ended December 31, 2018 compared to $327,422 during the three months ended December 31, 2017. The increase in expenses of $648,923 is primarily from the increase $1,480,227 increases in interest expense associated with financing activities off-set by a gain of $852,628 change in fair market value of derivative liabilities.

 

Net Loss

 

 

 

2018

 

 

2017

 

 

Change

 

Net income (loss)

 

 

(2,649,041 )

 

 

(994,482 )

 

 

(1,656,915 )

Provision for income taxes (benefit)

 

 

2,356

 

 

 

 

 

 

 

2,356

 

Net income (loss) attributable to noncontrolling interest

 

 

(54,738 )

 

 

(7,890 )

 

 

(46,848 )

Net income (loss) attributable to EVIO, Inc. shareholders

 

$ (2,596,659 )

 

$ (986,592 )

 

$ (1,610,067 )

 

Net loss during the three months ended December 31, 2018 was $2,649,041 compared to $994,482 during the three months ended December 31, 2017. The increase in net loss is the result of a decrease in gross margin, increase in interest expense, increased operating expenses, offset by increases in change in fair market value of derivative liabilities.

 

Liquidity and Capital Resources

 

The Company had cash on hand of $210,084 as of December 31, 2018, current assets of $ 914,554 and current liabilities of $ 8,236,307 creating a working capital deficit of $7,321,753. Current assets consisted of cash totaling $210,084, accounts receivable net of allowances totaling $251,654, prepaid expenses totaling $173,578, other current assets of $179,238 and current portion of a note receivable of $100,000. Current liabilities consisted of accounts payable and accrued liabilities of $2,460,289, client deposits of $236,259, convertible notes payable net of discounts of $2,083,787, current capital lease obligations of $839,571, interest payable of $669,595, derivative liabilities of $678,689, and current portion of notes payable net of discounts of $1,268,117.

 

The Company had cash on hand of $81,736 as of September 30, 2018, current assets of $608,670 and current liabilities of $6,506,787 creating a working capital deficit of $5,898,117. Current assets consisted of cash totaling $81,736, accounts receivable net of allowances totaling $234,178, prepaid expenses totaling $45,940, other current assets of $146,816 and current portion of a note receivable of $100,000. Current liabilities consisted of accounts payable and accrued liabilities of $1,546,617, client deposits of $363,211, convertible notes payable net of discounts of $1,678,265, current capital lease obligations of $677,030, interest payable of $416,459, derivative liabilities of $1,181,278, and current portion of notes payable net of discounts of $643,927.

 

Three Months Ended December 31, 2018

 

During the three months ended December 31, 2018, the Company used $247,720 of cash in operating activities which consisted of a net loss of $2,651,397, non-cash losses of $1,448,792 and changes in working capital of $954,885.

 

Net cash used in investing activities total $554,731 during the three months ended December 31, 2018, all of which related to the purchase of equipment.

 

During the three months ended December 31, 2018, the Company generated cash of $933,876 from financing activities. The Company repaid $61,379 of capital lease obligations; received $910,413 of cash from the issuance of convertible debentures, $103,000 from the sale of common stock, repaid convertible notes payable of $61,595, repaid loans payable $7,947, repaid related party notes payable $1,941, and $53,325 received proceeds from related party advances.

 

Three Months Ended December 31, 2017

 

The Company used $192,386 of cash in operating activities which consisted of a net loss of $994,482, non-cash losses of $622,362 and changes in working capital of $179,734.

 

 
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Net cash used in investing activities totaled $6,952 during the three months ended December 31, 2017 which consisted solely of cash used to purchase equipment.

 

During the three months ended December 31, 2017, the Company generated cash of $300,145 from financing activities. The Company received $350,000 from the sale of common stock, made repayments of $9,391 on capital leases, repayments of $2,636 on loans payment and $37,828 on related party loans payable.

 

Dividends

 

The Company declared $0 of dividends during the three months ending December 31, 2018 and 2017.

 

Critical Accounting Policies and Estimates.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

 

While our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation of our financial statements.

 

Revenue Recognition

 

In 2018 the Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should 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. The following five steps are applied to achieve that core principle:

 

· Step 1: Identify the contract with the customer
· Step 2: Identify the performance obligations in the contract
· Step 3: Determine the transaction price
· Step 4: Allocate the transaction price to the performance obligations in the contract
· Step 5: Recognize revenue when the company satisfies a performance obligation

 

In 2017 the Company’s policy was that revenues and gains will be recognized in accordance with ASC Topic 605102, “Revenue Recognition.” Under ASC Topic 6051025, revenue earning activities are recognized upon the sale and delivery of its products and services.

 

The Company generates revenue from consulting services, licensing agreements and testing of cannabis and cannabis products for both medicinal and recreational consumption.

 

The Company accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

The Company evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The Company’s services included in its contracts are distinct from one another.

 

The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.

 

The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the goods or services provided. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms and whether there is an alternative future use of the product or service.

 

 
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The Company recognizes revenue from testing services upon delivery of its testing results to the client. Customer orders for testing services are generally completed within two weeks of receiving the order.

 

Consulting engagements may vary in length and scope, but will generally include the review and/or preparation of regulatory filings, business plans and financial models to customers within the same industry. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting agreement.

 

The Company recognizes revenue from right of use license agreements upon transfer of control of the functional intellectual property. In certain licensing agreements, the Company may receive royalty revenues based upon performance metrics which are recognized as earned over time.

 

Stock Based Compensation

 

In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the cost of stock based Compensation arrangements based on the grant date fair value and recognizes the cost in the financial statements over the period during which employees are required to provide services. Stock based compensation arrangements may include stock options, restricted stock plans, performance based awards, stock appreciation rights and employee stock purchase plans.

 

The Company utilizes the Black Scholes option pricing model, which was developed for use in estimating the fair value of options. Option pricing models require the input of highly complex and subjective variables including the expected life of options granted and the expected volatility of the Company’s stock price over a period equal to or greater than the expected life of the options.

 

Equity instruments issued to nonemployees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non Employees (“ASC 505”) defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the nonemployee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the ASC 505.

 

Accounting and Audit Plan

 

In the next twelve months, we anticipate spending approximately $150,000 - $180,000 to pay for our accounting and audit requirements.

 

Our Website.

 

Our website can be found at www.eviolabs.com.

 

 
28
 
Table of Contents

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company, as a smaller reporting company, as defined by Rule 229.10(f)(1), is not required to provide the information required by this Item.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report for the reasons disclosed in our annual report on Form 10-K.

 

This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to Rule 308(b) of Regulation S-K, which permits the Company to provide only management’s report in this Quarterly Report.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no changes in Internal Controls over Financial Reporting during the three months ended December 31, 2018. Upon hiring additional financial staff, EVIO will prepare written policies and procedures for accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity transactions, and prepare, review and submit SEC filings in a timely manner.

 

 
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PART II -- OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On May 9, 2019, Stephanie Head, a former part-time lab administrator for EVIO Labs Eugene, LLC, filed a wrongful termination lawsuit with the US District Court - District of Oregon, Eugene Division, Case No. 6:19-CV-00681, against EVIO Labs Eugene, LLC, EVIO, Inc. and Lori Glauser. This case is still in process.

 

On August 29, 2018, the Company issued FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC (“Creditor”) a Promissory Note in the original principal amount of $220,000.00 (the “Note”). The Company failed to timely pay certain sums under the Note and, as a result of the Breach, on or about August 7, 2019, Creditor filed a Complaint - Breach of Promissory Note in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Since such filing, the Company and Creditor have entered into a Settlement Agreement and Stipulation, pursuant to which the Company has agreed to issue the Creditor 1,000,000 shares of its common stock under 3(a)(10) of the Securities Act of 1933 in settlement for all claims. The settlement was approved by the court on August 27, 2019. The shares were issued on September 6, 2019.

 

ITEM 1A. RISK FACTORS

 

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

 

The above statement notwithstanding, shareholders and prospective investors should be aware that certain risks exist with respect to the Company and its business, including those risk factors contained in our most recent Registration Statements on Form S-1 and Form 10, as amended. These risks include, among others: limited assets, lack of significant revenues and only losses since inception, industry risks, dependence on third party manufacturers/suppliers and the need for additional capital. The Company’s management is aware of these risks and has established the minimum controls and procedures to insure adequate risk assessment and execution to reduce loss exposure.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

There was no other information during the quarter ended December 31, 2018, which was not previously disclosed in our filings during that period.

 

 
30
 
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ITEM 6. EXHIBITS

 

31.1

 

Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

31.2

 

Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

32.1

 

Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

32.2

 

Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

 
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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 30, 2019.

 

 

EVIO, INC.

 

By:

/s/ William Waldrop

 

William Waldrop

 

Chief Executive Officer

 

 

By:

/s/ Paul Wright

 

Paul Wright

 

Acting Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on September 30, 2019.

 

 

By:

/s/ William Waldrop

 

William Waldrop

 

Director & Principal Executive Officer

 

By:

/s/ Lori Glauser

 

Lori Glauser

 

Director

 

By:

/s/ Anthony Smith

 

Anthony Smith

 

Director

 

 

32

 

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