Quarterly Report (10-q)

Date : 10/18/2019 @ 7:12PM
Source : Edgar (US Regulatory)
Stock : Evio, Inc. (QB) (EVIO)
Quote : 0.0699  -0.00176 (-2.46%) @ 9:43PM

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 March 31, 2019

 

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 October 14, 2019, there were 29,288,776 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 MARCH 31, 2019

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements (Unaudited) 3
  Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and September 30, 2018 3
  Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2019 and 2018 (Unaudited) 4
  Consolidated Statements of Stockholders Equity for the Three and Six Months Ended March 31, 2019 and 2018 (Unaudited) 6
  Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
 

Business of Registrant

22
  Results of Operations 23
  Liquidity and Capital Resources 26
  Critical Accounting Policies and Estimates 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Control and Procedures 28
   
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Mine Safety Disclosures 29
Item 5. Other Information 29
Item 6. Exhibits 30

 

     2
 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 –FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2019 AND SEPTEMBER 30, 2018

(UNAUDITED)

 

    March 31,
2019
    September 30,
2018
 
ASSETS                
Current assets:                
Cash and cash equivalents   $ 47,261     $ 81,736  
Accounts receivable, net of allowance of $445,887 and $414,475     122,783       234,178  
Prepaid expenses     131,982       45,940  
Other current assets     113,694       146,816  
Note receivable, current portion     100,000       100,000  
Total current assets     515,720       608,670  
Right of use assets     2,667,715       -  
Capital assets, net of accumulated depreciation of $229,343 and $123,854     1,057,748       411,241  
Assets not in service     -       455,540  
Land     212,550       212,550  
Property and equipment, net of accumulated depreciation of $897,746 and $520,437     3,623,541       3,525,772  
Security deposits     160,353       159,632  
Note receivable     1,200,000       1,200,000  
Prepaid expenses     120,108       63,582  
Intangible assets, net of accumulated amortization of $506,944 and $318,816     1,463,217       1,680,569  
Goodwill     5,954,207       6,037,404  
Total assets   $ 16,975,159     $ 14,354,960  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued liabilities   $ 2,724,222     $ 1,546,617  
Client deposits     206,686       363,211  
Interest payable     767,524       416,459  
Capital lease obligation, current     865,558       677,030  
Derivative liability     2,102,387       1,181,2781  
Convertible notes payable, net of discounts of $792,040 and $753,557, respectively     2,978,319       1,678,265  
Loans payable, current, net of discounts $0 and $119,000, respectively     786,727       643,927  
Total current liabilities     10,431,423       6,506,787  
Convertible debentures, net of discounts of $3,484,269 and $4,043,836, respectively     1,698,731       1,153,164  
Lease liabilities     2,716,047       -  
Capital lease obligation, net of current     173,854       148,433  
Loans payable, net of current     651,365       1,193,781  
Convertible loans payable, related party, net of current     -       61,263  
Loans payable, related party, net of current and discounts of $39,302 and $51,971     1,588,904       1,348,793  
Total liabilities     17,260,324       10,412,221  
                 
Stockholders’ Equity:                
Series B convertible preferred stock, $0.0001 par value. 5,000,000 authorized; 5,000,000 shares issued and outstanding at March 31, 2019 and September 30, 2018     500       500  
Series C convertible preferred stock, $0.0001 par value. 500,000 authorized; 500,000 shares issued and outstanding at March 31, 2019 and September 30, 2018     50       50  
Series D convertible preferred stock, $0.0001 par value. 1,000,000 authorized; 349,500 and 552,500 shares issued and outstanding at March 31, 2019 and September 30, 2018     35       55  
Common stock, $0.0001 par value. 1,000,000,000 authorized; 27,094,744 and 23,255,409 shares issued and outstanding at March 31, 2019 and September 30, 2018     2,709       2,326  
Subscription Receivable     (406,000 )     -  
Additional paid-in capital     24,278,682       21,495,621  
Retained earnings (accumulated deficit)     (25,554,846 )     (19,226,462 )
Accumulated other comprehensive income     (379,546 )     (263,985 )
Total stockholders’ equity     (2,058,416 )     2,008,105  
Noncontrolling interest     1,773,251       1,934,634  
Total equity     (285,165 )     3,942,739  
Total liabilities and stockholders’ equity   $ 16,975,159     $ 14,354,960  

 

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

 

     3
 

 

EVIO, INC.

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

 

    Three Month Ended March 31,     Six Months Ended March 31,  
    2019     2018     2019     2018  
Revenues                                
Testing revenue   $ 735,179     $ 689,011     $ 1,922,417     $ 1,576,360  
Consulting revenue     -       43,300       -       102,816  
Total revenues     735,179       732,311       1,922,417       1,679,176  
                                 
Cost of revenue                                
Testing services     835,186       664,182       1,849,166       1,360,840  
Consulting services     -       78,500       -       88,992  
Depreciation and amortization     321,846       55,706       612,304       84,819  
Total cost of revenue     1,157,042       798,388       2,461,470       1,534,651  
                                 
Gross margin     (421,863 )     (66,077 )     (539,053 )     144,525  
                                 
Operating expenses:                                
Selling, general and administrative     1,223,662       2,213,094       2,702,302       3,033,369  
Depreciation and amortization     57,116       83,769       115,982       141,156  
Total operating expenses     1,280,778       2,296,863       2,836,284       3,174,525  
                                 
Income (loss) from operations     (1,702,641 )     (2,362,940 )     (3,375,337 )     (3,030,000 )
                                 
Other income (expense)                                
Interest income (expense), net     (692,419 )     (1,102,537 )     (2,457,297 )     (1,387,188 )
Other income (expense)     (33,422 )     -       (97,517 )     -  
Gain (loss) on settlement of debt     -       -       -       (56,093 )
Gain (loss) on change in fair market value of derivative liabilities     (1,409,305 )     1,780,769       (556,647 )     1,794,091  
Total other income (expense)     (2,135,146 )     678,232       (3,111,461 )     350,810  
Income (loss) before income taxes     (3,837,787 )     (1,684,708 )     (6,486,798 )     (2,679,190 )
                                 
Provision for income taxes (benefit)     613               2,969       -  
                                 
Net income (loss)     (3,838,400 )     (1,684,708 )     (6,489,767 )     (2,679,190 )
Net income (loss) attributable to noncontrolling interest     18,439       (4,906 )     (161,383 )     (12,796 )
Net income (loss) attributable to EVIO, Inc. shareholders   $ (3,856,839 )   $ (1,679,802 )   $ (6,328,384 )   $ (2,666,394 )
                                 
Basic and diluted earnings (loss) per common share     (0.16 )     (0.11 )   $ (0.25 )   $ (0.20 )
                                 
Weighted-average number of common shares outstanding:                                
Basic and diluted     24,753,819       15,387,039       25,366,021       13,519,957  
                                 
Comprehensive loss:                                
Net income (loss)   $ (3,838,400 )   $ (1,684,708 )   $ (6,489,767 )   $ (2,679,190 )
Foreign currency translation adjustment     (115,561 )             (115,561 )     -  
Comprehensive income (loss)   $ (3,953,961 )   $ (1,684,708 )   $ (6,605,328 )   $ (2,679,190 )

 

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

 

     4
 

 

EVIO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

    Six Months Ended March 31,  
    2019     2018  
Cash flows from operating activities of continuing operations:                
Net income (loss)   $ (6,489,767 )   $ (2,679,190 )
                 
Amortization of debt discount     1,951,983       1,199,159  
Common stock issued in exchange for fees and services     240,501       254,720  
Depreciation and amortization     720,739       225,975  
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     35,333       3,067  
Stock based compensation     395,850       1,234,415  
Unrealized (gain) loss on derivative liability     556,647       (1,794,091 )
Changes in operating assets and liabilities:                
Accounts receivable     74,625       16,067  
Prepaid expenses     (142,911 )     77,954  
Other current assets     33,122       (52,647 )
Security deposits     (722 )     (451,323 )
Operating lease right of use assets     48,332       -  
Accounts payable and accrued liabilities     1,179,775       (348,073 )
Customer deposits and deferred revenues     (156,363 )     (83,385 )
Interest payable     410,712       192,616  
Net cash provided by (used in) operating activities     (1,078,049 )     (2,148,643 )
                 
Cash flows from investing activities:                
Cash consideration for acquisition of business     -       20,468  
Notes receivable     -       (39,987 )
Deposit, related party     -       (200,000 )
Purchase of fixed assets     (580,075 )     (571,501 )
Net cash provided by (used in) investing activities     (580,075 )     (791,020 )
                 
Cash flows from financing activities:                
Proceeds from issuance of common stock, net of issuance costs     186,000       508,000  
Proceeds from issuance of convertible debentures     414,183       6,136,120  
Proceeds from issuance of convertible notes, net of issuance costs     971,014       -  
Proceeds from related party advances     199,040       -  
Repayments of capital leases     (93,050 )     (22,347 )
Repayments of loans payable     (18,617 )     (605,348 )
Repayments of related party loans payable     (27,151 )     (176,528 )
Net cash provided by (used in) financing activities     1,631,419       5,839,897  
                 
Effect of exchange rates on cash and cash equivalents     (7,769 )     -  
Net increase (decrease) in cash and cash equivalents     (34,474 )     2,900,234  
Cash and cash equivalents at beginning of period     81,735       121,013  
Cash and cash equivalents at end of period   $ 47,261     $ 3,021,247  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest     -       80,028  
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       730,485  
Reclassification of derivative liability to additional paid in capital     -       882,454  
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     406,000       -  
Conversion of Series D Preferred stock to common stock     -       70  
Debt discount recorded on convertible notes and debentures payable upon initial measurement of derivative liability     364,462       5,505,131  
Debt discounts recorded for original issue discounts on convertible debentures     846,985       446,800  
Equipment financed through capital leases     323,411       385,208  
Issuance of convertible notes payable and other obligations in connection with the acquisition of a business             600,000  
Sale and assumption of note payable and accrued interest     556,658       -  

 

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

 

     5
 

 

EVIO, INC.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Three and Six Months Ended March 31, 2019 and 2018.

 

                                                  Accumulated                  
    Series B
Preferred Stock
    Series C
Preferred Stock
    Series D Preferred Stock     Common Stock     Stock
Subscriptions
    Additional
Paid-in
    Retained     Other
Comprehensive
    Total
Stockholders’
    Non
controlling
    Total  
    Shares     Value     Shares     Value     Shares     Value     Shares     Value     Receivable     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 )
Change in foreign currency translation     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
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 in connection with the exercise of common stock purchase warrants     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
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       13       -       62,487       -       -       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  
Recognition of beneficial conversion features related to convertible debt instruments     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Acquisition of equity interests in subsidiaries     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
                                                                                                                         
Balance, December 31, 2017     5,000,000     $ 500       500,000     $ 50       744,772     $ 74       13,890,028     $ 1,390     $ -     $ 9,337,431     $ (8,578,963 )   $ -     $ 760,482     $ 150,234     $ 910,716  
                                                                                                                         
Net income (loss)     -       -       -       -       -       -       -       -       -       -       (1,679,802 )     -       (1,679,802 )     (4,906 )     (1,684,708 )
Change in foreign currency translation     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock in connection with the conversion of Series D preferred stock     -       -       -       -       (192,272 )     (19 )     480,680       48       -       (29 )     -       -       -       -       -  
Issuance of common stock in connection with sales made under private offerings     -       -       -       -       -       -       25,000       2       -       9,998       -       -       10,000       -       10,000  
Issuance of common stock in connection with the exercise of common stock purchase warrants     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock as compensation to employees, officers and/or directors     -       -       -       -       -       -       45,000       5       -       160,890       -       -       160,895       -       160,895  
Issuance of common stock in exchange for consulting, professional and other services provided     -       -       -       -       -       -       15,000       1       -       38,251       -       -       38,252       -       38,252  
Issuance of common stock in satisfaction of debt issuances costs     -       -       -       -       -       -       620,271       62       -       1,389,345       -       -       1,389,407       -       1,389,407  
Issuance of common stock in connection with the settlement of accounts payable     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock in connection with the settlement of notes payable     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock in connection with the conversion of loans payable     -       -       -       -       -       -       968,857       97       -       384,118       -       -       384,215       -       384,215  
Issuance of common stock in connection with the conversion of debentures     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock in connection with the conversion of related party notes payable     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock in connection with the conversion of interest payable     -       -       -       -       -       -       23,669       2       -       9,384       -       -       9,386       -       9,386  
Common stock options issued under employee equity incentive plan     -       -       -       -       -       -       -       -       -       995,181       -       -       995,181       -       995,181  
Reclassifcation of derivative liability to additional paid-in capital     -       -       -       -       -       -       -       -       -       601,139       -       -       601,139       -       601,139  
Recognition of beneficial conversion features related to convertible debt instruments     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Acquisition of equity interests in subsidiaries     -       -       -       -       -       -       -       -       -       -       -       -       -       400,000       400,000  
                                                                                                                         
Balance, March 31, 2018     5,000,000     $ 500       500,000     $ 50       552,500     $ 55       16,068,505     $ 1,607     $ -     $ 12,925,708     $ (10,258,765 )   $ -     $ 2,669,155     $ 545,328     $ 3,214,483  

 

    Preferred Stock     Preferred Stock     Preferred Stock     Common Stock     Additional
Paid-in
    Additional
Paid-in
    Retained     Accumulated
other
Comprehensive
    Total
Stockholders’
    Non
controlling
    Total  
    Shares     Value     Shares     Value     Shares     Value     Shares     Value     Capital     Capital     Earnings     Income     Equity     Interest     Equity  
                                                                                           
Balance, September 30, 2018     5,000,000     $ 500       500,000     $ 50       552,500     $ 55       23,255,411     $ 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 )     -       -       (1 )     -       (1 )
Issuance of common stock in connection with sales made under private offerings     -       -       -       -       -       -       200,000       20       -       105,980       -       -       106,000       -       106,000  
Issuance of common stock in connection with the exercise of common stock purchase warrants     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
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 and common stock purchase warrants in satisfaction of debt issuances costs     -       -       -       -       -       -       -       -       -       12,423       -       -       12,423       -       12,423  
Recognition of beneficial conversion features related to convertible debt instruments     -       -       -       -       -       -       -       -       -       280,144       -       -       280,144       -       280,144  
Stock based compensation related to employee stock options     -       -       -       -       -       -       -       -       -       169,922       -       -       169,922       -       169,922  
                                                                                                                         
Balance, December 31, 2018     5,000,000     $ 500       500,000     $ 50       514,500     $ 51       25,309,744     $ 2,531     $ -     $ 22,936,272     $ (21,823,121 )   $ (443,807 )   $ 672,476     $ 1,879,896     $ 2,552,372  
                                                                                                                         
Net income (loss)     -       -       -       -       -       -       -       -       -       -       (3,731,725 )     -       (3,731,725 )     (106,645 )     (3,838,370 )
Change in foreign currency translation     -       -       -       -       -       -       -       -       -       -       -       64,261       64,261       -       64,261  
Issuance of common stock in connection with the conversion of Series D preferred stock     -       -       -       -       (165,000 )     (16 )     412,500       41       -       (24 )     -       -       1       -       1  
Issuance of common stock in connection with sales made under private offerings     -       -       -       -       -       -       200,000       20       -       79,980       -       -       80,000       -       80,000  
Issuance of common stock in connection with stock subscriptions received under private offerings     -       -       -       -       -       -       1,015,000       101       (406,000 )     405,899       -       -       -       -       -  
Issuance of common stock in connection with the exercise of common stock purchase warrants     -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  
Issuance of common stock as compensation to employees, officers and/or directors     -       -       -       -       -       -       37,500       4       -       19,496       -       -       19,500       -       19,500  
Issuance of common stock in exchange for consulting, professional and other services provided     -       -       -       -       -       -       100,000       10       -       52,990       -       -       53,000       -       53,000  
Issuance of common stock and common stock purchase warrants in satisfaction of debt issuances costs     -       -       -       -       -       -       20,000       2       -       46,675       -       -       46,677       -       46,677  
Recognition of beneficial conversion features related to convertible debt instruments     -       -       -       -       -       -       -       -       -       566,841       -       -       566,841       -       566,841  
Stock based compensation related to employee stock options     -       -       -       -       -       -       -       -       -       170,553       -       -       170,553       -       170,553  
                                                                                                                         
Balance, March 31, 2019     5,000,000     $ 500       500,000     $ 50       349,500     $ 35       27,094,744     $ 2,709     $ (406,000 )   $ 24,278,682     $ (25,554,846 )   $ (379,546 )   $ (2,058,416 )   $ 1,773,251     $ (285,165 )

 

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

 

     6
 

 

EVIO, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

 

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.

 

     7
 

 

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 24,753,819 and 11,713,103 potentially dilutive common shares outstanding as of March 31, 2019 and 2018, respectively. Because of the net losses incurred during the six months ended March 31, 2019 and 2018, 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

 

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

 

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.

 

     8
 

 

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 Black-Scholes 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
March 31, 2019:

 

    Level 1     Level 2     Level 3     Total  
Liabilities                        
Derivative financial instruments   $ -     $ -     $ 2,102,387     $ 2,102,387  

 

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 31, 2018:

 

    Level 1     Level 2     Level 3     Total  
Liabilities                        
Derivative financial instruments   $ -     $ -     $ 1,181,278     $ 1,181,278  

 

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.

 

     9
 

 

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 $2,667,715, 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 March 31, 2019, are as follows:

 

Year ended March 31,   Operating Leases     Financing Leases  
2019     662,673     $ 404.795  
2020     784,958       354,898  
2021     525,852       340,025  
2022     489,392       181,372  
2023     323,356       204,812  
Thereafter     27,911       4,977  
Total lease payments     2,814,142       1,490,879  
Less: Payments Made     (225,192 )     (196,035 )
Total Lease Liabilities   $ 2,478,950     $ 1,294,845  

 

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 March 31, 2019 and September 30, 2018 consist of:

 

    March 31, 2019     September 30, 2018  
Customer list   $ 849,458     $ 865,672  
License     503,000       503,000  
Favorable lease     3,100       3,100  
Domains & Websites     49,448       49,690  
Non-compete agreements     181,538       184,563  
Assembled Workforce     50,750       50,750  
Intellectual Property     332,868       342,610  
Total     1,970,162       1,999,385  
Accumulated amortization     (506,945 )     (318,815 )
Net value   $ 1,463,217     $ 1,680,570  

 

     10
 

 

The Company estimates amortization to be recorded on existing intangible assets through the year ended September 30, 2030 to be:

 

    Amortization  
2019   $ 193,959  
2020     346,656  
2021     307,469  
2022     238,289  
2023     197,765  
2024     124,847  
2025     44,097  
2026     2,317  
2027     2,317  
2028     2,317  
2029     2,317  
2030     868  
Total   $ 1,463,217  

 

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 March 31, 2019, 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 both March 31, 2019 and September 30, 2018, the Company had a note receivable totaling $1,300,000 due from a single entity.

 

Customer Concentrations

 

During the six months ended March 31, 2019, there was no customers that represented over 10% of the Company’s revenues. During the six months ended March 31, 2018, no customer represented over 10% of the Company’s revenues. As of March 31, 2019, there was one customer who represented 32% of accounts receivable. As of May 31, 2018, there were no customers who represented more than 10% of accounts receivable.

 

As of March 31, 2019, the Company had total accounts receivable net of allowances of $122,783. Three clients comprised a total of 36% of this balance as follows:

 

    Balance     Percent of Total  
Customer 1   $ 180,000       32 %
Customer 2     29,063       5 %
Customer 3     22,740       4 %
All others     325,034       58 %
Total     556,837       100 %
Allowance for doubtful accounts     (434,054 )        
Net accounts receivable   $ 122,783          

 

As of September 30, 2018, the Company had total accounts receivable, net of allowances, of $234,178. 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          

 

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.

 

     11
 

 

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 March 31, 2019 and September 30, 2018:

 

    March 31, 2019     September 30, 2018  
Assets Not-In-Service   $ -     $ 455,540  
Capital Assets     1,287,091       535,095  
Land     212,550       212,550  
Buildings & Real Estate     941,857       937,450  
Furniture and Equipment     187,602