NOTES
TO CODENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Description of Business and Summary of Significant Accounting Policies
Description
of Business
Item 9 Labs Corp.
(“Item 9 Labs” or the “Company”), formerly Airware Labs Corp., is a Delaware corporation. The Company
was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp. On October 26, 2012, the Articles
of Incorporation were amended to reflect a name change to Airware Labs Corp, and on April 2, 2018, they were amended again to
reflect the name change to Item 9 Labs Corp.
On
October 18, 2018 the Company effected a 1 for 20 reverse stock split of the Company’s common stock. The par value and number
of authorized shares were not adjusted as a result of the reverse stock split. The total number of shares outstanding at the time
of the split was adjusted from 1,095,332,835 to 54,766,642. All share information in these financial statements has been retroactively
adjusted to reflect the effect of the reverse split.
On March 20, 2018,
the Company closed on an Agreement and Plan of Exchange (the “Agreement”) to acquire all of the membership interests
of BSSD Group, LLC (“BSSD”), an Arizona limited liability company formed on May 2, 2017, in exchange for newly issued
restricted shares of the Company’s common stock (the “Shares”), which represent approximately 75% of the issued
and outstanding shares of the Company’s common stock on a fully-diluted basis. The 40,355,771 Shares were distributed pro-rata
to the BSSD members. As part of the Agreement, the Company agreed to increase its authorized shares of common stock to two billion.
For accounting
purposes the transaction is being recorded as a reverse recapitalization, with BSSD as the accounting acquirer. Consequently,
the historical pre-merger financial statements of BSSD are now those of the Company. In its determination that BSSD was the accounting
acquirer, the Company considered pertinent facts and circumstances, including the following: (i) the BSSD owners received the
largest portion of the voting rights of the combined entity; (ii) the management team of the combined entity is primarily comprised
of owners or management of BSSD; (iii) the continuing business of the combined entity will be the business of BSSD. The accompanying
consolidated financial statements reflect the consolidated operations of the Company from March 20, 2018.
Through a licensing
agreement, the Company grows medical marijuana and produces cannabis related products at their facility in Pinal County, Arizona
on behalf of licensed medical marijuana dispensaries in the state of Arizona. The major assets of the Company, consisting of five
acres of land and a cultivation facility, were contributed by the members of BSSD in May 2017 and were recorded at the historical
carrying value (original cost less any related accumulated depreciation) of the member as of the contribution date.
On September 12,
2018, the Company executed a $1,500,000 promissory note (see Note 7) which was used to make a capital contribution into Strive
Management, LLC, a Nevada limited liability company (“Strive Management”). In exchange for the contribution, the Company
received a 20% membership interest in Strive Management. The remaining interests are held by three individuals one of which is
the Company’s current Chief Executive Officer. Through a management agreement with Strive Wellness of Nevada, LLC, a related
party (the Company CEO is a member of this LLC), Strive Management will facilitate the cultivation, processing and distribution
of marijuana in Nevada. Strive Wellness of Nevada, LLC has been allocated cultivation, processing and distribution licenses from
the State of Nevada. Additionally, the Company will acquire an additional 31% ownership of Strive Management upon the approval
from the State of Nevada to operate the cultivation and processing facility.
Principles
of Consolidation
Item
9 Labs consolidates all variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary
and all other entities in which it has a controlling voting interest. An entity is generally a VIE if it meets any of the
following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial
support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations
or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the
entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted
on behalf of the investor with disproportionately few voting rights. The Company periodically makes judgments in determining whether
its investees are VIEs and, each reporting period, the Company assesses whether it is the primary beneficiary of any of its VIEs.
As of June 30, 2019 and September 30, 2018, the Company is deemed the primary beneficiary of Strive Management because the entity
has insufficient equity to finance its activities without additional subordinated support. The interests in Strive Management
held by non-controlling members has been presented on the statement of operations and statement of stockholders’ equity
as non-controlling interest.
The consolidated
financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities in which
the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated.
The accompanying interim unaudited condensed
consolidated financial statements of the Company as of June 30, 2019,
do not include all
the information and notes necessary for a comprehensive presentation of financial position and results of operations and should
be read in conjunction with our September 30, 2018 audited financial statements filed with the Securities and Exchange Commission
on our Form 10-12G filed June 27, 2019. It is management’s opinion that all material adjustments (consisting of normal recurring
adjustments) have been made, which are necessary for a fair financial statement presentation. The results for the interim period
are not necessarily indicative of the results to be expected for the year ending September 30, 2019.
Accounting Estimates
The preparation
of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the
Company include estimated useful lives of property and equipment, deferred income taxes, fair value of acquired intangible assets,
the fair value of common stock provided as consideration and the estimated fair value of stock options and warrants.
Discontinued
Operations
The Company
sold the former Airware business of nasal dilator sales on May 3, 2018, see Note 4. The operating results related to this business
have been classified as discontinued operations in the condensed interim consolidated financial statements in accordance with
Accounting Standards Codification 205-20,
Discontinued Operations
for the three and nine months ended June 30, 2018. Accounts
payable from these discontinued operations in the amount of $427,389 remain on the balance sheet as of June 30, 2019. The amount
presented as other income during the three and nine months ended June 30, 2019 represents a gain resulting from the repayment
of a liability acquired from Airwares that was negotiated and repaid in full at an amount less than the carrying amount.
Cash
Cash represents
cash on hand, demand deposits placed with banks and other financial institutions and all highly liquid instruments purchased with
a remaining maturity of three months or less as of the purchase date of such investments. The Company maintains cash on deposit,
which, can exceed federally insured limits. The Company has not experienced any losses on such accounts nor believes it is exposed
to any significant credit risk on cash.
Accounts Receivable and
Notes Receivable
Accounts receivable
are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the
amount management expects to collect are reported in the results of operations of the year in which those differences are determined,
with an offsetting entry to a valuation allowance for accounts receivable. Management believes all accounts receivable outstanding
as of the balance sheet dates are fully collectible, and as such has elected to not record a valuation allowance for these periods.
Deferred Costs
Deferred costs
consist of the costs directly related to the production and cultivation of marijuana crops. Deferred costs are relieved to cost
of services as products are delivered to dispensaries.
Property and
Equipment
Property and equipment
are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets.
Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged
to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property
and equipment are recorded in the period incurred.
The estimated useful
lives of property and equipment are:
|
·
|
Cultivation equipment
|
2-5 years
|
Intangible
Assets Subject to Amortization
Intangible
assets include trade name, customer relationships, website, a noncompete agreement and intellectual property obtained through
a business acquisition (see Note 2). Intangible assets acquired in a business combination are recognized at fair value using generally
accepted valuation methods deemed appropriate for the type of intangible asset acquired. Intangible assets with finite lives are
amortized over their estimated useful life and reported net of accumulated amortization, separately from goodwill. Amortization
is calculation on the straight-line basis using the following estimated useful lives:
|
·
|
Customer relationships
|
5 years
|
|
·
|
Noncompete agreements
|
3 years
|
|
·
|
Website and intellectual property
|
10 years
|
Generally,
the Company utilizes the relief from royalty method to value trade name, the with or without method for valuing the customer relationships,
and the discounted cash flow method for valuing website and intellectual property.
Goodwill
Goodwill
represents the excess of the purchase price paid for the acquisition of a business over the fair value of the net tangible and
intangible assets acquired. Goodwill is not subject to amortization and is tested annually for impairment, or more frequently
if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
Income Taxes
The Company accounts
for income taxes under FASB ASC 740,
Income Taxes
. Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The Company
files income tax returns in the U.S. federal jurisdiction, and the State of Arizona. The Company is subject to U.S. federal, state,
and local income tax examinations by tax authorities. All periods beginning on or after January 1, 2014 are open to examination
by taxing authorities. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain.
Revenue
Recognition
On
October 1, 2017, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”)
and all the related amendments. The Company elected to adopt this guidance using the modified retrospective method. The adoption
of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.
The
core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates
may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations
in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation.
The
majority of the Company’s revenue is associated with a customer contract that represents an obligation to perform services
that are delivered at a single point in time. Any costs incurred prior to the period in which the services are performed
to completion are deferred and recognized as cost of services in the period in which the performance obligations are completed.
Since the Company’s revenue is generated from one customer contract, the Company does not have material contract assets
or liabilities that fall under ASC 606. As of June 30, 2019 and 2018, 90% of the Company’s revenues were generated for performance
obligations completed in the State of Arizona.
The
Company recognizes revenue as services are rendered. Services are considered complete upon successful delivery of the product
to the dispensary as the Company has no further performance obligations at this point in time and collection is assured. Per the
dispensary contract, the Company is paid 85% of the wholesale market price of the marijuana for the services rendered.
The
Company’s revenues accounted for under ASC 606, do not require significant estimates or judgments based on the nature of
the Company’s revenue stream. The sales price is generally fixed at the point of sale and all consideration from the contract
is included in the transaction price. The Company’s contracts do not include multiple performance obligations or variable
consideration.
Fair
Value of Financial Instruments
The carrying
value of the Company’s financial instruments, consisting of cash, accounts receivable, accounts payable, and accrued expenses
approximate fair value due to their short term to maturity. The Company’s long-term receivable resulting from the
sale of Airware was discounted to its estimated fair value on the date (see Note 4).
Net
Loss Per Share
Basic earnings
per share does not include dilution and is computed by dividing loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion
would be anti-dilutive. At June 30, 2019, there were 646,008 shares underlying convertible notes payable, warrants and options.
Stock-Based Compensation
The Company accounts
for its stock-based awards in accordance with ASC Subtopic 718-10,
“Compensation – Stock Compensation”,
which
requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made
to employees and directors. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes)
model. The fair value is then expensed over the requisite service periods of the award which is generally the vesting period and
the related amount is recognized in the consolidated statements of operations. The Company recognizes forfeitures at the time
they occur.
The Black-Scholes
option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected
term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based
compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application
of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could
be materially different in the future.
Reclassifications
Certain accounts and financial statement
captions in the prior periods have been reclassified to conform to the current period financial statements.
Note 2 –Acquisition
On
November 26, 2018, the company’s wholly owned subsidiary AZ DP Holdings, LLC (AZDP) performed an acquisition of the
majority of the assets of Arizona DP Consulting, LLC (AZDPC), a consulting firm specializing in obtaining marijuana
dispensary permits and cannabis related business plans. The purchase price was $1,500,000 in cash and 3,000,000 shares of
restricted common stock having an aggregate value of $7,500,000 or $2.50 per share based on current market price of the
Company shares at time asset purchase agreement was executed. Pursuant to the agreement, Sara Gullickson transitioned from
President to CEO under a 3 year employment agreement and became a member of the board of directors of the company.
Additionally, AZDP agreed to hire the employees of AZDPC and lease its existing office space which requires $3,200 of monthly
rent through May 2019. This acquisition effectiv
ely terminates the
contract dated June 26, 2018 described in Note 11. Below is a summary of AZDPC’s revenue, expense and net income for
January 1, 2018 through August 31, 2018, and January 1, 2017 through December 31, 2017. Assets and liabilities of AZDPC were
negligible so presentation was not deemed necessary.
|
|
(unaudited)
|
|
(unaudited)
|
|
|
January 1 through
|
|
January 1 through
|
|
|
August
30, 2018
|
|
to
December 31, 2017
|
Revenue
|
|
$
|
744,822
|
|
|
$
|
1,084,202
|
|
Expense
|
|
|
(356,169
|
)
|
|
|
(655,911
|
)
|
Net Income
|
|
$
|
388,653
|
|
|
$
|
428,291
|
|
In
accordance with ASC 805,
Business Combinations
, the Company accounted for the acquisition of AZDP using the acquisition
method of accounting. The purchase price was allocated to specific identifiable intangible assets at their respective fair values
at the date of acquisition. There were no tangible assets acquired.
A
summary of assets acquired in the acquisition and their fair values are presented below:
Tradename
|
|
$
|
120,000
|
|
Customer Relationship
|
|
|
290,000
|
|
Templates, website,
and other IP
|
|
|
2,470,000
|
|
Noncompete agreement
|
|
|
470,000
|
|
Goodwill
|
|
|
5,650,000
|
|
|
|
$
|
9,000,000
|
|
Identifiable
intangible assets consist of the following as of June 30, 2019:
|
|
Balance
at
|
|
Additions
from
|
|
|
|
Balance
at
|
|
|
October
1, 2018
|
|
Acquisitions
|
|
Amortization
|
|
June
30, 2019
|
Tradename
|
|
$
|
—
|
|
|
$
|
120,000
|
|
|
$
|
(6,000
|
)
|
|
$
|
114,000
|
|
Customer
Relationship
|
|
|
—
|
|
|
|
290,000
|
|
|
|
(29,000
|
)
|
|
|
261,000
|
|
Websites
and intellectual property
|
|
|
—
|
|
|
|
2,470,000
|
|
|
|
(123,500
|
)
|
|
|
2,346,500
|
|
Noncompete
agreement
|
|
|
—
|
|
|
|
470,000
|
|
|
|
(78,333
|
)
|
|
|
391,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
3,350,000
|
|
|
$
|
(236,833
|
)
|
|
$
|
3,113,167
|
|
Future
amortization of the identifiable intangible assets is as follows:
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Tradename
|
|
$
|
3,000
|
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
|
$
|
63,000
|
|
|
$
|
114,000
|
|
Customer
Relationship
|
|
|
14,500
|
|
|
|
58,000
|
|
|
|
58,000
|
|
|
|
58,000
|
|
|
|
58,000
|
|
|
|
14,500
|
|
|
|
261,000
|
|
Websites
and intellectual property
|
|
|
61,750
|
|
|
|
247,000
|
|
|
|
247,000
|
|
|
|
247,000
|
|
|
|
247,000
|
|
|
|
1,296,750
|
|
|
|
2,346,500
|
|
Noncompete
agreement
|
|
|
39,167
|
|
|
|
156,668
|
|
|
|
156,668
|
|
|
|
39,164
|
|
|
|
—
|
|
|
|
—
|
|
|
|
391,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118,417
|
|
|
$
|
473,668
|
|
|
$
|
473,668
|
|
|
$
|
356,164
|
|
|
$
|
317,000
|
|
|
$
|
1,374,250
|
|
|
$
|
3,113,167
|
|
Amortization
expense for the three- and nine-month periods ended June 30, 2019 was $82,500 and $236,833, respectively. The Company had no amortizable
intangible assets during the nine months ended June 30, 2018.
The
goodwill arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations
and personnel of the businesses. These synergies include access into new markets.
Note 3 - Property
and Equipment, Net
The following represents
a summary of our property and equipment as of June 30, 2019 and September 30, 2018:
|
|
June 30, 2019
|
|
September 30, 2018
|
Manufacturing Equipment
|
|
$
|
154,059
|
|
|
$
|
154,059
|
|
Construction in Progress
|
|
|
5,031,143
|
|
|
|
233,768
|
|
Land and Building
|
|
|
913,314
|
|
|
|
913,314
|
|
|
|
|
6,098,516
|
|
|
|
1,301,141
|
|
Accumulated Depreciation
|
|
|
(106,700
|
)
|
|
|
(67,099
|
)
|
|
|
$
|
5,991,816
|
|
|
$
|
1,234,042
|
|
The construction
in progress relates to cultivation facilities being built in Arizona and Nevada which were not yet complete or in use as of June
30, 2019; therefore, we have not yet began to depreciate the costs of constructing these facilities.
Depreciation expense
for the nine months ended June 30, 2019 and 2018 was $39,122 and $36,825, respectively, and for the three months ended June 30,
2019 and 2018 was $13,200 and $12,355, respectively.
Note 4 –
Sale of Airware Assets and Investment in Health Defense LLC
On May 3, 2018,
the Company entered into an intellectual property sales agreement with Health Defense LLC. Pursuant to the terms of the agreement,
the Company sold all of the assets related to the former business of the Company, nasal dilator sales.
In consideration
for entering into the agreement, the Company received: (i) $300,000 in cash at execution, (ii) $700,000 in cash within one year
of execution and (iii) an additional $300,000 by December 31, 2019. Due to the long-term nature of the final $300,000, the Company
recognized a discount of $70,070 using a discount rate of 21.50%. During the nine months ended June 30, 2019, the Company recognized
$39,057 of interest income related to the accretion of this discount which is included in interest income on the accompanying
consolidated statements of operations. As of June 30, 2019, the receivable was in default, though management believes it to be
fully collectible within one year of these consolidated financial statements. As of June 30, 2019, unamortized discount on this
long-term receivable was $11,855. As of September 30, 2018, unamortized discount on this long-term receivable was $50,912. As
additional consideration, the Company was also given a 10% ownership interest in Health Defense LLC. This ownership is valued
at $100,000 and is reflected on the balance sheet as an other long-term asset.
Note 5 – Notes Receivable
On May 11, 2018,
the Company entered into a Promissory Note Agreement with borrower in principal amount of $150,000. This is a one year note with
20% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into a unit offering
of the borrower at a 15% discount. The note is personally guaranteed by the borrower.
On May 15, 2018,
the Company entered into a Promissory Note Agreement with borrower in principal amount of $60,000. This is a one year note with
15% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into an interest in
a strategic partnership of ownership and operations of a certain dispensary license. The note is personally guaranteed by the
borrower.
For the nine months
ended June 30, 2019 and year ended September 30, 2018, the Company has accrued $48,712 and $15,074, respectively, of interest
receivable related to these notes which is included in notes and interest receivables on the accompanying consolidated balance.
As of the date of the condensed financial statements, the notes receivable are in default though management believes them to be
fully collectible in the next twelve months.
Note 6 –
Unsecured Convertible Note Payable
In the reverse
recapitalization disclosed in Note 1, the Company assumed one unsecured convertible note payable with principal balance totaling
$20,000 which was due in August 2012, carry an interest rate of 8% and is convertible to common stock at $.50 per share. As of
June 30, 2019 and September 30, 2018, this unsecured convertible note payable is considered in default and has been presented
as a current liability on the condensed interim consolidated balance sheets.
Note 7 – Long Term Debt
On September 13,
2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”)
in which Viridis has agreed to loan the Company up to $2.7 million for the expansion of the Company’s Arizona and Nevada
properties (see Note 10). As of September 30, 2018, the Company received $1,500,000 of proceeds from Viridis in the form of a
promissory note. The $1,500,000 proceeds were utilized to acquire a 20% ownership in Strive Management, LLC as described in Notes
1 and 8. In exchange for the loan, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall
receive 5% of the Company’s gross revenues from the Nevada operations, until the loan is repaid, 2% until repaid 200% of
the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. Payments on the loan will commence 90
days after the Nevada operation begins earning revenue. Parties acknowledge that the Company is expected to own only 51% of the
Nevada operations and therefore Viridis’ revenue participation is limited to the Company’s interest. The operations
in Nevada have not yet begun as of the date of this filing.
The additional
$1,200,000 proceeds were utilized to construct an additional 10,000 square foot cultivation and processing facility in Arizona
that became operational in June 2019. The proceeds were received as construction draws between November 2018 and January 2019.
In exchange for the loan, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive
5% of the Company’s gross revenues from the Arizona operations, until the loan is repaid, 2% until repaid 200% of the amount
loaned, and 1% of gross revenues in perpetuity or until a change in control. Payments on the loan will commence 90 days after
the Arizona operation begins earning revenue. Interest on the notes accrue monthly at a 2.9% annual rate. Interest of $24,097
has been accrued as of June 30, 2019.
Note 8 – Variable Interest
Entity
As of June 30,
2019, the Company has determined that it holds a variable interest in Strive Management due to the Company being its sole source
of capital. Further, the Company has agreed to construct an operational facility in Nevada. As such, Item 9 Labs Corp will raise
funds as necessary ($4,000,000 expected) to construct the facility, which will be wholly owned by a subsidiary of Item 9 Labs
Corp and leased to Strive Management, LLC, the operating company. No funds have been raised as of the date of these financial
statements. If the funds are not raised, the additional 31% interest due to the Company upon operational approval from the State
of Nevada as discussed in Note 1 would be subject to reclamation by the other members of Strive Management. The Company has been
determined to be the primary beneficiary of Strive Management has the Company has the power to direct the activities that significantly
impact Strive Management’s economic performance and the obligation to absorb losses. Strive Managements financial statements
as of June 30, 2019 and September 30, 2018 have been consolidated with the Company. Upon consolidation, the asset of Strive Management
was recorded at its carrying amounts. As of June 30, 2019, and September 30, 2018 the effects of consolidating Strive Management
resulted in an increase in assets of $626,067 and $1,500,000, respectively, primarily from cash. For the three and nine months
ended June 30, 2019, Strive Management incurred income of $8,508 and a loss of $66,732, respectively.
Note 9 -
Concentrations
For
the three and nine months ended June 30, 2019 and 2018, 92% and 100%, respectively, of the Company’s revenue was generated
from a single customer. All trade accounts receivable at June 30, 2019 and 2018 was due from one customer.
Note 10 - Commitments
and Contingencies
The production
and possession of marijuana is prohibited by the United States of America, though the state of Arizona allows these activities
to be performed at licensed facilities such as BSSD. The Company does not believe the federal prohibition of these activities
will negatively impact the business. As such, the Company has not elected to record a related accrual contingency.
The Company is
in default on convertible notes payable totaling $20,000 (see Note 6). The Company has attempted to communicate with the note
holder to request extension or conversion, but has been unsuccessful in doing so. The full balance on this note is included in
current liabilities.
On April 20, 2018,
the Company entered into an agreement for the purchase of approximately 44 acres of land from an affiliate of a founding member
of BSSD. The purchase price of the property is $3,000,000, payable as follows; (i) $200,000 deposited with escrow agent as an
initial earnest money deposit in April 2018, (ii) on or before February 1, 2019, the Company will deposit an additional $800,000
into escrow as additional earnest money deposit and (iii) the balance of the purchase price shall be paid via a promissory note.
The earnest money amounts are non-refundable. The Company has negotiated an amendment to this agreement that will spread the $800,000
payment over the course of 4 months through June 30, 2019. As of June 30, 2019, the Company had paid a total of $600,000 which
was deposited in escrow, and classified as a long-term asset on the consolidated balance sheet as of June 30, 2019. As of the
date of these financial statements, a total of $600,000 has been deposited in escrow.
On June 26, 2018,
the Company entered into a contractor agreement with Chase Herschman pursuant to which he will provide services in exchange for
$120,000 annually, payable each month; up to $420,000 in common stock options which shall vest upon the occurrence of certain
benchmarks as described in the contractor agreement and a commission of 1% of the gross profits of the Company. The term of the
agreement is a period of three years.
Under the terms
of the Loan and Revenue Participation Agreement (see Note 7), upon a change in control of the Company, Viridis will be entitled
to receive 200% of the principal amount of the loans to the Company computed after considering previous revenue participation
payments through the date of change of control and 1% of the aggregate sales price or consideration received in the change in
control transaction.
As of September
30, 2018, the Company received the $1,500,000 and invested the funds in Strive Management (see Notes 7 and 8). The remaining $1,200,000
has been provided by Viridis directly to contractors of the Arizona property from an account owned and controlled by Viridis.
The Company recorded the $1,200,000 as construction in progress (see Note 3) a long-term debt (see Note 7) upon the completion
and occupancy of the Arizona facility expansion, as agreed upon in the terms of the note which occurred in June 2019.
As part of the
agreement to invest in Strive Management, the Company has committed to raise funding of approximately $4,000,000 to complete the
construction of a cultivation and processing facility in Nevada which will be leased to Strive Management LLC.
On
October 22, 2018 the Company entered into a 6 month services agreement with Axiom Group to provide marketing and data distribution
services. As part of the agreement, the Company will pay a sum of $15,000 and issue 15,000 shares of common stock to Axiom Group
each month the agreement is in place. This contract was terminated in December 2018.
On
March 11, 2019 the Company entered into a 6 month services agreement with JLS Ventures to provide marketing and data distribution
services. As part of the agreement, the Company will pay a sum of $15,000 and issue 35,000 shares of common stock to JLS Ventures
each month the agreement is in place. This contract was terminated in May 2019.
The
Company made a commitment to its Chief Operating Officer to issue 9,615 common stock shares quarterly, starting January 2019,
as compensation through October 2019. The shares are being valued at $2.60 per share as that was the market closing price as of
the date the agreement was signed. The Company recognized $25,000 of stock compensation for the shares issued in April 2019 which
is included in payroll and employee related expenses on the statements of operations.
Note
11 – Related Party Transactions
As
discussed in Note 1, on March 20, 2018, the Company issued 40,355,771 shares of common stock to the members of BSSD for their
membership interests.
As
discussed in Note 10, the Company has entered into an agreement as of April 20, 2018 for the purchase of land. The land owner
is one of the original members of BSSD and a current employee of the Company.
As
discussed in Notes 7 and 10, the Company has entered into a Loan and Revenue Participation Agreement and Promissory Note with
Viridis. The member of Viridis was elected to the Company’s board of directors on December 21, 2018.
As discussed
in the
Description of the Business
section of Note 1 and in Note 2 of the financial statement disclosures, the Company
is involved in transactions with companies that are owned in whole, or in part by the Company’s CEO, Sara Gullickson.
Note 12 - Stockholders’
Deficit
Common Stock
As
discussed in Note 1, on March 20, 2018, the Company issued 40,355,771 shares of common stock to the members of BSSD for their
membership interests.
During
the nine months ended June 30, 2019, the Company raised $5,660,003 via private placements. The selling price for 5,000,000 shares
was $1 per share and the selling price for 440,000 was $1.50 per share for a total of 5,440,002 shares of common stock issued.
Additionally, 158,529 shares with a market value of $270,000 were issued to contractors for services and 42,759 shares valued
at $150,000 were issued to employees as compensation
Warrants
As of June 30,
2019 there are 298,411 warrants for purchase of the Company’s common stock outstanding. The Company issued no new warrants
during the nine months ended June 30, 2019 and no warrants expired during that period. Warrants outstanding are as follows:
|
|
Common Shares Issuable Upon
Exercise of Warrants
|
|
Exercise Price of Warrants
|
|
Date Issued
|
|
Expiration Date
|
Warrants issued by predecessor
|
|
|
175,000
|
|
|
$
|
2.00
|
|
|
3/31/2015
|
|
|
8/31/2020
|
|
Warrants issued by predecessor
|
|
|
100,000
|
|
|
$
|
1.00
|
|
|
7/28/2016
|
|
|
7/28/2021
|
|
Warrants issued by predecessor
|
|
|
23,411
|
|
|
$
|
1.30
|
|
|
12/22/2016
|
|
|
12/22/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of Warrants at June 30, 2019
|
|
|
298,411
|
|
|
|
|
|
|
|
|
|
|
|
(1)
As discussed in Note 2, on March 20, 2018 the Company executed an agreement to acquire all the voting interest in BSSD Group,
LLC. As BSSD Group, LLC is the accounting acquirer, all previously outstanding warrants were re-issued under the new company.
Stock
Options
On May 8, 2018,
the Company granted 22,500 stock options to board members. The options are exercisable at $2.40 per share with a ten year term.
The options will vest equally over three years unless there is a change of control of the Company at which time any unvested options
vest immediately. As of June 30, 2019, there are 294,991 stock options outstanding.
As discussed in
Note 2, on March 20, 2018 the Company executed an agreement to acquire all the voting interest in BSSD Group, LLC. As BSSD Group,
LLC is the accounting acquirer, all previously outstanding options were re-issued and vested immediately as this was considered
a change in control.
The Company determines
the fair value of stock options issued on the date of grant using the Black-Scholes option-pricing model. There was no option
activity in the nine months ended June 30, 2019. The following assumptions were used for determining the fair value of the options
granted during the year ended September 30, 2018:
Expected stock price volatility
|
|
34.72%
|
|
|
|
|
|
Expected dividend yield
|
|
0.00%
|
|
|
|
|
|
Risk-free interest rate
|
|
2.97%
|
|
|
|
|
|
Option life
|
|
10 years
|
|
|
|
|
|
Stock-based compensation recognized
|
|
3,773
|
|
|
|
|
|
Unrecognized compensation expense
|
|
23,390
|
|
to be recognized in future periods
|
|
|
|
We do not have
an extensive history as a public company and our common stock transactions are too infrequent, therefore we could not practicably
estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant comparable
company that is publicly traded and does business within the industry we operate.
The options granted
during the year ended September 30, 2018 were determined to have a fair value at date of grant of $2.40. The unrecognized compensation
expense of $13,856 will be recognized over a weighted average period of 1.09 years. Compensation expense in the amount of $3,178
and $9,534, respectively, was recognized in the three and nine months ended June 30, 2019.
There was
no activity in stock options during the nine months ended June 30, 2019 and 2018. 294,991 and 272,491 options remain outstanding
as of June 30, 2019 and 2018, respectively. 272,491 options were exercisable as of June 30, 2019 and 2018.
Note 13 - Subsequent
Events
On
July 1, 2019, the Company entered into a 3 year agreement with a concert venue to be the name sponsor for the venue. In exchange,
the Company issued 45,457 shares of restricted common stock valued at $200,000($4.40/share) and is to pay $5,000 monthly for the
first 12 months and $60,000 in July 2020 and 2021.
On July 3, 2019,
the Company’s Board approved an employment agreement for a sales director. In connection therewith, the Company granted
16,667 common stock shares totaling $50,000 which will vest six months from the employment agreement.