Quarterly Report (10-q)

Date : 02/19/2020 @ 10:24PM
Source : Edgar (US Regulatory)
Stock : Item 9 Labs Corporation (PK) (INLB)
Quote : 0.942  -0.008 (-0.84%) @ 9:20PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 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 000-54730

 

ITEM 9 LABS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

96-0665018

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

 

2727 North 3rd Street, Suite 201 Phoenix, Arizona 85004

 

(Address of principal executive offices and zip code)

 

1-833-867-6337

(Registrant’s telephone number, including area code)

 

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 ☑  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 to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of February 19, 2020, there were 61,424,905 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.

 
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included in this Quarterly Report on Form 10-Q and other filings of the Registrant under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as information communicated orally or in writing between the dates of such filings, contains or may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from expected results. Among these risks, trends and uncertainties are the availability of working capital to fund our operations, the competitive market in which we operate, the efficient and uninterrupted operation of our computer and communications systems, our ability to generate a profit and execute our business plan, the retention of key personnel, our ability to protect and defend our intellectual property, the effects of governmental regulation, and other risks identified in the Registrant’s filings with the Securities and Exchange Commission from time to time.

 

In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Although the Registrant believes that the expectations reflected in the forward-looking statements contained herein are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Registrant, nor any other person, assumes responsibility for the accuracy and completeness of such statements. The Registrant is under no duty to update any of the forward-looking statements contained herein after the date of this Quarterly Report on Form 10-Q.

 

 
 

 

ITEM 9 LABS CORP.

FORM 10-Q

DECEMBER 31, 2019

 

 

INDEX

 

    Page
Part I – Financial Information F-1
     
Item 1. Financial Statements F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
Item 4T. Controls and Procedures 25
     
Part II – Other Information  
     
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosures 26
Item 5. Other Information 26
Item 6. Exhibits 27
     
Signatures 28
     
Certifications  

 

 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

INDEX F-1
Consolidated Condensed Balance Sheets as of  December 31, 2019 (Unaudited) and September 30, 2019 F-2
Consolidated Condensed Statements of Operations for the Three Months Ended  December 31, 2019 and 2018 (Unaudited) F-3

Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 2019 and 2018 (Unaudited)

F-4

Consolidated Condensed Statements of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2019 and 2018 (unaudited)

F-5
Notes to Consolidated Condensed Financial Statements (Unaudited) F-6

 

 

  F-1  

 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES
(FORMERLY AIRWARE LABS CORP.)
CONSOLIDATED CONDENSED BALANCE SHEETS
                 
      (unaudited)          
      December 31,        September 30,   
      2019       2019  
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 46,680     $ 21,092  
Restricted cash and cash equivalents     517,664       553,851  
Accounts receivable, net of reserves of $22,460 and $0 at December 31, 2019 and September 30, 2019, respectively     366,658       437,026  
Deferred costs     2,004,235       1,936,534  
Prepaid expenses and other current assets     75,293       14,409  
Total current assets     3,010,530       2,962,912  
                 
Property and equipment, net     7,180,662       7,170,422  
Right of use asset     243,027       —    
Investment in Health Defense, LLC     100,000       100,000  
Deposit on land purchase from related party     600,000       600,000  
Receivable for sale of Airware assets, net of reserves and unamortized discount of $307,430     474,715       504,715  
Notes and interest receivable, net of reserves of $69,000     180,000       180,000  
Other intangible assets, net     1,738,268       1,839,875  
Goodwill, net     1,116,396       1,116,396  
Total Assets   $ 14,643,598     $ 14,474,320  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities:                
Accounts payable   $ 1,252,976     $ 1,076,546  
Accrued payroll     103,342       77,560  
Accrued compensated absences     69,424       69,424  
Accrued interest     1,362,568       675,182  
Accrued expenses     715,847       379,972  
Accrued income tax     87,476       87,476  
Short term notes payable     2,520,714       2,051,714  
Operating lease liability - short term portion     67,952       —    
Long term debt, in default     2,700,000       2,700,000  
Convertible notes payable, in default     20,000       20,000  
Total current liabilities     8,900,299       7,137,874  
                 
Operating lease liability     175,075       —    
                 
Total liabilities     9,075,374       7,137,874  
                 
Commitments and Contingencies                
                 
Stockholders' Equity:                
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 63,724,905 issued, 61,424,905 outstanding at December 31, 2019 and 63,643,005 shares issued and outstanding at September 30, 2019     6,374       6,365  
Additional paid-in capital     21,806,059       18,148,962  
Treasury stock     (3,450,000 )     —    
Accumulated deficit     (12,645,129 )     (10,694,939 )
Total Item 9 Labs Corp. stockholders' equity     5,717,304       7,460,388  
                 
Noncontrolling Interest     (149,080 )     (123,942 )
                 
Total Stockholders' Equity     5,568,224       7,336,446  
                 
Total Liabilities and Stockholders' Equity   $ 14,643,598     $ 14,474,320  

 

 

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

 

  F-2  

 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES
(FORMERLY AIRWARE LABS CORP.)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 
      Quarter Ending       Quarter Ending  
      December 31, 2019       December 31, 2018  
Revenues, net   $ 1,532,856     $ 955,614  
Cost of revenues     1,047,079       476,218  
Gross profit     485,777       479,396  
                 
Operating expenses                
Professional fees and outside services     267,378       350,884  
Payroll and employee related expenses     822,458       315,617  
Sales and marketing     120,977       82,443  
Other operating expenses     454,474       129,205  
Provision for bad debt     22,460       —    
Total operating expenses     1,687,747       878,149  
                 
Loss from operations     (1,201,970 )     (398,753 )
                 
Other income (expense)                
Interest income     —         22,256  
Interest expense     (773,358 )     (800 ) 
Total other income (expense), net     (773,358 )     21,456  
                 
Net loss     (1,975,328 )     (377,297 )
                 
Less: Net loss attributable to noncontrolling interest     (25,138 )     (48,478 )
                 
Net loss attributable to Item 9 Labs Corp.   $ (1,950,190 )   $ (328,819 )
                 
Basic and diluted weighted average common shares outstanding     62,563,490       56,851,805  
                 
Basic and diluted net loss per common share   $ (0.03 )   $ (0.01 )

 

 

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

 

  F-3  

 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES
(FORMERLY AIRWARE LABS CORP.)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
         
    Three Months Ended
   

December 31,

2019

 

December 31,

2018

Operating Activities:                
Net loss   $ (1,975,328 )   $ (377,297 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     32,110       12,961  
Amortization     245,727       —    
Common stock issued for services     132,106       123,500  
Stock compensation expense     75,000       —    
Provision for bad debt     22,460       —    
Interest accretion from receivable     —         (12,532 )
Changes in operating assets and liabilities:                
Accounts receivable     47,908       (188,061 )
Deferred costs     (67,701 )     (354,345 )
Prepaid expenses     (60,884 )     10,299
Accounts payable     176,430       (59,631 )
Accrued payroll     25,782       22,784  
Accrued compensated absences     —         (827 )
Accrued interest     687,386       400  
Accrued expenses     335,875       (1,855 )
Net Cash Used in Operating Activities     (323,129 )     (824,604 )
                 
Investing Activities:                
Purchases of property and equipment     (42,350 )     (5,023 )
Cash paid for purchase of AZ DP Counsulting LLC assets     —         (1,500,000 )
Cash received from sale of Airware assets     30,000       —    
Capitalized license fees     (144,120 )     —    
Net Cash Used in Investing Activities     (156,470 )     (1,505,023 )
                 
Financing Activities:                
Proceeds from the sale of common stock, net of issuance costs     —         3,150,000  
Proceeds from the issuance of debt     469,000       —    
Net Cash Provided by Financing Activities     469,000       3,150,000  
                 
Net (Decrease)/Increase in Cash     (10,599 )     820,373  
                 
Cash and cash equivalents- Beginning of Period     574,943       1,674,266  
                 
Cash and cash equivalents - End of Period   $ 564,344     $ 2,494,639  
                 
Supplemental disclosure of cash flow information:                
Interest paid in cash   $ 50,000     $ —    
Income taxes paid in cash   $ —       $ —    
                 
Cash and cash equivalents   $ 46,680     $ 2,494,639  
Restricted cash and cash equivalents     517,664       —    
Total   $ 564,344     $ 2,494,639  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Stock issued for asset acquisition of Arizona DP Consulting, LLC   $ —       $ 7,770,000  
Noncontrolling Interest   $ (149,080 )   $ (48,478 )
Right of use asset   $ (243,027 )   $ —    
Lease Liability   $ 243,027     $ —    
Non-cash equity compensation   $ 207,106     $ 123,500  
Non-Cash Treasury Stock   $ 3,450,000     $ —    
                 
Net assets acquired in acquisition of Arizona DP Consulting, LLC                
Intangible assets   $ —       $ 3,350,000  
Goodwill     —         5,920,000  
Total purchase consideration   $ —       $ —    

 

 

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

 

  F-4  

 

 

ITEM 9 LABS CORP. AND SUBSIDIARIES
(FORMERLY AIRWARE LABS CORP.)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018
                                 
    Item 9 Labs Corp Equity        
            Additional               Non    
    Common Stock   Paid-in   Treasury Stock   Accumulated   Controlling    
    Shares   Amount   Capital   Shares   Amount   (Deficit)   Interest   Total
Balance at September 30, 2018     54,766,642     $ 5,477     $ 3,427,230       —       $ —       $ (870,243 )   $ —       $ 2,562,464  
Stock issued for acquisition     3,000,000       300       7,769,700       —         —         —         —         7,770,000  
Issuance of stock for cash     3,100,000       310       3,149,690       —         —         —         —         3,150,000  
Exchange of shares for services     30,000       3       123,497       —         —         —         —         123,500  
Net loss     —         —         —         —         —         (328,819 )     (48,478 )     (377,297 )
Balance at December 31, 2018     60,896,642     $ 6,090     $ 14,470,117       —       $ —       $ (1,199,062 )   $ (48,478 )   $ 13,228,667  
                                                                 
Balance at September 30, 2019     63,643,005       6,365       18,148,962       —         —         (10,694,939 )     (123,942 )     7,336,446  
Treasury stock acquired in settlement agreement     —         —         3,450,000       (2,300,000 )     (3,450,000 )     —         —         —    
Exchange of shares for services     55,618       6       132,100       —         —         —         —         132,106  
Stock compensation     26,282       3       74,997       —         —         —         —         75,000  
Net loss     —         —         —         —         —         (1,950,190 )     (25,138 )     (1,975,328 )
Balance at December 31, 2019     63,724,905     $ 6,374     $ 21,806,059       (2,300,000 )   $ (3,450,000 )   $ (12,645,129 )   $ (149,080 )   $ 5,568,224  

 

 

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

 

  F-5  

 

 

ITEM 9 LABS CORP.

(FORMERLY AIRWARE LABS CORP)

NOTES TO CONSOLIDATED CONDENSED 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 consolidated condensed 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 represented 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 was 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.

 

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 members as of the contribution date.

 

On September 12, 2018, the Company executed a $1,500,000 promissory note (see Note 8) 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 former Chief Executive Officer. Through a management agreement with Strive Wellness of Nevada, LLC, a related party (the Company’s former 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. See Note 15.

  F-6  

 

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, at each reporting period, the Company assesses whether it is the primary beneficiary of any of its VIEs. As of December 31, 2019 and September 30, 2019, 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 have been presented on the statement of operations and statement of stockholders’ equity as non-controlling interest. See Note 15.

 

The consolidated condensed 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 unaudited consolidated condensed financial statements of the Company as of December 31, 2019 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all the information and notes necessary for a presentation of financial position and results of operations in accordance with GAAP and should be read in conjunction with our September 30, 2019 audited financial statements filed with the SEC on our Form 10-K filed January 14, 2020. It is management’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, 2019 consolidated condensed balance sheet data from audited consolidated financial statements, however, we did not include all disclosures required by GAAP. The results for the interim period are not necessarily indicative of the results to be expected for the year ending September 30, 2020.

 

Accounting Estimates

 

The preparation of financial statements in conformity with Accounting Principles Generally Accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, deferred costs, accruals and contingencies, carrying value of goodwill and intangible assets, collectability of notes receivable, the fair value of common stock and the estimated fair value of stock options and warrants. Due to the uncertainties in the formation of accounting estimates, and the significance of these items, it is reasonably possible that these estimates could be materially changed in the near term.

 

Cash and Cash Equivalents and Restricted 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. Restricted cash represents funds held by a bank pending resolution of a dispute with a former officer of the Company.

 

Accounts 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 period in which those differences are determined, with an offsetting entry to a valuation allowance for accounts receivable.

 

  F-7  

 

Deferred Costs

 

Deferred costs consist of the costs directly related to the production and cultivation of marijuana crops and cannabis derived concentrates. 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 and manufacturing equipment 2-7 years
· Buildings 30 years

 

Notes and Other Receivables, net

 

Notes and other receivables 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 period in which those differences are determined, with an offsetting entry to a valuation allowance for receivables. Management assesses all receivables individually and in total, considering historical credit losses as well as existing economic conditions to determine the likelihood of future credit losses. The Company stops accruing interest on interest bearing receivables when the receivable is in default. There was a total valuation allowance as of December 31, 2019 and September 30, 2019 of $376,430.

 

Impairment of Long-Lived Assets

We analyze long-lived assets, including property and equipment and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and estimated period of useful life at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets are less than the carrying amount of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets, which is generally calculated using discounted cash flows.

 

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 calculated on the straight-line basis using the following estimated useful lives:

 

Trade names  10 years
Customer relationships 2 years
Noncompete agreement 4 months (settlement agreement, see Note 2)
Websites and other intellectual property   5 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.

 

  F-8  

 

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. The goodwill included in these consolidated condensed financial statements represents the amount of consideration paid above the amount of the individually identifiable assets acquired. In assessing potential impairment, management first considers qualitative factors to determine if an impairment of goodwill exists. Upon the determination of a likely impairment, management assesses the recorded goodwill balance with the fair value of the business acquired.

 

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. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized.

 

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, and state income tax examinations by tax authorities. Generally all periods beginning on or after January 1, 2015 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 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 previously required under 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.

 

All 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 revenues in the period in which the performance obligations are completed. For the three months ended December 31, 2019, approximately 92% of the Company’s revenue was generated from performance obligations completed in the state of Arizona and for the three months ended December 31, 2018, all 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. Under the performance contract, the Company acts as an agent for the dispensary, does not own the marijuana, cannot exchange the marijuana, prepares invoices for the dispensary and all employees that are in contact with marijuana are dispensary agents of the dispensary with which we have our contract. Given these facts and circumstances, it is the Company’s policy to record the revenue related to the contract net of the amount retained by the dispensary. 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.

 

  F-9  

 

Fair Value of Financial Instruments

 

The carrying value of the Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short term to maturity.  The Company’s receivable resulting from the sale of Airware, notes receivable and notes payable were discounted to its estimated fair value.

 

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:

 

Level 1: Quoted prices in active markets for identical assets or liabilities;

 

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.

 

Net Loss Per Share

 

Basic earnings per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. At December 31, 2019 and September 30, 2019, there were 632,701, and 656,112 shares underlying convertible notes payable, warrants and options, that were anti-dilutive, respectively.

 

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 estimated fair value is then expensed over the requisite service period of the award which is generally the vesting period and the related amount is recognized in the consolidated condensed 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.

 

  F-10  

 

Recently Issued Accounting Pronouncements

 

Adopted

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). The update simplifies the process for assessing goodwill for impairment. The amended guidance removes the second step that was previously required. ASU 2017-04 is effective for us on October 1, 2023, with early adoption permitted for periods beginning after January 1, 2017. The Company adopted ASU 2017-04 on October 1, 2018.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. The Company adopted ASU 2016-02 effective October 1, 2019.The most significant change was related to the recognition of a right-of-use asset and lease liability on our consolidated condensed balance sheet for our real estate operating lease. The impact on our results of operations and cash flows is not material. See Note 10.

 

Pending Adoption

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for the Company on October 1, 2023, with early adoption permitted on October 1, 2019. The Company is assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our consolidated condensed financial statements.

 

There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to the Company.

 

 

Note 2 –Business Combination

 

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 developing cannabis related business plans. The purchase price was $9,270,000, $1,500,000 in cash and 3,000,000 shares of restricted common stock having an aggregate value of $7,770,000 or $2.59 per share based on the market price of the Company’s shares at the time the asset purchase agreement was executed. There were no significant costs relating to the acquisition. 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 required $3,200 of monthly rent through May 2019, which was subsequently extended through August 2019. The primary reason for the acquisition was to utilize the assets held by AZDPC to assist in the expansion of the Company. Assets and liabilities of AZDPC were negligible so presentation was not deemed necessary.

 

In accordance with ASC 805, Business Combinations, the Company accounted for the acquisition of AZDPC 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 or liabilities acquired.

 

Identifiable intangible assets consist of the following as of December 31, 2019:

 

    Balance at         Balance at
    October 1, 2019   Other Additions   Amortization   December 31, 2019
Trade names   $ 161,848     $ 144,120     $ (3,000 )   $ 302,968  
Customer relationships     181,250       —         (36,250 )     145,000  
Websites and other intellectual property     1,144,277       —         (67,310 )     1,076,967  
Non-compete agreement     352,500       —         (139,167 )     213,333  
                                 
Total other intangible assets     1,839,875       144,120       (245,727 )     1,738,268  
                                 
Goodwill     1,116,396       —         —         1,116,396  
                                 
Total   $ 2,956,271     $ 144,120     $ (245,727 )   $ 2,854,664  

 

On November 15, 2019, Ms. Sara Gullickson voluntarily resigned as Chief Executive Officer and member of the Board of Directors of Item 9 Labs Corp. The resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies, or practices. Ms. Gullickson and the Company have mutually agreed to amend the terms of the employment agreement and non-competition agreement between Ms. Gullickson and the Company dated November 26, 2018 pursuant to which (i) the non-competition period shall be reduced from three (3) years to four (4) months; (ii) Ms. Gullickson shall receive her full salary and health benefits for four (4) months from the resignation date (a significantly reduced period of time); and (iii) Ms. Gullickson shall cancel and return to treasury an aggregate amount 2,300,000 restricted shares of Company Common Stock which were acquired by Gullickson pursuant to that certain Asset Purchase Agreement dated November 26, 2018 by and between Arizona DP Consulting LLC, an Arizona limited liability company, as seller, and Gullickson as the sole member of the seller on the one hand, and the Company and AZ DP Holdings, LLC, a Nevada limited liability company as buyer, on the other hand. The returning of the stock was accounted for as a capital contribution and treasury stock transaction. As such, there was no impact on total equity.

 

In exchange for the aforementioned terms, the Company and Gullickson agreed to a release of claims against each other, among other things. The agreement contains representations and warranties customary for agreements of this type.

 

  F-11  

 

Note 3 - Property and Equipment, Net

 

The following represents a summary of our property and equipment as of December 31, 2019 and September 30, 2019:

 

    December 31,   September 30,
    2019   2019
Cultivation and manufacturing equipment   $ 171,271     $ 154,059  
Construction in progress     4,085,435       4,060,297  
Land and building     3,093,549       3,093,549  
      7,350,255       7,307,905  
Accumulated Depreciation     (169,593 )     (137,483 )
    $ 7,180,662     $ 7,170,422  

 

Depreciation expense for the three months ended December 31, 2019 and 2018 was $32,110 and $12,961, 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 is to receive: (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.

 

As additional consideration, the Company was given a 10% ownership interest in Health Defense LLC. This ownership is valued at $100,000 and is reflected on the consolidated condensed balance sheets as Investment in Health Defense at December 31, 2019 and September 30, 2019.

 

As of December 31, 2019 and September 30, 2019, management determined that the receivable described above should be classified as long-term on the consolidated condensed balance sheets as the payments have not been made as scheduled. Additionally, management has recorded an allowance on the receivable of $307,430 at December 31, 2019 and September 30, 2019.

 

 

Note 5 – Notes Receivable

 

On May 11, 2018, the Company entered into a Promissory Note Agreement with a borrower in the 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. This note is in default and is on non-accrual status. The Company is currently negotiating an amendment to the note.

 

On May 15, 2018, the Company entered into a Promissory Note Agreement with a borrower in the 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. This note is in default and is on non-accrual status. At December 31, 2019, the principal and interest has been fully reserved in the amount of $69,000.

 

At December 31, 2019 and September 30, 2019, the Company has accrued $39,000 of interest receivable related to these notes which is included in notes and interest receivables on the accompanying consolidated condensed balance sheets.

 

 

Note 6 – Short Term Note Payable

 

On August 28, 2019, Item 9 Properties, LLC, a Nevada limited liability company, and BSSD Group, LLC, an Arizona limited liability company, each wholly owned subsidiaries of Item 9 Labs Corp. collectively, entered into a Loan Agreement up to $2.5 million (the “Loan Agreement”) with Aeneas Venture Partners 3, LLC, an Arizona limited liability company (the “Lender”).

 

Pursuant to the Loan Agreement, the Company may make multiple borrowings under the Loan Agreement in the total aggregate principal amount of up to $2.5 million (the “Loan”) for the purpose of completing development and construction on certain real property located in Pahrump, Nevada owned by the Company. The Loan is a multiple advance credit facility. The Company drew $2,000,000 on August 28, 2019 and an additional $200,000 on November 26, 2019. Interest in the amount of 15% of the total amount borrowed (based on total draws) under the Loan will be paid in addition to principal at the maturity date. The Loan has a term of sixty days from funding of the Loan and may be extended for additional sixty days subject to the satisfaction of certain conditions including ten days’ notice and an extension loan fee of 15% of the aggregate total of advances under the Loan. The Loan is secured by a first priority interest in the Company’s real property located in Coolidge, Arizona, including improvements and personal property thereon (the “Property”) and includes an unconditional guarantee by Item 9 Labs Corp. The 5-acre property has 20,000 square feet of buildings, housing the cultivation and processing operations. The total balance of the loan, including accrued interest as of December 31, 2019 was $3,050,000, after the Company executed extensions in October and December 2019.

 

 

Note 7 – 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, carries an interest rate of 8% and is convertible including accrued interest to common stock at $.50 per share, which would be 62,710 shares as of December 31, 2019 and September 30, 2019. As of December 31, 2019 and September 30, 2019, this unsecured convertible note payable is considered in default and has been presented as a current liability on the consolidated condensed balance sheets.

 

  F-12  

 

Note 8 – Long Term Debt in Default

 

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 12). 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 9, and is collateralized with a Deed of Trust on the Company’s approximately 5 acre property and construction in progress. 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 was expected to own only 51% of the Nevada operations and therefore Viridis’ revenue participation is limited to the Company’s interest. On February 14, 2020, the Company acquired the remaining 80% membership interest in Strive Management, LLC. Therefore, the revenue participation payments will be based on 100% of the revenues of the Company’s Nevada operations. The operations in Nevada have not yet begun as of the date of this filing. On August 26, 2019, the loan was amended to include 6% annualized interest in exchange for Viridis subordinating its debt to another lender. Interest of $294,084 has been accrued as of December 31, 2019.

 

The additional $1,200,000 of proceeds drawn during the year ended September 30, 2019 were utilized to construct an additional 10,000 square foot cultivation and processing facility in Arizona that became operational in June 2019. The loan was originally collateralized with a Deed of Trust on the Company’s 5 acre parcel in Coolidge, AZ and its two 10,000 square foot buildings. In August 2019, Viridis agreed to subordinate its first priority Deed of Trust and move into a 2nd position. 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. On August 26, 2019, the loan was amended to include 6% annualized interest in exchange for Viridis subordinating its debt to another lender. Interest of $249,245 has been accrued as of December 31, 2019.

 

Both notes are in default as of December 31, 2019. As such, the notes are presented as current liabilities on the consolidated condensed balance sheets. The notes are with a related party, Viridis. The former CEO of Viridis is the CEO and a board member of Item 9 Labs Corp.

 

The Company’s subsidiary, BSSD Group, LLC borrowed $269,000 from Viridis Group during the three months ended December 31, 2019. This note bears annualized interest at 15%. The remaining terms of the note are still being negotiated.

 

 

Note 9 – Variable Interest Entity

 

As of December 31, 2019 and September 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 raise $4,000,000 on Strive Management’s behalf through promissory note agreements that the Company will guarantee. No funds have been raised as of the date of these consolidated condensed 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 as the Company has the power to direct the activities that significantly impact Strive Management’s economic performance and the obligation to absorb losses. Strive Management’s financial statements as of December 31, 2019 and September 30, 2019 and for the quarters ending December 31, 2019 and 2018 have been consolidated with the Company. Upon consolidation, the assets of Strive Management were recorded at its carrying amounts. The effects of consolidating Strive Management resulted in an increase in assets of $517,664 and $553,851 as of December 31, 2019 and September 30, 2019, respectively, and an increase in expenses of $31,423 and $60,598 for the three months ended December 31, 2019 and 2018, respectively. Though consolidated, all assets and liabilities of Strive Management LLC are non-recourse in that they can only be used to settle obligations of Strive Management and creditors can only seek recourse against Strive Management, not the Company, even though it has been deemed the primary beneficiary.

 

As discussed in Note 15, the Company completed the purchase of the remaining ownership interests of Strive Management LLC in February 2020.

 

  F-13  

 

Note 10 – Leases

 

The Company leases its corporate office from an entity controlled by the CEO of the Company, under an operating lease. The lease is for a term of 5 years beginning September 1, 2019. The following is a schedule by years of future minimum payments required under the lease together with their present value as of December 31, 2019:

 

    Future Minimum
    Payments
  2020     $ 58,478  
  2021       80,013  
  2022       82,114  
  2023       84,215  
  2024       78,963  
             
          383,783  
             
  less imputed interest       (140,756 )
             
        $ 243,027  

  

As of the inception of the lease, the lease liability and right of use asset was recorded at $268,359, the amount of the present value of all lease payments. To calculate the lease liability and right of use asset, the Company used a 20% discount rate, the approximate interest rate the Company would borrow at.

 

Amortization in the amount of $25,332 has been recorded against the right of use asset and lease liability, leaving a balance in each of $243,027 as of December 31, 2019.

 

 

Note 11 - Concentrations

 

For the three months ended December 31, 2019 and 2018, respectively, 92% and 100% of the Company’s revenue were generated from a single customer.

 

 

Note 12 - 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. If the federal government decides to enforce the Controlled Substances Act, it could have a material adverse effect on our business. However, the Company does not currently 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 7). 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, (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. As of the date of these consolidated condensed financial statements, $600,000 has been deposited in escrow which has been classified as a long-term asset on the consolidated condensed balance sheet as of December 31, 2019 and September 30, 2019.

 

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 Nevada Operations of the Company. The term of the agreement is a period of three years.

 

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”). Viridis agreed to make secured loans of up to $2.7 million to the Company which is represented by two separate notes, one for the construction and enhancement of the Company’s Arizona property and one for the Company’s proposed ventures in Nevada. In exchange for the loans, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive 5% of the Company’s gross revenues from each of the Company’s Arizona and Nevada operations, respectively, 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.

 

Under the terms of the Loan and Revenue Participation Agreement, 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 December 31, 2019, the Company has received the $1,500,000 and invested the funds in Strive Management (see Notes 8 and 9). 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 $2,700,000 as debt at December 31, 2019 and September 30, 2019.

 

As part of the agreement to invest in Strive Management, the Company has committed to raise funding of approximately $4,000,000 through promissory notes that the Company will guarantee so that Strive Management can develop the property in Nevada through promissory notes that the Company will guarantee.

 

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.

 

The Company entered into a 60 month lease with VGI Citadel LLC to rent office space for its corporate headquarters which began on September 1, 2019. The lease payments total $6,478 monthly for the first twelve months, include all utilities and an estimated amount for common area maintenance and real estate taxes. The monthly lease rate increases to $6,653, $6,828, $7,003, and $7,178 for years two through five, respectively.

 

  F-14  

 

Note 13– 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 12, 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 Note 14, on May 8, 2018, the Company issued 22,500 options for the purchase of common stock to three board members.

 

As discussed in Notes 8 and 12, 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 and is currently the Company’s CEO.

 

As discussed in Note 8, BSSD Group, LLC, a wholly owned subsidiary of the Company entered into a loan agreement with Viridis.

 

As discussed in Note 2, the Company issued 3,000,000 shares of restricted common stock as part of the asset purchase agreement dated November 26, 2018. As part of November 15, 2019 settlement agreement, Gullickson returned 2,300,000 shares of stock to the Company.

 

During the three months ended December 31, 2018, the Company issued 3,000,000 shares of restricted common stock to Viridis I9 Capital LLC, an LLC in which, Andrew Bowden, director and CEO of the Company is a member. The sales price was $1.00 per share with net proceeds of $3,000,000.

 

The Company has a construction management agreement with the Viridis Group to oversee the Nevada construction project totaling $20,000 monthly. The Company owes Viridis $60,000 for these services as of December 31, 2019 and September 30, 2019.

 

As discussed in Note 12, the Company has a lease agreement with VGI Capital LLC. A member of VGI Capital was elected to the Company’s board of directors on December 21, 2018 and is currently the Company’s CEO.

 

Included in our accounts payable at December 31, 2019 and September 30, 2019 is approximately $160,000 in amounts due to related parties.

 

 

Note 14 - Stockholders’ Equity

 

Common Stock

 

During the three months ended December 31, 2018, the Company raised approximately $3,150,000 via private placement. 3,000,000 shares were issued for $1 per share and 100,000 shares were issued for $1.50 per share.

 

As discussed in Note 2, the Company issued 3,000,000 shares of restricted common stock, valued at $7,770,000 as consideration for the acquisition of the majority of the assets in AZ DP Consulting, LLC.

 

In the three months ended December 31, 2018, in the normal course of business, the Company issued 30,000 shares of restricted common stock, valued at $123,500 as consideration for various consulting contracts.

 

In the three months ended December 31, 2019, in the normal course of business, the Company issued 55,618 shares of restricted common stock, valued at $132,106 as consideration for various contracts, including venue sponsorships, marketing, and investor relations.

 

In the three months ended December 31, 2019, the Company issued 26,282 shares of restricted common stock to employees, valued at $75,000.

 

Warrants

 

As of December 31, 2019, there are 275,000 warrants for purchase of the Company’s common stock outstanding. 23,411 warrants expired during the three months ended December 31, 2019. Warrants outstanding as of December 31, 2019 are as follows:

 

    Common Shares            
    Issuable Upon   Exercise Price of   Date   Expiration
    Exercise of Warrants   Warrants   Issued   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  
                             
Balance of Warrants at December 31, 2019     275,000                      

 

As discussed in Note 1, 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 December 31, 2019 and September 30, 2019, there are 294,991 stock options outstanding.

 

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 during the three months ended December 31, 2019 and 2018. 

 

 

  F-15  

 

Note 15 - Subsequent Events

 

In December 2019, BSSD Group LLC, a wholly owned subsidiary of the Company terminated its personal services agreement with Buds & Roses. This agreement allowed the Company to cultivate, process and distribute cannabis in the state of Arizona. The agreement has a run-out period through March 31, 2020, during which time, BSSD Group LLC was negotiating with other Arizona dispensaries to perform under a similar contract. BSSD had to make a payment of approximately $400,000 in December 2019 to settle the outstanding balance on the current contract, and is required to pay $80,000 monthly on the first of January, February and March 2020. In February 2020, the Company entered into a similar agreement with another company with a flat monthly rate of $40,000.

 

In February 2020, the Company executed an agreement with the other members of Strive Management, LLC to purchase the remaining 80% of Strive Management, LLC, as well as the Nevada licenses its members held in another entity. The Company agreed to pay $500,000 in cash, $1,000,000 in an unsecured note payable and issue 3,250,000 membership units of Strive Management and Strive Wellness which are exchangeable for shares of the Company’s restricted common stock. Additionally, the Company issued a cashless warrant for 2,000,000 membership units of Strive Management and Strive Wellness which are exchangeable for shares of the Company’s restricted common stock. In order to close the transaction, the Company borrowed $500,000 from Stockbridge Enterprises, a related party. The note bears interest at 6% per annum and entitles Stockbridge Enterprises to a cashless warrant for 500,000 shares of common stock of the Company with an exercise price of $1.00. The Company is to repay the loan by April 11, 2020. Upon default, the interest rate increases to 11% per annum and the exercise price of the warrants decreases to $.75 for the next thirty days, $.50 for the following thirty days and finally $.05 thereafter.

 

In February 2020, the Company appointed Doug Bowden to its Board of Directors.

 

 

Note 16 – Going Concern

 

The accompanying consolidated condensed financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company’s planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying consolidated condensed balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company’s ability to continue as a going concern. As a result, the Company’s independent registered public accounting firm included an emphasis-of-matter paragraph with respect to the consolidated financial statements for the year ended September 30, 2019, expressing uncertainty regarding the Company’s assumption that it will continue as a going concern.

 

In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management’s plans in regard to these matters are described as follows:

 

Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company’s revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of Arizona, with construction of a cultivation and processing facility underway in Nevada.

 

Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will grow significantly, thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company’s overall efforts will be successful.

 

If the Company is unable to generate significant sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations, and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

 

 

END NOTES TO FINANCIALS

 

  F-16  

 

  

ITEM 2.

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended September 30, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on January 14, 2020.

 

Forward-Looking Statements

 

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the securities Exchange Act of 1934, as amended, (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. The words “anticipated,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “should,” “could,” “predicts,” potential,” continue,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this quarterly report on Form 10-Q. You should carefully consider these risks and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

 

Overview

 

Item 9 Labs produces premium cannabis and cannabis related products in a rapidly growing market. We currently offer more than 300 products that we group in the following categories: flower; concentrates; distillates; and hardware. Our product offerings will continue to grow as we develop new products to meet the needs of the end-users. We make our products available to consumers through licensed dispensaries in Arizona. In just over a year from our first product delivery, Item 9 Labs’ products are now carried in more than 40 dispensaries throughout the state of Arizona.

 

We believe our past and future success is dependent upon our ongoing ability to understand the needs and desires of the consumers; and we develop and offer products that meet their needs.

 

The objective of Item 9 Labs is to leverage our assets (tangible and intangible) to fuel the growth of our share of the Arizona cannabis market, as well as expand the geographical reach of our products into markets outside of Arizona, with the ultimate goal of providing comfortable cannabis health solutions to a larger population in a manner that will create value for our shareholders.

 

We expanded our assets in November 2018 with the acquisition of the majority of the assets of AZ DP Consulting LLC. The acquisition was treated as a business combination for financial reporting purposes. The acquisition was valued at $9,270,000, $1,500,000 in cash and $7,770,000 (3 million shares valued at $2.59/share) of the Company’s restricted common stock. As part of the acquisition, the owner of AZ DP Consulting LLC, Sara Gullickson came aboard Item 9 Labs Corp. as CEO. We acquired numerous web domains, including dispensarypermits.com and dispensarytemplates.com, amongst many others, marijuana business templates, a workforce, tradenames and customer lists. The consulting side of the business provides dispensary application services to its clients, and through the acquisition, provides Item 9 Labs Corp. with synergistic partnerships for growth into new markets. Through nine months of operating the business, we concluded that the assets, as recorded at the acquisition date were impaired as of September 30, 2019. The impairment is included in the results of operations, totaling $5,758,827 for the year ended September 30, 2019. In November 2019, Sara Gullickson resigned as CEO. As part of her resignation, she and the Company mutually agreed on an amendment to her employment agreement in which she would cancel and return 2,300,000 shares of the common stock she obtained in the acquisition in exchange for a reduction in the duration of her non-compete agreement from 3 years to 4 months.

 

Our Arizona facility expanded during the year ended September 30, 2019, and we have continued our production increase in the three months ended December 31, 2019. As demand for our products continues to grow, we will continually increase production to meet the demand.

 

We plan to expand into other markets through various methods, and plan to utilize strategic partnerships as necessary to provide the synergies to assist in our growth. As part of this expansion plan, we acquired land in Pahrump, Nevada during the year ended September 30, 2018 to build our second production facility. As described in Note 15 of the consolidated condensed financial statements, the Company acquired cultivation, processing and distribution licenses in Nevada on February 14, 2020, keeping the Company on track to continue its expansion into Nevada.

 

  20  

 

Results of Operations

 

    Three Months Ended   Three Months Ended
    December 31, 2019   December 31, 2018
Revenues, net   $ 1,532,856     $ 955,614  
Cost of services     1,047,079       476,218  
Gross profit     485,777       479,396  
                 
Operating expenses     1,687,747       878,149  
                 
Loss from operations     (1,201,970 )     (398,753 )
                 
Interest income (expense)     (773,358 )     21,456  
                 
Net loss   $ (1,975,328 )   $ (377,297 )

 

Revenues

 

Total revenues for the three months ended December 31, 2019 were $1,532,856 compared to the revenue for the period ended December 31, 2018 of $955,614, an increase of $577,242 or 60%. This increase was primarily due to an overall increase in monthly sales as production and demand for our products grew. Management anticipates revenues to continue to grow as the revenue trends are positive month over month.

 

Costs of Services

 

Costs of services consist primarily of labor, materials, supplies and utilities. Costs of services as a percentage of revenues was 68% for the three months ended December 31, 2019 compared to 50% for the period ended December 31, 2018, consisting of certain costs, predominantly labor and materials increased at a higher rate to ramp up production. Management believes these costs will increase at a much lower rate than revenues and production in future periods, which will lead to higher profit margins than these historical figures illustrate.

 

Gross Profit

 

Gross profit for the three months ended December 31, 2019 was $485,777 compared to $479,396 (50%) for the three months ended December 31, 2018. The decrease in profit margin was due to an increase in costs necessary to ramp up production to meet demand.

 

Operating Expenses

 

Total operating expenses for the three months ended December 31, 2019 were $1,687,747 compared to $878,149 for the three months ended December 31, 2018, an increase of $809,598. Operating expenses as a percentage of gross profit increased from 183% to 347% for the periods compared. Management believes this ratio will decrease going forward as the expectation is that revenues will continue to grow at a higher rate than operating expenses. The largest increase in operating expenses for the three months ended December 31, 2019 compared to 2018 was in payroll and employee related expenses, which saw an increase of $506,842. As the Company continues to grow, payroll in management and the corporate office has had to increase significantly to prepare for the additional growth. $507,403 of the Company’s operating expenses for the three months ended December 31, 2019 related to non-cash transactions including depreciation, amortization, bad debt expense and stock issued for services rendered.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

 

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, acquisitions, debt service, and for general corporate purposes. Our primary source of liquidity is funds generated by financing activities and from private placements. Our ability to fund our operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control.

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the Company’s planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying consolidated condensed balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the Company’s ability to continue as a going concern. As a result, the Company’s independent registered public accounting firm included an emphasis-of-matter paragraph with respect to the consolidated financial statements for the year ended September 30, 2019, expressing uncertainty regarding the Company’s assumption that it will continue as a going concern.

 

  21  

 

In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management’s plans in regard to these matters are described as follows:

 

Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing its products to dispensaries throughout the state of Arizona. The Company’s revenues have increased significantly since its inception in May 2017, and continue to grow as of the date of these consolidated condensed financial statements. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company will expand into additional markets outside of Arizona, with construction of a cultivation and processing facility underway in Nevada.

 

Financing. To date, the Company has financed its operations primarily with loans from shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will grow significantly, thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the Company’s overall efforts will be successful.

 

If the Company is unable to generate significant sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations, and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

 

As of December 31, 2019, the Company had $564,344 of cash and restricted cash and working capital of $(5,889,769) (current assets minus current liabilities), compared with $574,943 of cash and $(4,174,962) of working capital as of September 30, 2019. The decrease of $1,714,807 in our working capital was primarily due to an increase in short term notes payable and accrued interest incurred during the three months ended December 31, 2019. The Company is an early stage growth company. It is generating cash from sales and is investing its capital reserves in current operations and new acquisitions that will generate additional earnings in the long term. The Company expects that its cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet its capital requirements and operational needs for the next 12 months.

 

Cash Flows

 

The following table summarizes the sources and uses of cash for each of the periods presented:

 

    Three Months Ended   Three Months Ended
    December 31, 2019   December 31, 2018
Net cash used in operating activities   $ (323,129 )   $ (824,604 )
Net cash used in investing activities     (156,470 )     (1,505,023 )
Net cash provided by financing activities     469,000       3,150,000  
Net increase (decrease) in cash and cash equivalents   $ (10,599 )   $ 820,373  

 

Operating Activities

 

During the three months ended December 31, 2019, operating activities used $323,129 of cash, primarily resulting from a net loss of $1,975,328 which was offset by net cash provided by operating assets and liabilities of $1,144,796. There was significant non-cash activity that contributed to the net loss totaling $507,403 including depreciation and amortization of $277,837, provision for bad debt of $22,460 and compensation paid in the form of stock of $207,106.

 

During the three months ended December 31, 2018, operating activities used $824,604 of cash, primarily resulting from a net loss of $377,297 and net cash used in operating assets and liabilities of $571,236. Cash used by changes in operating assets and liabilities was primarily due to an increase in accounts receivable of $188,061, and deferred costs of $354,345.

 

Investing Activities

 

During the three months ended December 31, 2019, investing activities used $156,470 of cash, consisting primarily of $42,350 in purchases of equipment and $144,120 of capitalized legal fees related to trademarks and licenses.

 

During the three months ended December 31, 2018, investing activities used $1,505,023 of cash, consisting primarily of payments totaling $1,500,000 paid to acquire substantially all the assets of AZ DP Consulting LLC.

 

Financing Activities

 

During the three months ended December 31, 2019, financing activities provided $469,000, all of which was cash proceeds from notes payable.

 

During the three months ended December 31, 2018, financing activities provided $3,150,000, all of which was cash proceeds from the sale of common stock.

 

  22  

 

Anticipated Capital Requirements

 

We estimate that our capital requirements to implement our expansion plan over the next 18 months will be approximately $15,000,000 as described in the table below. These estimates may change significantly depending on the nature of our future business activities, expansion rollout, identification of suitable acquisition targets, and our ability to raise capital necessary to conduct the aforementioned activities. We further anticipate incurring additional costs and expenses for accounting, legal, and other miscellaneous fees relating to compliance with SEC requirements.

 

Description  

Estimated

Expenses

Legal, Accounting & Other Registration Expenses   $ 350,000  
Costs Associated with Being a Public Company     240,000  
Trade Shows and Travel     50,000  
Website Development     40,000  
Rent     170,000  
Advertising and Marketing     600,000  
Staffing     2,750,000  
General Working Capital     400,000  
Cash Reserves     1,500,000  
Business Acquisitions and Construction     7,000,000  
License Applications     1,900,000  
Total   $ 15,000,000  

 

Given that our cash needs are strongly driven by our growth requirements, we also intend to maintain a cash reserve for other risk contingencies that may arise.

 

We intend to meet our cash requirements for the next 12 months through the use of the cash we have on hand and through business operations, future equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. We currently do not have any other arrangements in place to complete any private placement financings of debt and equity and there is no assurance that we will be successful in completing any such financings on terms that will be acceptable to us.

 

  23  

 

Off-Balance Sheet Arrangements

 

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies


Our discussion and analysis of our financial condition and results of operations are based on our consolidated condensed financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated condensed financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. Significant accounting estimates in these financial statements include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, deferred costs, accruals and contingencies, carrying value of goodwill and intangible assets, collectability of notes receivable, the fair value of common stock and the estimated fair value of stock options and warrants. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. For a discussion of our critical accounting policies, refer to Part I, item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form-10K for the year ended September 30, 2019. Management believes that there have been no changes in our critical accounting policies during the three months ended December 31, 2019.

 

Recently Issued Accounting Pronouncements

 

See Note 1 to our consolidated condensed financial statements, included in Part I, Item 1, Financial Information for this quarterly report on Form 10-Q.

 

Seasonality

 

We do not expect our sales to be impacted by seasonal demands for our products and services. Also, due to the fact we use indoor grow space, seasonality should not have any impact on our cultivation operations.

 

Contractual Obligations

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

  24  

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

ITEM 4. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2019.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting subsequent to the fiscal year ended September 30, 2019, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations of the Effectiveness of Disclosure Controls and Internal Controls

 

 Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

 

The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

    

  25  

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.

 

We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

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

 

Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect. 

 

  1. Quarterly Issuances:

The Company issued a total of 81,900 shares during the quarter ended December 31, 2019. 55,618 shares were issued in exchange for services and 26,282 shares were issued for employee compensation.

 

  2. Subsequent Issuances:

 

Subsequent to December 31, 2019, the Company has not issued shares.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company is in default on notes payable to a related party as discussed in Note 8 of the accompanying consolidated condensed financial statements. Interest and revenue share payments have not begun as of February 19, 2020. The Company is currently in negotiations with Viridis to restructure the notes payable. 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

N/A.

 

 

ITEM 5. OTHER INFORMATION

N/A.

  26  

 

ITEM 6. EXHIBITS

 

The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:

 

Exhibit        
Number   Description of Exhibit    
3.01a   Articles of Incorporation dated June 15, 2010   Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
3.01b   Certificate of Amendment to Articles of Incorporation dated October 22, 2012   Filed with the SEC on November 13, 2012 as part of our Current Report on Form 8-K
3.01c   Certificate of Amendment to Articles of Incorporation dated March 15, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01d   Certificate of Amendment to Articles of Incorporation dated March 19, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01e   Certificate of Amendment to Articles of Incorporation dated April 3, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01f   Certificate of Amendment to Articles of Incorporation dated October  9, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.02   Bylaws   Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
4.1   2019 Equity Incentive Plan   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.03   Share Exchange Agreement between Crown Dynamics Corp. and Airware Dated March 20, 2012   Filed with the SEC on March 26, 2012 as part of our current report on Form 8-K.
10.04   Agreement and Plan of Exchange   between Item 9 Labs Corp. fka Airware and  BSSD Group, LLC dated March 20, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.05   Purchase Agreement between Sidewinder Dairy, Inc. and the Company  dated April 20, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.6   Asset Purchase Agreement between Item 9 Labs Corp. and AZ DP Consulting, LLC dated November 26, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.7   Loan and Revenue Participation Agreement between Item 9 Labs Corp. and Viridis Group I9 Capital LLC dated September 13, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
10.8   Severance Agreement between Airware Labs Corp and Jeffrey Rassas, effective July 16, 2013   Filed with the SEC on July 19, 2013 as part of our Current Report on Form 8-K.
10.9   Employment Agreement with Sara Gullickson dated November 26, 2018   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
14.1   Code of Ethics   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
31.01   Certification of Principal Executive Officer Pursuant to Rule 13a-14   Filed herewith.
31.02   Certification of Principal Financial Officer Pursuant to Rule 13a-14   Filed herewith.
32.01   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act   Filed herewith.
32.02   CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act   Filed herewith.
99.1   Audit Committee Charter   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
99.2   Compensation Committee Charter   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
99.3   Nominations and Governance Committee Charter   Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
101.INS*   XBRL Instance Document   Filed herewith.
101.SCH*   XBRL Taxonomy Extension Schema Document   Filed herewith.
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document   Filed herewith.
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document   Filed herewith.
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document   Filed herewith.
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document   Filed herewith.

   

*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

  27  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Item 9 Labs Corp.
   
 Date: February 19, 2020 By: /s/ Andrew Bowden  
 

Name:

Title:

Andrew Bowden

Chief Executive Officer

(Principal Executive Officer)

 

 Date: February 19, 2020 By: /s/ Robert Mikkelsen
 

Name:

Title: 

Robert Mikkelsen

Chief Financial Officer

(Principal Financial Officer)

 

28

Item 9 Labs (PK) (USOTC:INLB)
Historical Stock Chart

1 Year : From Apr 2019 to Apr 2020

Click Here for more Item 9 Labs (PK) Charts.

Item 9 Labs (PK) (USOTC:INLB)
Intraday Stock Chart

Today : Saturday 4 April 2020

Click Here for more Item 9 Labs (PK) Charts.

Latest INLB Messages

{{bbMessage.M_Alias}} {{bbMessage.MSG_Date}} {{bbMessage.HowLongAgo}} {{bbMessage.MSG_ID}} {{bbMessage.MSG_Subject}}

Loading Messages....


No posts yet, be the first! No {{symbol}} Message Board. Create One! See More Posts on {{symbol}} Message Board See More Message Board Posts


Your Recent History
LSE
GKP
Gulf Keyst..
LSE
QPP
Quindell
FTSE
UKX
FTSE 100
LSE
IOF
Iofina
FX
GBPUSD
UK Sterlin..
Stocks you've viewed will appear in this box, letting you easily return to quotes you've seen previously.

Register now to create your own custom streaming stock watchlist.


NYSE, AMEX, and ASX quotes are delayed by at least 20 minutes.
All other quotes are delayed by at least 15 minutes unless otherwise stated.