Notes
to Unaudited Condensed Consolidated Financial Statements
1.
|
Incorporation
and operations and Liquidity
|
Stem Holdings, Inc. (the “Company”) is a Nevada corporation incorporated on June 7, 2016. The
Company purchases, improves, and leases properties for use in the cannabis production, distribution and sales industry beginning
in the state of Oregon. In September and October 2016, the Company subleased its first production facility and acquired its first
commercial location, respectively. In February 2017 and May 2017, the Company acquired its second commercial location and acquired
its second production facility, respectively. The Company enter into 4 leases for these properties (see Note 7). As shown in the
accompanying consolidated financial statements, the Company has experienced recurring losses, and has accumulated a deficit of
approximately $ 9,319,193 as of June 30, 2018. For the nine months ended June 30, 2018 we had a net loss of $6,484,842. In January
2018, the Company completed the purchase of the farm property in Mulino, Oregon (see Note 7), which will require the Company to
invest approximately $300,000 in its purchase in the coming years. The Company has entered into four leases with tenants in which
it has committed the Company to improve those properties which will require additional funding in the amount of $600,000 (see Note
7). In addition, the Company continues to work towards acquiring additional properties to lease to cannabis operators to grow its
business. To date, the Company has raised substantial funds through private placements of its debt, equity securities and mortgage
proceeds. Since inception, the Company has raised funds in private placements and debentures and mortgage funding, raising in excess
of $14.6 million as of the date of these financial statements. In addition, the Company is currently in discussions with potential
investors to invest in the Company at higher amounts. The Company also expects that its cash outflow from operation will decrease
significantly in fiscal year 2018 as three of its four subleases to cannabis operators begin generating cash flow in the fourth
quarter of the fiscal year and its current cash balance plus expected private placement and other investment proceeds allow it
to continue operating and build out its properties.
As
of June 30, 2018, the Company has incorporated three new subsidiaries – Opco LLC, NVD RE Corp and Stem Holdings Florida,
Inc.
2.
|
Summary
of significant accounting policies
|
Basis
of preparation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”). The condensed financial statements included herein are unaudited. Such financial
statements, in the opinion of management, contain all adjustments necessary to present fairly the financial position and results
of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results
are not necessarily indicative of the results to be expected for the year ending September 30, 2018 or for any other period. Certain
information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission, and because of this, for further information, readers should refer to the financial statements and footnotes
included in its Form 10 for the fiscal year ended September 30, 2017 filed on January 16, 2018. The Company believes that the
disclosures are adequate to make the interim information presented not misleading.
Principals
of Consolidation
The
accompanying consolidated financial statements include the accounts of Stem Holdings, Inc. and its wholly-owned subsidiaries,
Opco, LLC and Stem Holdings Florida Inc. All material intercompany accounts, transactions, and profits have been eliminated in
consolidation. Our wholly owned subsidiaries OPCO, LLC and Stem Holdings Florida, Inc. had no operations, assets or liabilities as of
June 30, 2018.
Revenue
Recognition
The
Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases
attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably
assured. The Company makes estimates of the collectability of its tenant receivables related to base rents, straight-line rent
and other revenues. In the current fiscal year, the Company began significant rental operations. The Company considers such things
as historical bad debts, tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments
relevant to a tenant’s business, and changes in tenants’ payment patterns in its analysis of accounts receivable and
its evaluation of the adequacy of the allowance for doubtful accounts. Specifically, for straight-line rent receivables, the Company’s
assessment includes an estimation of a tenant’s ability to fulfill its rental obligations over the remaining lease term.
Real
Estate Acquisition Valuation
All
assets acquired and liabilities assumed in an acquisition of real estate are measured at their acquisition date fair values. The
acquisition value of land, building and improvements are included in real estate investments on the accompanying consolidated
balance sheets. Acquisition pursuit costs associated with asset acquisitions are capitalized. The Company has early adopted ASU
2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as businesses acquisitions. As a result of early adopting ASU 2017-01, real estate
acquisitions did not meet the definition of a business combination and were deemed asset acquisitions, and the Company therefore
capitalized its acquisition pursuit costs associated with these acquisitions.
Reclassifications
Certain
amounts in the Company’s consolidated financial statements for prior periods have been reclassified to conform to the current
period presentation. These reclassifications have not changed the results of operations of prior periods.
Use
of estimates
The
preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets, liabilities, income and expenses. Estimates and judgments used are
based on management’s experience and the assumptions used are believed to be reasonable given the circumstances that exist
at the time the financial statements are prepared. The significant estimates included in these financial statements are those
associated with the assumptions used to value options issued to consultants and the estimated rent payment deferral period at
inception of its cannabis operation subleases. Actual results may differ from these estimates.
Warrants
to Purchase Common Stock and Other Derivative Financial Instruments
We
classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement
or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our
own stock. We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share settlement). We assess the classification of warrants issued
to purchase our common stock and any other financial instrument at each reporting date to determine whether change in classification
between assets and liabilities is required.
Cash
and cash equivalents
Cash
and cash equivalents include short-term investments with original maturities of three months or less and are recorded at cost,
which approximates fair market value given the short-term nature.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. As of
June 30, 2018, the Company had deposits in a major financial institution in excess of the FDIC insurance limit. The Company believes
the risk of loss to be minimal as it maintains its cash balances at well capitalized financial institutions.
Carrying
value, recoverability and impairment of long-lived assets
The
Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
360 to evaluate its long-lived assets. The Company’s long-lived assets, which include property and equipment are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company does not test for impairment in the year of acquisition of properties so long as those properties are acquired from
unrelated third parties.
The
Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated
with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective
carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair
value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
If long- lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter
than originally estimated, the net book values of the long-lived assets are depreciated and amortized over the newly determined
remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger
an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future
operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect
to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative
industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price
for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators
at least annually and more frequently upon the occurrence of such events.
Through
June 30, 2018 the Company has not experienced impairment losses on its long-lived assets.
Capitalization
of Project Costs
The
Company’s policy is to capitalize all costs that are directly identifiable with a specific property, would be capitalized
if the Company had already acquired the property, and when the property, or an option to acquire the property, is being actively
sought after, and either funds are available or will likely become available in order to exercise their option. All amounts shown
capitalized prior to acquisition of a property are included under the caption of Project Costs in the balance sheet.
Income
Taxes
Income
taxes are provided for the tax effects of transactions reported in the financial statements and consist of currently due plus
deferred taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting carrying amounts
and the respective tax bases of assets and liabilities and are measured using tax rates and laws that are expected to be in effect
when the differences are expected to be recovered or settled. Valuation allowances are provided against deferred tax assets if
it is more likely than not that the deferred tax assets will not be realized.
The
Company follows the guidance of FASB ASC 740-10 which relates to the Accounting for Uncertainty in Income Taxes, which seeks to
reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation
prescribes a comprehensive model for financial statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns.
Fair
value of financial instruments
As
defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. To estimate fair value, the Company utilizes market
data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and
the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally
unobservable. The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level
1” measurements) and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of
the fair value hierarchy are as follows:
Level
1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 — Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs
which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level
3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about
how market participants would price the assets and liabilities.
In
instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level
input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of
a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset
or liability.
Earnings
per share
The
Company presents basic and diluted per share amounts (“EPS”) data for its common shares. Basic EPS is calculated by
dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares
outstanding during the period. Diluted loss per share is calculated based on the weighted-average number of outstanding common
shares plus the effect of dilutive potential common shares, using the treasury stock method. The Company’s calculation of
diluted net loss per share excludes potential common shares as of June 30, 2018 as the effect would be anti-dilutive (i.e. would
reduce the loss per share). As of June 30, 2018, the Company has 3,218,749 shares issuable upon note conversion, options and warrants
exercisable into the common stock of the Company outstanding.
Advertising
Costs
The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was $ 36,612 for the
nine months ended June 30, 2018 and $31,792 for the nine months ended June 30, 2017.
Emerging
Growth Company
The
Company has elected to be an emerging growth company as defined under the Jumpstart Our Business Startups Act of 2012 (“Jobs
Act”). Included with this election, the Company has also elected to use the provisions within the Jobs Act that allow companies
that go public to continue to use the private company adoption date rules for new accounting policies. Should the Company obtain
revenues in excess of $1 billion on an annual basis, have its non-affiliated market capitalization increase to over $700 million
as of the last day of its second quarter, or raise in excess of $1 billion in public offerings of its equity or instruments directly
convertible into its equity, it will forfeit its status under the Jobs Act as an emerging growth company.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation and is depreciated using the straight-line method over the assets’
estimated useful life as follows:
Buildings
|
20
years
|
Leasehold
improvements
|
Shorter
of term of lease or economic life of improvement
|
Furniture
and equipment
|
5
years
|
Signage
|
5
years
|
Software
and related
|
5
years
|
Normal
maintenance and repairs for equipment are charged to expense as incurred, while significant improvements are capitalized.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
3.
|
Property,
Plant & Equipment
|
At
June 30, 2018 property and equipment consisted of the following:
Automobile
|
|
$
|
18,275
|
|
Signage
|
|
|
19,118
|
|
Furniture
and equipment
|
|
|
905,161
|
|
Leasehold
improvements
|
|
|
2,327,586
|
|
Buildings
and property improvements
|
|
|
5,192,362
|
|
Land
|
|
|
300,000
|
|
Software
and related
|
|
|
58,518
|
|
|
|
|
|
|
Subtotal
|
|
|
8,821,020
|
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
|
(486,608
|
)
|
Property,
plant and equipment, net
|
|
|
8,334,412
|
|
(1)
Because the Company closed on the acquisition of the Mulino property (see Note 9) in January 2018, the Company has treated the
costs to improve the property as building improvements and not as project costs as of June 30, 2018.
On
November 1, 2016, the Company acquired certain real property located at 1027 Willamette Street, Eugene, OR 97401 (the “Property”)
for a total cash purchase price plus closing costs of approximately $918,000.
On February 6, 2017,
the Company acquired certain real property located at 7827 SE Powell Blvd, Portland, OR 97206 (the “Property”) for
a total purchase price plus closing costs of approximately $656,498. As part of the consideration for closing on the property,
the Company issued a short term note payable to the seller in the Amount of approximately $304,000. The note is non-interest bearing
and requires four monthly payments of $75,000 plus a final payment for the remaining amount due immediately thereafter plus fees.
Due to the short-term nature of the note, the Company has not imputed any interest as it would be immaterial to the results for
the period.
The Company has
advised the note holder that it is in breach of certain provisions of the Purchase and Sale Agreement and has withheld the final
payment required under the note. The Company and the note holders are in discussions, through their respective counsel, to attempt
to reach a settlement of the amount due under the note. If the matter cannot be resolved informally, it could proceed to arbitration.
Depreciation
and amortization expense was $353,526 for the nine months ended June 30, 2018 and $94,912 for 2017.
In
2016, the Company adopted a plan to allow the Company to compensate prospective and current employees, directors and consultants
through the issuance of equity instruments of the Company. The plan has an effective life of 10 years. The plan is administered
by the board of directors of the Company until such time as the board transfers responsibility to a committee of the board. The
plan is limited to issuing common shares of the Company up to 15% of the total shares then outstanding. No limitations exist on
any other instruments issuable under the plan. In the event of a change in control of the Company, all unvested instruments issued
under the plan become immediately vested.
In
November 2017, the Company entered into a promissory note in the amount of $21,749 from a vendor of the Company. The promissory
note bears an interest rate of 18% per annum and also contains a 10% servicing fee. The note matures 24 months after issuance
and is secured by certain security electronics purchased with proceeds of the note. As of June 30, 2018, the obligation outstanding
is $16,025.
The
Company issued a $100,000 promissory note dated December 7, 2017 to accredited investor which matures March 7, 2018 and has an
annual rate of interest at 24%. Both principal and interest is due at maturity. The promissory note ranks senior to all obligations
not designated as a primary obligation by the Company. As an inducement to issue the promissory note, the Company granted the
holder warrants to acquire 20,833 shares of the Company’s common stock. The warrant has an exercise price of $2.40 per underlying
common share and are exercisable for 2 years from the anniversary date of issuance (see Note 6). This obligation fully repaid
on March 28, 2018.
The
Company issued a $100,000 promissory note dated December 1, 2017 to accredited investor which matures March 1, 2018 and has an
annual rate of interest at 24%. Both principal and interest is due at maturity. The promissory note ranks senior to all obligations
not designated as a primary obligation by the Company. As an inducement to issue the promissory note, the Company granted the
holder warrants to acquire 20,833 shares of the Company’s common stock. The warrant has an exercise price of $2.40 per underlying
common share and are exercisable for 2 years from the anniversary date of issuance (see Note 6). On March 1, 2018, pursuant to
the First Amendment to Loan Agreement and Promissory note, the parties agreed to extend the note for one more year which includes
the following terms; (1) interest payment of $6,000 due from the original note is to be paid (2) interest rate decreases from
an annual rate of 24% to 8% (3) the Company has the right to prepay the note combined with accrued interest at any time prior
to maturity (4) the lender has the right to call the note together with accrued interest not less than 30 days written
notice to the Company (5) at any time prior to maturity of the note, lender has the option to convert the indebtedness with accrued
interest into the Company’s common stock at the rate of $2.40 a share. At issuance, the Company determined that there was
no beneficial conversion feature.
In
February 2018, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $252,445. The note bears an annual interest rate of 5.75% and requires the Company to make ten monthly
payments of $22,105 over the term of the note. As of June 30, 2018, the obligation outstanding is $132,629.
Effective
March 2, 2018, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $14,390. The note bears an annual interest rate of 5.75% and requires the Company to make ten monthly
payments of $904 over the term of the note. As of June 30, 2018, the obligation outstanding is $5,423.
Effective
May 24, 2018, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $13,400. The note bears an annual interest rate of 8.49% and requires the Company to make ten monthly
payments of $1,234 over the term of the note. As of June 30, 2018, the obligation outstanding is $9,874.
Effective
April 29, 2018, the Company entered into a 36-month premium finance agreement in consideration for a John Deere Gator Tractor
in the principal amount of $15,710. The note bears no annual interest rate and requires the Company to make thirty-six monthly
payments of $442 over the term of the note. As of June 30, 2018, the obligation outstanding is $15,044.
Effective
May 29, 2018, the Company entered into a 24-month premium finance agreement in consideration for a MT85 wide track loader in the
principal amount of $27,844.00. The note bears no annual interest rate and requires the Company to make 24 monthly payments of
$1,160 over the term of the note. As of June 30, 2018, the obligation outstanding is $26,684.
The
Company issued eight senior convertible debentures totaling $1,500,000 executed in May and June of 2018 to accredited investors
which matures May 2019 and has an annual rate of interest at 8%. Accrued interest is payable quarterly in arrears on the fifth
day of each calendar quarter. Interest is payable either in cash or in common shares of the Company based on the average closing
price of the Company’s common shares for the 20 trading days prior to the payment date. The principal shall be payable at
the earlier to occur of: 1) five days after the company has received in aggregate at least five million of new equity investment
since the date of this debenture; or 2) the maturity date. The debenture ranks senior to all obligations not designated as a primary
obligation by the Company. At any time prior to maturity of the note, the holder has the option to convert the indebtedness with
accrued interest into the Company’s common stock at the rate of $2.50 a share. At issuance, the Company determined that
there was no beneficial conversion feature.
Mortgages
payable
On January 16, 2018 the
Company consummated a “Contract for Sale” for a Farm Property in Mulino OR (the “Mulino Property”). The
purchase price was $1,700,000 which was reduced by a rental credit of approximately $135,000 which is equivalent to nine months’
rent at $15,000 a month and an additional credit of $9,500 for additional work done on the property. In connection with the purchase
of the property, the Company made a cash payment as down payment plus payment of closing costs in the amount of $370,637 and issued
a promissory note in the amount of $1,200,000 with a maturity of January 2020. The Company will pay monthly installments of principal
and interest (at a rate of 2% per annum) in the amount of $13,500, commencing in July 2018 through the maturity date (January
2020), at which time the entire unpaid principal balance and any remaining accrued interest shall be due and payable in full.
The note is secured by a deed of trust on the property.
On
February 28, 2018, the Company executed a $550,000 mortgage payable on the Willamette property to acquire additional funds. The
mortgage bears interest at 15% per annum. Monthly interest only payments began March 1, 2018 and continue each month thereafter
until paid. The entire unpaid balance is due on March 1, 2020, the maturity date of the mortgage, and is secured by the underlying
property. The mortgage terms do not allow participations by the lender in either the appreciation in the fair value of the mortgaged
real estate project or the results of operations of the mortgaged real estate project. For the nine months ended June 30, 2018,
interest expense related to this mortgage amounted to $27,500. The note has been cross guaranteed by the CEO and Director of the
Company.
On
April 4, 2018, the Company executed a $314,000 mortgage payable on the Powell property to acquire additional funds. The mortgage
bears interest at 15% per annum. Monthly interest only payments began May 1, 2018 and continue each month thereafter until paid.
The entire unpaid balance is due on April 1, 2020, the maturity date of the mortgage, and is secured by the underlying property.
The mortgage terms do not allow participations by the lender in either the appreciation in the fair value of the mortgaged real
estate project or the results of operations of the mortgaged real estate project. For the nine months ended June 30, 2018, interest
expense related to this mortgage amounted to $ 7,850. The note has been cross guaranteed by the CEO and Director of the Company.
Preferred
shares
The
Company has no preferred shares issued and outstanding as of June 30, 2018.
Common
shares
The
holders of common shares are not entitled to receive dividends at this time, however, are entitled to one vote per share at meetings
of the Company. The Company received subscriptions in private placement offerings completed for the following shares for the nine
months ended June 30, 2018:
●
For the nine months ended June 30, 2018, 2,749,387 common shares were issued at $2.40 per share to unaffiliated investors raising
gross cash proceeds (including collection of $100,000 subscription receivable) of $6,620,940. 10,417 shares of common stock were
issuable as of June 30, 2018.
●
During the nine months ended June 30, 2018, the Company began the process of registering shares of common stock for trading under
the securities laws of Canada. As part of that process, certain founders were notified that they had to contribute additional
amounts for their shares. In the nine months ended June 30, 2018, two founders contributed an additional $9,933 towards their
founders shares as part of the requirements of the securities regulators of Canada.
Subscription
receivable
On
September 27, 2017, the Company received a subscription for 41,667 shares in the amount of $100,000. The funds were received by
the Company in October 2017.
Option
Issuances for compensation:
During
the nine months ended June 30, 2018, the Company entered into several employment agreements, and as part of these agreements agreed
to issue a total of 1,650,416 options to purchase the common stock of the Company, with an exercise price of $2.40 per share and
terms ranging between 3 to 4 years. Pursuant to these agreements, 1,487,953 options have vested as of June 30, 2018. In total,
the Company recorded employee compensation option expense of $2,658,598 as a result of these options in the nine months ended
June 30, 2018.
During
the nine months ended June 30, 2018, the Company entered into certain consulting agreements, and as part of that agreement for
professional services, agreed to issue a total of 235,000 options to purchase the common stock of the Company, with all options
having an exercise price of $2.40 per share and a term of 4 years. Pursuant to the agreements, 138,125 options have vested as
of June 30, 2018. In total, the Company recorded option-based consulting expense of $893,339 as a result of these options and
options issued to consultants in the fiscal year ended September 30, 2017 in the nine months ended June 30, 2018.
The
significant assumptions used to value the options granted in the nine months ended June 30, 2018 are as follows:
Fair
value of underlying common shares
|
|
$
|
2.40
|
|
Exercise
price
|
|
$
|
2.40
|
|
Dividend
yield
|
|
|
0.0
|
%
|
Historical
volatility
|
|
|
176.7%
to
110.20
|
%
|
Risk
free interest rate
|
|
|
2.0%
to
2.9
|
%
|
Common
Stock issuances for compensation:
The
grant date for all of the issuances noted below were prior to the Company’s common stock opening for trading on the Over-The-Counter
bulletin board market. The Company therefore used the price received in its private placements of $2.40 per share to determine
the fair value of the shares issued.
During
the nine months ended June 30, 2018, the Company entered into several consulting agreements, and as part of these agreements agreed
to issue a total of 195,000 shares of common stock at $2.40 per share in payment for consulting services provided to the Company.
In total, the Company recorded stock-based consulting expense of $178,000 and a prepaid consulting expense of $290,000 in the
nine months ended June 30, 2018.
During
the nine months ended June 30, 2018, as part of two employment contracts, the Company agreed to issue a total of 650,000 shares
of common stock at $2.40 per share to two employees for professional services provided. In total, the Company recorded stock-based
compensation expense of $1,255,000 and prepaid officer compensation of $330,000.
Warrants
The
fair values of the warrants granted during the term of the agreement in connection with promissory notes issued (see Note 5) were
determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
Fair
value of underlying common shares
|
|
$
|
2.40
|
|
Risk-free
interest rate:
|
|
|
5.00
|
%
|
Expected
term:
|
|
|
4
years
|
|
Expected
dividend yield:
|
|
|
0.00
|
%
|
Expected
volatility:
|
|
|
126.6
|
%
|
The
valuation of the warrants was $92,499 which has been recorded as a debt discount and is being amortized over the life of the loans
on a straight-line basis to interest expense. As of June 30, 2018, $0 remained unamortized.
7.
|
Commitments
and contingencies
|
In
July 2016, the Company entered into a 10-year lease for a commercial building from an unrelated third party in Springfield, Oregon.
At the time the original lease was entered into, the Company had expected to close on significant subscriptions from its private
placement. However, when those did not immediately materialize, the Company entered into an agreement with the landlord to cancel
the lease and in addition, paid the landlord $15,000 not to rent out the property until such time the Company could enter into
a new lease. In September 2016, the Company entered into a new 10-year lease with the landlord that commenced in November 2016.
The lease requires the Company to pay a base rental fee of $7,033 plus an additional estimated $315 per month in real estate taxes
in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance
and utilities are included at the end of each year as a one-time payment. In addition, the Company also remitted $14,000 for a
security deposit to the landlord. No amounts have been recorded for deferred rent in these financial statements as the amount
was deemed immaterial by the Company. The Company has subleased this space pursuant to a 10-year lease. On February 22, 2018,
both parties executed a lease addendum that adds contiguous property for 12,322 square feet. The term commences November 1, 2017
and continues through November 31, 2026 at a rate of $3,525 a month that escalates 3% per year.
In
August 2016, the Company and certain shareholders of the Company entered into a “Multi Party” Agreement, in which
the Company became obligated to lease or acquire three separate real estate assets, and separately, if certain events occur, additional
real estate assets held by entities related to those shareholders. The Agreement also gives the Company the right of first refusal
in regards to certain properties owned by the persons and entities affiliated with the parties of the Agreement so long as certain
targets are met.
Should
the Company obtain in excess of $10,000,000 through a combination of its private placements and its merger with Patch Holdings,
Inc. (see Note 5), it is required to purchase certain real estate properties owned by entities affiliated with certain of its
shareholders. In addition, if the Company obtains in excess of $13 million through a combination of private placements and its
merger with Patch Holdings, Inc., the cannabis affiliates become obligated to purchase preferred stock of the Company in an amount
equivalent to 50% of their post-tax net operating income.
Certain
shareholders of the Company have organized entities that operate directly in the cannabis industry, and the Company leases its
properties to these entities. The Multi Party Agreement also requires that in the event that Stem has fully satisfied all of its
obligations pursuant to the Multi Party Agreement, Stem shall have the obligation to acquire the related party entities that are
operating within the Stem leased facilities. The agreements to acquire those related entities and issue such equity that the shareholders
of the related entities obtain 75% of the then issued and outstanding equity of the Company, regardless of the profitability or
financial condition of the related entities at the time of their acquisition.
In
February 2017, the Company entered into an advisory agreement with an unrelated third party with a term of 12 months. As part
of that agreement, the third party agreed to provide assistance for the Company with respect to eligibility for becoming quoted
on the OTCQB/OTCQX and advising and assisting the Company in complying with its ongoing OTCQB/OTCQX disclosure obligation under
current federal and state securities laws. These services to the Company are exchanged for a $10,000 upfront payment, and $5,000
payment upon the acceptance on OTCQB/OTCQX. On May 21, 2018, payment was tendered and contract terminates as services were completed.
In
November 2017, the Company entered into a consulting agreement with an unrelated third party with a term of 12 months. As part
of that agreement, the third party agreed to provide assistance for the Company with respect to business affairs relating to business
consolidations and financing. As consideration for these services, the Company has agreed to issue to the consultant options to
acquire up to 100,000 shares of common stock of the Company.
In
March 2018, the Company entered into a 3-year lease for the occupancy of the Company’s corporate office located in Boca
Raton, Florida. The lease requires the Company to pay a base rental fee of $3,024 per month. All taxes, maintenance and utilities
are billed separately. In addition, the Company also remitted $6,048 or a security deposit to the landlord. The landlord provided
the Company with 2 free months.
Property
Rental Agreements
1027
Willamette
In
July 2017, the Company entered into an operating lease agreement with a marijuana dispensary (the “Lessee”) to move
into the Company’s acquired property located at 1027 Willamette Street in Eugene, Oregon. The lease agreement is for a base
term of ten years (see note below) and a monthly rent obligation of $13,800, subject to annual increases of 3% per year, plus
an amount for additional rent based on final buildout costs incurred by the Company. The lease is a double net lease with maintenance
and real property taxes to be paid by the Tenant and insurance costs paid by the Company. The Company provided the tenant with
one month of free rent. Upon the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for
one five-year term, on the same terms as provided in the lease agreement.
Springfield
Suites
In
July 2017, the Company entered into a lease agreement for its property and warehouse building located at 800 N 42
nd
street in Springfield, Oregon. The lease agreement is for a term of ten years (see note below) and a monthly rent obligation of
$64,640, subject to annual increases of 3% per year plus an amount for additional rent based on final buildout costs incurred
by the Company. The lease is a double net lease with maintenance and real property taxes to be paid by the Tenant and insurance
costs paid by the Company. Rent payments commence on the date the growing season ends, which the Company currently estimates will
occur in September 2018, and thus expects payments to begin in October 2018. The Company has treated this period as a free rental
period for accounting purposes.
Upon
the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same
terms as provided in the lease agreement.
14336
S. Union Hall Road, Mulino
In
July 2017, the Company entered into a lease agreement for its property located at 14336 South Union Hall Road in Mulino, Oregon.
The lease agreement is for a term of ten years (see note below) and a monthly rent obligation of $18,750, subject to annual increases
of 3% per year plus an amount for additional rent based on final buildout costs incurred by the Company. The lease is a double
net lease with maintenance and real property taxes shall be paid by the Tenant and insurance costs paid by the Company. Rent payments
will begin at the of the first growing season, which the Company currently estimates will occur in September 2018, and thus payments
will commence in October 2018. The Company expects to treat such period as a free rental period for accounting purposes. At the
time rental payments begin, the total of base rent and additional rent will not be less than $1.00 per foot for light assisted
greenhouse and $.25 per usable square foot for un-light assisted greenhouse or outdoor grow space.
Upon
the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same
terms as provided in the lease agreement.
7827
SE Powell
In
July 2017, the Company entered into a lease agreement for its acquired property located at 7827 SE Powell Blvd. in Portland, Oregon.
The lease agreement is for a term of ten years and a monthly rent obligation of $6,523, subject to annual increases of 3% per
year. Maintenance and real property taxes shall be paid by the Tenant and insurance paid by the Company. Additional rents will
be added to pay landlord back for tenant improvements by the end of the first term of the lease, payments will include annual
interest at 12% compounded monthly. Rent payments commence on the date the growing season ends, which the Company currently estimates
will occur in October 2018, and thus expects payments to begin in November 2018. The Company has treated this period as a free
rental period for accounting purposes.
Upon
the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same
terms as provided in the lease agreement.
During
the nine months ended June 30, 2018, the Company incurred total rent expense of $169,573. As of June 30, 2018, the Company has
recorded a long-term asset for the straight lining of rent under the rental leases to the cannabis operators of approximately
$1,149,012.
Potential
Acquisition
In
the period ended June 30, 2018, the Company has entered into a non-binding letter of intent to acquire an Oregon entity. As of
the date of these financial statements, the Company is currently negotiating the terms of the sale. The Company has transferred
$375,000 to a refundable escrow account held by its corporate counsel while it works through the terms of the transactions. As
of the date of these financial statements, the transaction is not yet probable of being consummated.
8.
|
Investment
in equity method investee
|
In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment
to contribute $1.275 million to NVD. As of June 30, 2018, the Company had funded approximately $799,000 of these proceeds and
has recorded the amount as its investment in equity method investee on the balance sheet. NVD used the funds provided to date
by the Company to acquire an under- construction cannabis indoor grow building and to continue the buildout of the property. The
Company has no further commitment to fund the entity beyond its initial equity purchase commitment. NVD intends to lease the property
upon its buildout completion to an entity that the Company expects to acquire within its Opco, LLC subsidiary. Should the Company
complete that acquisition it will no longer hold 100% of the membership interests in Opco, LLC.
For
the period from acquisition through June 30, 2018, NVD had only minimal operations, which were not apportioned to these financials
statements as of June 30, 2018 due to immateriality.
Subsequent
to June 30, 2018, and up to the date of this filing, we have raised $40,000 as part of our continuing private placement at $2.40
per share.
As
of July 1, 2018, the Company entered into a consulting agreement with an unrelated third party with a term of 12 months. As part
of that agreement, the third party agreed to provide assistance for the Company with respect to business affairs relating to business
consolidations and financing. As consideration for these services, the Company has agreed to issue to the consultant warrants
to acquire 20,000 shares of common stock of the Company.
July
16, 2018, the Company is began trading its common stock under the ticker symbol “STEM” on the Canadian Securities
Exchange (the “
CSE
”).
On
July 13, 2018, a meeting of the stockholders of the Company took place, and the stockholders adopted a resolution authorizing
the Board of Directors, in its sole discretion, to amend the Company’s Articles of Incorporation to increase the number
of authorized shares of Company Common Stock from 100,000,000 to 300,000,000.
Subsequent
to June 30, 2018, the Company incorporated two additional subsidiaries, Stem Holdings Oregon Inc. and Stem Holdings IP Inc.