NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Incorporation and Operations and Going Concern
Stem
Holdings, Inc. (“Stem” or the “Company”) is a Nevada corporation incorporated on June 7, 2016. The Company
is a multi-state, vertically integrated, cannabis company that purchases, improves, leases, operates and invests in properties
for use in the production, distribution and sales of cannabis and cannabis-infused products licensed under the laws of the states
of Oregon, Nevada, California and Oklahoma. As of June 30, 2020, Stem had ownership interests in 26 state issued cannabis licenses
including nine (6) licenses for cannabis cultivation, three (3) licenses for cannabis production, five (5) licenses for cannabis
processing, one (1) license for cannabis wholesale distribution, one (1) license for hemp production and ten (10) cannabis dispensary
licenses.
Stem’s
partner consumer brands are award-winning and nationally known, and include cultivators, TJ’s Gardens, Travis X James, and
Yerba Buena; retail brands, Stem and TJ’s; infused product manufacturers, Cannavore and Supernatural Honey; and a CBD company,
Dose-ology. As of June 30, 2020, the Company has acquired nine commercial properties and leased a seventh property, located in
Oregon and Nevada, and has entered into leases to related entities for these properties (see Note 15). As of June 30, 2020, the
buildout of these properties to support cannabis related operations was either complete or near completion.
The
Company has incorporated nine wholly-owned subsidiaries –Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC,
Stem Agri, LLC., Stem Group Oklahoma, Inc. and Stem Holdings Florida, Inc. Stem, through its subsidiaries, is currently in the
process of finalizing the investment in and acquisition of entities that engage directly in the production and sale of cannabis,
thereby transitioning from a real estate company, with a focus on cannabis industry tenants, to a vertically integrated, multi-state
cannabis operating company.
The
Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the symbol “STEM”
and the OTCQX under the symbol “STMH”.
Going
Concern
As
of June 30, 2020, the Company had approximate balances of cash and cash equivalents of $1.9 million, negative working capital
of $8.5 million, total stockholders’ equity of $26.4 million and an accumulated deficit of $49 million.
These
unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that the Company
will be able to realize its assets and discharge its liabilities in the normal course of business.
While
the recreational use of cannabis is legal under the laws of certain States, where the Company has and is working towards further
finalizing the acquisition of entities or investment in entities that directly produce or sell cannabis, the use and possession
of cannabis is illegal under United States Federal law for any purpose, by way of Title II of the Comprehensive Drug Abuse Prevention
and Control Act of 1970, otherwise known as the Controlled Substances Act of 1970 (the “ACT”). Cannabis is currently
included under Schedule 1 of the Act, making it illegal to cultivate, sell or otherwise possess in the United States.
On
January 4, 2018, the office of the Attorney General published a memo regarding cannabis enforcement that rescinds directives promulgated
under former President Obama that eased federal enforcement. In a January 8, 2018 memo, Jefferson B. Sessions, then Attorney General
of the United States, indicated enforcement decisions will be left up to the U.S. Attorney’s in their respective states
clearly indicating that the burden is with “federal prosecutors deciding which cases to prosecute by weighing all relevant
considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent
effect of federal prosecution, and the cumulative impact of particular crimes on the community.” Subsequently, in April
2018, President Trump promised to support congressional efforts to protect states that have legalized the cultivation, sale
and possession of cannabis, however, a bill has not yet been finalized in order to implement legislation that would, in effect,
make clear the federal government cannot interfere with states that have voted to legalize cannabis. Further in December 2018,
the US Congress passed legislation, which the President signed on December 20, 2018, removing hemp from being included with Cannabis
in Schedule I of the Act.
In
December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to a number
of other countries, including the United States. On June 11, 2020, the World Health Organization characterized COVID-19 as a pandemic.
In addition, as of the time of the filing of this Annual Report on Form 10-K, several states in the United States have declared
states of emergency, and several countries around the world, including the United States, have taken steps to restrict travel.
The existence of a worldwide pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments in
response to COVID-19, or any, pandemic, to regulate the flow of labor and products and impede the travel of personnel, may impact
our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity. Disruptions
to our supply chain and business operations disruptions to our retail operations and ou9r ability to collect rent from the properties
which we own, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products,
any of which could have adverse ripple effects throughout our business. If we need to close any of our facilities or a critical
number of our employees become too ill to work, our production ability could be materially adversely affected in a rapid manner.
Similarly, if our customers experience adverse consequences due to COVID-19, or any other, pandemic, demand for our products could
also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social,
economic, and labor instability in the markets in which we operate. Any of these uncertainties could have a material adverse effect
on our business, financial condition or results of operations.
These
conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Should the United States
Federal Government choose to begin enforcement of the provisions under the Act, the Company through its wholly owned subsidiaries
could be prosecuted under the Act and the Company may have to immediately cease operations and/or be liquidated upon their closing
of the acquisition or investment in entities that engage directly in the production and or sale of cannabis.
Management
believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities.
However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures
to reduce costs, including reducing its workforce, eliminating outside consultants and reducing legal fees to conserve its cash
in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments
that might become necessary should the Company be unable to continue as a going concern.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The unaudited 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, 2020
or for any other period. Certain information and footnote disclosures normally included in the financial statements prepared in
accordance with GAAP 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 amended
Form 10-K for the fiscal year ended September 30, 2019 filed on March 19, 2020. The Company believes that the disclosures
are adequate to make the interim information presented not misleading.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The most
significant estimates included in these condensed consolidated financial statements are those associated with the assumptions
used to value equity instruments, derivative liabilities and valuation of its long live assets for
impairment testing. These estimates and assumptions are based on current facts, historical experience and various other
factors believed to be reasonable given the circumstances that exist at the time the financial statements are prepared.
Actual results may differ materially and adversely from these estimates. To the extent there are material differences between
the estimates and actual results, the Company’s future results of operations will be affected.
Principals
of Consolidation
The
Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock.
In addition, the Company consolidates entities that meet the definition of a variable interest entity (“VIE”) for
which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE
that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity
or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities
that are less than wholly owned, the third party’s holding of equity interest is presented as noncontrolling interests in
the Company’s condensed consolidated balance sheets and condensed consolidated statements of changes in stockholders’
equity. The portion of net loss attributable to the noncontrolling interests is presented as net loss attributable to noncontrolling
interests in the Company’s condensed consolidated statements of operations.
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 regard to certain properties
owned by the persons and entities affiliated with the parties of the Agreement so long as certain targets are met. In the quarter
ended June 30, 2019, the Company issued 12,500,000 shares of its common stock (shares are held in escrow) as it is currently attempting
to acquire the set of entities that include Consolidated Ventures of Oregon, LLC (“CVO”) and Opco Holdings, LLC (“Opco”)
which comprise the entities within the Multi Party Agreement. In addition, the Company is also currently negotiation with the
owners of certain properties contained within the Multi Party Agreement. The Company and owners of CVO and Opco have finalized
their agreements, and are waiting for regulatory approval to transfer certain licenses, which has not yet occurred as of the date
of this filing, or the date of these consolidated financial statements, however, the Company does believe it will complete the
acquisition in the current calendar year. Should the acquisition be completed, the Company will no longer be engaged primarily
in property rental operations, but will take over the operations of its primary renters, which is the cultivation, production
and sale of cannabis and related productions. Because CVO and Opco are related to the Company, should the acquisition occur, it
will not be accounted for as a business combination at fair value under the codification sections of ASC 805. The assets and liabilities
will transfer at their historical cost and the company will include the operations of CVO and Opco for all periods presented.
The Company has therefore recorded the par value of the shares issued of $12,500 as of September 30, 2019. As of September 30,
2019, the Company has consolidated the entities with the Opco Holdings Group. As of June 30, 2020, the Company has consolidated
the entities within the CVO group as it has determined that they are now material.
The
accompanying unaudited condensed consolidated financial statements include the accounts of Stem Holdings, Inc. and its wholly-owned
subsidiaries, Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri, LLC., Stem Group Oklahoma, Inc, Stem Holdings
Florida, Inc. (what about foothills, SAV and WCV) In addition, the Company has consolidated YMY Ventures, LLC, NVDRE, Inc.,
Opco Holdings, Inc. and its subsidiaries and CVO and its subsidiaries under the variable interest requirements. All material
intercompany accounts, transactions, and profits have been eliminated in consolidation.
Loss
per Share
ASC
260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Basic
net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares
of common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive.
Since the Company has only incurred losses, basic and diluted net loss per share is the same. Securities that could potentially
dilute loss per share in the future that were not included in the computation of diluted loss per share at June 30, 2020 is as
follows:
Convertible notes
|
|
|
3,924,075
|
|
Options to purchase common stock
|
|
|
4,747,916
|
|
Unvested restricted stock awards
|
|
|
1,392,922
|
|
Warrants to purchase common stock
|
|
|
4,564,733
|
|
|
|
|
14,629,646
|
|
Revenue
Recognition
The
Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with
Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it
is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is
determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines
those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes
as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.
Revenue
for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at
contract inception, that the period between when the Company’s transfers control of the product and when the Company receives
payment will be one year or less. Product shipping and handling costs are included in cost of product sales.
Effective
October 1, 2019, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective
method. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues
related to wholesale and retail revenue are recorded upon transfer of merchandise to the customer, which was the effective policy
under ASC 605 previously.
The
following policies reflect specific criteria for the various revenue streams of the Company:
Revenue
is recognized upon transfer of retail merchandise to the customer upon sale transaction.
The
Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale)
there are essentially no returns allowed or warranty available to the customer under the various state laws.
Revenue
related to wholesale products is recognized upon receipt by the customer.
Disaggregation
of Revenue
In
the three and nine months ended June 30, 2019, the Company’s revenue was primarily rental of land, buildings and improvements
in nature, and governed primarily under ASC 840. In the three and nine months ended June 30, 2020, all of the Company’s
rental revenue is eliminated upon consolidation, and the revenue reported is primarily from the sale of cannabis and related products
accounted for under ASC 606.
The
following table illustrates our revenue by type related to the three months ended June 30, 2020 and 2019:
Three Months Ended June 30,
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,595
|
|
|
$
|
-
|
|
Retail
|
|
|
5,072
|
|
|
|
-
|
|
Rental
|
|
|
11
|
|
|
|
361
|
|
Other
|
|
|
18
|
|
|
|
260
|
|
Total revenue
|
|
|
6,696
|
|
|
|
621
|
|
Discounts and returns
|
|
|
1,498
|
|
|
|
-
|
|
Net Revenue
|
|
$
|
5,198
|
|
|
$
|
621
|
|
The
following table illustrates our revenue by type related to the nine months ended June 30, 2020 and 2019:
Nine Months Ended June 30,
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
2,903
|
|
|
$
|
-
|
|
Retail
|
|
|
7,366
|
|
|
|
-
|
|
Rental
|
|
|
26
|
|
|
|
1,053
|
|
Other
|
|
|
20
|
|
|
|
261
|
|
Total revenue
|
|
|
10,315
|
|
|
|
1,314
|
|
Discounts and returns
|
|
|
1,498
|
|
|
|
-
|
|
Net Revenue
|
|
$
|
8,817
|
|
|
$
|
1,314
|
|
Recent
Accounting Guidance
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU
2018-07”). ASU 2018-07 expands the guidance in Topic 718 to include share-based payments for goods and services to non-employees
and generally aligns it with the guidance for share-based payments to employees. The amendments are effective for fiscal years
beginning after December 15, 2018, including interim periods within that fiscal year. The Company’s adoption of this standard
on October 1, 2019 did not have a material impact on the Company’s condensed consolidated financial condition or results
of operations.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides companies with
a single model for use in accounting for revenue arising from contracts with customers and will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective, including industry-specific revenue guidance. The standard
specifically excludes lease contracts. The ASU allows for the use of either the full or modified retrospective transition
method and will be effective for the Company on October 1, 2019, at which time the Company expects to adopt the updated
standard using the modified retrospective approach. The financial information included in the Company’s 2020 Form 10-K
will be updated for the October 1, 2019 adoption date; this new guidance will be reflected for the first time in the
Company’s 2020 Form 10-K but effective as of October 1, 2019 in that filing. However, the Company will continue to
account for revenue recognition under ASC Topic 605 for interim periods in 2020 and will not be required to amend its Form
10-Q filings filed throughout 2020 to reflect the October 1, 2019 adoption date. The guidance allows for the use of one of
two retrospective application methods: the full retrospective method or the modified retrospective method. The Company
adopted the standard in fiscal year 2020 using the modified retrospective method. The adoption
of the standard did not have a material impact on the recognition of revenue.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and
requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have
a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar
to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods
but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required
to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable
period presented, with an option to elect certain transition relief. Full retrospective application is prohibited. The standard
will be effective for the Company on October 1, 2020; however, early adoption of the ASU is permitted. The Company is still finalizing
its analysis but expects to recognize additional operating liabilities of approximately $1.3 million, with corresponding ROU assets
of approximately the same amount as of October 1, 2020 based on the present value of the remaining lease payments.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”). ASU 2016-13 provides guidance for recognizing credit losses on financial
instruments based on an estimate of current expected credit losses model. The amendments are effective for fiscal years beginning
after December 15, 2019. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar
year 2023. The Company is currently assessing the impact of the adoption of this ASU on its financial statements.
3.
Property, Plant & Equipment
Property
and equipment consist of the following (in thousands):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,451
|
|
|
$
|
1,451
|
|
Automobiles
|
|
|
61
|
|
|
|
61
|
|
Signage
|
|
|
19
|
|
|
|
19
|
|
Furniture and equipment
|
|
|
2,291
|
|
|
|
2,125
|
|
Leasehold improvements
|
|
|
3,306
|
|
|
|
3,197
|
|
Buildings and property improvements
|
|
|
12,628
|
|
|
|
9,719
|
|
Computer software
|
|
|
59
|
|
|
|
59
|
|
|
|
|
19,815
|
|
|
|
16,631
|
|
Accumulated depreciation
|
|
|
(3,195
|
)
|
|
|
(1,925
|
)
|
Property and equipment, net
|
|
$
|
16,620
|
|
|
$
|
14,706
|
|
Depreciation
and amortization expense was approximately $0.5 million and $1.3 million for the three and nine months ended June
30, 2020.
Depreciation
and amortization expense was approximately $0.2 million and $0.7 million for the three and nine months ended June 30, 2019.
4.
Inventory
Inventory
consists of the following (in thousands):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
844
|
|
|
$
|
169
|
|
Work-in-progress
|
|
|
129
|
|
|
|
42
|
|
Finished goods
|
|
|
380
|
|
|
|
400
|
|
Total Inventory
|
|
$
|
1,353
|
|
|
$
|
611
|
|
The
Company’s inventory is related to twelve subsidiaries of which seven are consolidated because of their VIE
status, four are wholly owned by the Company and one subsidiary that is 50% owned by the Company. Raw materials and
work-in-progress include the costs incurred for cultivation materials and live plants. Finished goods consists of cannabis
products ready to be sold. There was no inventory reserve as of June 30, 2020 and September 30, 2019.
5.
Asset Acquisitions
November
1, 2019, the Company received 100.0% interest in Empire Holdings, LLC (“EH”). EH leases its facilities to Kind Care,
LLC. The Company purchased the property for $500,000 less the lien amount of $105,732 paid in kind and issued 394,270 shares of
its common stock in satisfaction of the purchase price.
For
the period ended June 2020, the Company acquired Seven Leaf Ventures Corp. (“7LV”), a private Alberta corporation,
and its subsidiaries, pursuant to the terms of a share purchase agreement dated March 6, 2020. 7LV owns Foothills Health and Wellness,
a medical dispensary, in the greater Sacramento, California area. In connection with the acquisition, the Company issued 11,999,008
shares of common stock to former shareholders of 7LV (“7LV Shares”). The Company issued an aggregate 682,000 shares
and replaced 10% unsecured convertible debentures in the aggregate principal amount of C4,571,170 ($3,410,000 USD) (the “Replacement
Debentures”), convertible into shares at a conversion price of C$1.67 per share at any time prior to May 3, 2021, to former
holders of unsecured convertible debentures of 7LV. As part of the Acquisition, the Company assumed the obligations of 7LV with
respect to the common share purchase warrants of 7LV outstanding on the closing of the acquisition, subject to appropriate adjustments
to reflect the exchange ratio. Accordingly, the Company has assumed 1,022,915 common share purchase warrants (the “Warrants”),
exercisable into shares at an exercise price of C$2.08 per share at any time prior to May 3, 2021, 299,975 Warrants, exercisable
into shares at an exercise price of C$4.17 per share at any time prior to December 30, 2020 and 999,923 Warrants, exercisable
into shares at an exercise price of C$0.50 at any time prior to October 10, 2020. Following the completion of the acquisition,
7LV is now a wholly-owned subsidiary of the Company. Certain shareholders of 7LV, who collectively held approximately 74.5% of
the 7LV Shares outstanding at the closing of the acquisition, have agreed to a contractual lock-up pursuant to which such shareholders
will not transfer 25% of the Company’s shares received as part of the acquisition until approximately 90 days following
the acquisition by 7LV of the Sacramento California Dispensary.
With
respect to the $3,410 of convertible debt acquired in the acquisition noted above, the Company agreed to issue to the Seven Leaf
debenture holders a First Supplemental Indenture dated March 6, 2020. This instrument is entered into for the purpose of providing
for the issue of additional debentures in an initial aggregate principal amount of $3,410 designated as 10 percent unsecured convertible
debentures under the indenture and establishing the terms, provisions, and conditions of the 10 percent debentures.
The
table below represents unaudited pro forma revenue and operating loss as if the acquisition of 7LV had occurred in September
2019.
|
|
Nine months ended
June 30, 2020
|
|
|
|
|
|
Revenues
|
|
$
|
5,672
|
|
Operating loss
|
|
$
|
(25,292
|
)
|
The following table presents a preliminary
allocation of the purchase price to the net assets acquired, inclusive of intangible assets, with the excess fair value recorded
to goodwill. The goodwill is not deductible for tax purposes. These estimates are provisional in nature and adjustments
may be recorded in future periods as appraisals and other valuation reviews are finalized. Any necessary adjustments
will be finalized within one year from the date of acquisition (in thousands).
Consideration Paid (in thousands)
|
|
|
|
|
Estimated fair value of common stock issued
|
|
$
|
10,022
|
|
Estimated fair value of warrants issued
|
|
|
653
|
|
Estimated fair value of debt issued
|
|
|
3,410
|
|
Contingent consideration
|
|
|
1,084
|
|
Total consideration paid
|
|
$
|
15,169
|
|
|
|
|
|
|
Assets acquired: (in thousands)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
81
|
|
Accounts Receivable, net
|
|
|
-
|
|
Inventory
|
|
|
131
|
|
Prepaid expenses and other current assets
|
|
|
12
|
|
Goodwill
|
|
|
10,543
|
|
Intangible assets
|
|
|
4,474
|
|
Total assets acquired
|
|
$
|
15,241
|
|
|
|
|
|
|
Liabilities assumed: (in thousands)
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
72
|
|
Total liabilities assumed
|
|
$
|
72
|
|
|
|
|
|
|
Net assets acquired (in thousands)
|
|
$
|
15,169
|
|
As part of the Seven LV acquisition, on
the anniversary date of the closing, the Company shall pay the seller additional consideration for the purchase price not greater
than $1,220,000 based on achieving revenue of $5,000,000 or greater. As of June 30, 2020, the Company has recorded the contingent
liability in the amount of $1,084.
As
of May 2020, the Company entered into a Share Exchange Agreement with the NVDRE shareholders to exchange their shareholdings that
represent 12.5 percent of NVDRE in exchange for the issuance of the Company’s common stock. The exchange amounted to the
issuance of 386,035 shares of the Company’s common stock valued and recorded to investment at $196,000.
6.
Notes Receivable
On
January 4, 2020, the Company issued a $355,000 promissory note to Community Growth Partners Holdings, Inc., (“CGS”).
CGS is a cannabis license holder in Massachusetts. Subject to the terms and conditions of the note, CGS promises to pay the Company
all of the outstanding balance together with interest upon the first to occur of (i) the closing of the initial capital equity
contribution made by the Company in GCS or (ii) the date that is nine months after the opening of the Great Barrington Dispensary
which is planned to open sometime this summer.
On
January 6, 2020, the Company issued a convertible promissory note to Community Growth Partners Holdings, Inc., (“CGS”)
which will act as a line of credit. Subject to the terms and conditions of the note, CGS promises to pay the Company all of the
outstanding principal together with interest on the unpaid principal balance upon the date that is twelve months after the effective
date and shall be payable as follows: (a)The Company agrees to make several loans to CGS from time to time upon request of CGS
in amounts not to exceed the principal sum of $2,000,000, (b) Payment of principal and interest shall be immediately available
funds, (c) This note may be prepaid in whole or in part at any time without premium or penalty. Any partial prepayment shall be
applied against the principal amount outstanding, (d) The unpaid principal amount outstanding under this note shall bear interest
commencing upon the first advance at the rate of 10% per annum through the maturity date, calculated on the basis of a 365-day,
until the entire indebtedness is fully paid, (e) Upon the closing of a $2,000,000 financing by the Company, all of the principal
and interest shall automatically convert into equity shares of CGS at the price obtained by the qualified financing. Balance outstanding
as of June 30, 2020 is approximately $600,000.
On
January 6, 2020, the Company issued a revolving credit promissory note to Community Growth Partners Holdings, Inc., (“CGS”)
which will act as a second line of credit once the convertible prom note is fulfilled. Subject to the terms and conditions of
the note, CGS promises to pay the Company, on the fourth anniversary of the effective date, the lesser of $2,500,000 or the aggregate
unpaid principal balance amount of the loans made by the Company to CGS from time to time in accordance with the terms together
with interest on the unpaid balance.
7.
Non-Controlling Interests
Non-controlling
interests in consolidated entities are as follows (in thousands):
|
|
As of June 30, 2020
|
|
|
|
NCI Equity Share
|
|
|
Net Loss Attributable to NCI
|
|
|
NCI in Consolidated Entities
|
|
|
Non-Controlling Ownership %
|
|
NVD RE Corp.
|
|
$
|
916
|
|
|
$
|
(43
|
)
|
|
$
|
873
|
|
|
|
50.0
|
%
|
Western Coast Ventures, Inc.
|
|
$
|
1,287
|
|
|
|
(192
|
)
|
|
|
1,095
|
|
|
|
49.0
|
%
|
YMY Ventures, Inc.
|
|
$
|
447
|
|
|
|
(231
|
)
|
|
|
216
|
|
|
|
50.0
|
%
|
|
|
$
|
2,650
|
|
|
$
|
(466
|
)
|
|
$
|
2,184
|
|
|
|
|
|
8.
Intangible Assets, net
Intangible
assets as of June 30, 2020 (in thousands):
|
|
Estimated Useful Life
|
|
|
Cannabis Licenses
|
|
|
Tradename
|
|
|
Customer Relationship
|
|
|
Non-compete
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Balance as September 30, 2019
|
|
|
|
|
|
$
|
5,814
|
|
|
$
|
147
|
|
|
$
|
135
|
|
|
$
|
220
|
|
|
$
|
-
|
|
|
$
|
6,316
|
|
YMY Ventures (1)
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(38
|
)
|
|
|
(38
|
)
|
Western Coast Ventures, Inc. (1)
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(122
|
)
|
|
|
(122
|
)
|
Yerba Buena
|
|
|
3-15 years
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
Foot Hills
|
|
|
15
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
4,376
|
|
Other
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as June 30, 2020
|
|
|
|
|
|
$
|
10,288
|
|
|
$
|
147
|
|
|
$
|
135
|
|
|
$
|
220
|
|
|
$
|
(430
|
)
|
|
$
|
10,360
|
|
(1)
These represent provisional licenses that the Company acquired during the fiscal years ended September 30, 2019 and 2018. Once
these licenses are approved by their respective regulatory bodies, the Company will amortize these cannabis licenses over a 15-year
estimated useful life. Amortization expense for the three and nine months ended June 30, 2020 was $172 and $430, respectively.
9.
Related party
In
the period ended June 30, 2020, the Company was advanced $490 by the parent company of 7LV.
10.
Accounts payable and accrued expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
June 30, 2020
|
|
|
September 30, 2019
|
|
Accounts payable
|
|
$
|
1,663
|
|
|
$
|
707
|
|
Accrued credit cards
|
|
|
38
|
|
|
|
31
|
|
Accrued interest
|
|
|
133
|
|
|
|
106
|
|
Other
|
|
|
393
|
|
|
|
238
|
|
Total Accounts Payable and Accrued Expenses
|
|
$
|
2,226
|
|
|
$
|
1,082
|
|
11.
Notes Payable and Advances
The
following table summarizes the Company’s notes, mortgages, and advances as of June 30, 2020 and September 30,
2019 (in thousands):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Equipment financing
|
|
$
|
30
|
|
|
$
|
33
|
|
Insurance financing
|
|
|
174
|
|
|
|
160
|
|
Mortgages payable
|
|
|
1,259
|
|
|
|
2,191
|
|
Promissory note
|
|
|
1,489
|
|
|
|
1,000
|
|
|
|
$
|
2,952
|
|
|
$
|
3,384
|
|
Acquisition notes payable
|
|
|
679
|
|
|
|
708
|
|
Total notes payable and advances
|
|
$
|
3,631
|
|
|
$
|
4,092
|
|
|
|
|
|
|
|
|
|
|
Long-term mortgages
|
|
|
3,085
|
|
|
|
|
|
Equipment
financing
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. 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, 2020, the obligation has been paid. No amount was recorded for the premium for the non-
interest-bearing feature of the note as it was immaterial.
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-nine monthly
payments of $442 over the term of the note. As of June 30, 2020, the obligation outstanding is $4,425. No amount was recorded
for the premium for the non-interest-bearing feature of the note as it was immaterial. The note is secured by the equipment financed.
November
2017, the Company entered into a promissory note in the amount of $21,749 from a vendor of the Company to finance the acquisition
of a security electronics system in one of its properties. 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. This vendor is currently in a restructuring and is likely to go out of business. As of June, 2019,
the Company has been notified that the vendor holding the note is in bankruptcy and during the year ended September June, 2019,
the Company withheld payment under the note. The obligation remains outstanding at $14,950 as of June 30, 2020.
Upon
acquisition of Yerba Buena on June 24, 2019, the Company assumed the liability of a 2017 tractor with a balance of approximately
$18,000. The note bears no annual interest rate and requires the Company to make monthly payments of $482 over the term of the
note. As of June 30, 2020, the obligation outstanding is $11,056. No amount was recorded for the premium for the non-interest-bearing
feature of the note as it was immaterial. The note is secured by the equipment financed.
Insurance
financing
Effective
July 30, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $63,101. The note bears an annual interest rate of 7.63% and requires the Company to make ten monthly
payments of $4,582 over the term of the note. As of June 30, 2020, the obligation has been paid in full.
Effective
July 30, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $78,900. The note bears an annual interest rate of 7.25% and requires the Company to make ten monthly
payments of $5,756 over the term of the note. As of June 30, 2020, the obligation has been paid in full.
Effective
June 8, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $5,975. The note bears an annual interest rate of 5.75% and requires the Company to make ten monthly payments
of $513 over the term of the note. As of June 30, 2020, the obligation was paid in full.
Effective
May 24, 2019, the Company entered into a 9-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $11,440. The note bears an annual interest rate of 8.7% and requires the Company to make 9 monthly payments
of $1,322 over the term of the note. As of June 30, 2020, the obligation was paid in full.
Effective
December 5, 2019, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $9,490. The note bears an annual interest rate of 8.7% and requires the Company to make 9 monthly payments
of $685 over the term of the note. As of June 30, 2020, the obligation outstanding is $1,369.
Effective
February 7, 2020, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $300,150. The note bears an annual interest rate of 7.46%. The Company paid $60,255 as a down payment
on February 7, 2020, the note requires the Company to make 9 monthly payments of $22,718 over the remaining term of the note.
As of June 30, 2020, the obligation outstanding is $159,024.
Notes
payable
In
July 2018, the Company entered into an agreement to acquire a 25% interest in East Coast Packers LLC (“ECP”) for the
purchase price of $1.5 million, payable in the amount of $500,000 in cash at closing and a note for $1 million. All amounts are
payable to ECP. At the time of closing, ECP was a dormant Florida LLC, but owned a citrus fruit dealer license active for the
2015-2016 growing season. This qualified ECP under newly enacted legislation in the state of Florida to apply for a license to
produce and sell medical cannabis. Until such time as ECP is granted a medical cannabis license, the $500 paid into ECP may only
be expended by ECP in acquiring a medical cannabis license.
In
the period ended June 30, 2020, the Company and ECP agreed to unwind the transaction. The Company returned its membership interest,
the $1 million promissory note was cancelled and the remaining equity method investment of approximately. $236 was written off
to loss from equity method investees on the statement of operations and ECP returned $232 of cash to the Company.
For
the quarter ended June 30, 2020, the Company received loan proceeds of $266,820 pursuant to the Paycheck Protection Program under
the CARES Act. The Loan, which was in the form of a promissory note, dated May 01, 2020, between the Company and Transportation
Alliance Bank as the lender, matures on May 01, 2022 and bears interest at a fixed rate of 1% per annum, payable monthly commencing
in six months. Under the terms of the PPP, the principal may be forgiven if the Loan proceeds are used for qualifying expenses
as described in the CARES Act, such as payroll costs, benefits mortgage interest, rent, and utilities. No assurance can be provided
that the Company will obtain forgiveness of the Loan in whole or in part. In addition, details of the PPP continue to evolve regarding
which companies are qualified to receive loans pursuant to the PPP and on what terms, and the Company may be required to repay
some or all of the Loan due to these changes or different interpretations of the PPP requirements.
The
Promissory Note evidencing the PPP Loan contains customary representations, warranties, and covenants for this type of transaction,
including customary events of default relating to, among other things, payment defaults and breaches of representations and warranties
or other provisions of the Promissory Note. The occurrence of an event of default may result in, among other things, the Company
becoming obligated to repay all amounts outstanding. We continue to evaluate and may still apply for additional programs under
the CARES Act, there is no guarantee that we will meet any eligibility requirements to participate in such programs or, even if
we are able to participate, that such programs will provide meaningful benefit to our business.
For
the quarter ended June 30, 2020, the Company’s related entity received loan proceeds of $245,400 pursuant to the Paycheck
Protection Program under the CARES Act. The Loan, which was in the form of a promissory note, dated June 03, 2020, between the
Company and Coastal States Bank as the lender, matures on June 03, 2022 and bears interest at a fixed rate of 1% per annum, payable
monthly commencing in six months. Under the terms of the PPP, the principal may be forgiven if the Loan proceeds are used for
qualifying expenses as described in the CARES Act, such as payroll costs, benefits mortgage interest, rent, and utilities. No
assurance can be provided that the Company will obtain forgiveness of the Loan in whole or in part. In addition, details of the
PPP continue to evolve regarding which companies are qualified to receive loans pursuant to the PPP and on what terms, and the
Company may be required to repay some or all of the Loan due to these changes or different interpretations of the PPP requirements.
The
Promissory Note evidencing the PPP Loan is entered into subject to guidelines applicable to the program and contains customary
representations, warranties, and covenants for this type of transaction, including customary events of default relating to, among
other things, payment defaults and breaches of representations and warranties or other provisions of the Promissory Note. The
occurrence of an event of default may result in, among other things, the Company becoming obligated to repay all amounts outstanding.
We continue to evaluate and may still apply for additional programs under the CARES Act, there is no guarantee that we will meet
any eligibility requirements to participate in such programs or, even if we are able to participate, that such programs will provide
meaningful benefit to our business.
For
the quarter ended June 30, 2020, the Company’s subsidiary received loan proceeds of $62,500 pursuant to the Paycheck Protection
Program under the CARES Act. The Loan, which was in the form of a promissory note, dated June 25, 2020, between the Company and
First Home Bank as the lender, matures on June 25, 2022 and bears interest at a fixed rate of 1% per annum, payable monthly commencing
in six months. Under the terms of the PPP, the principal may be forgiven if the Loan proceeds are used for qualifying expenses
as described in the CARES Act, such as payroll costs, benefits mortgage interest, rent, and utilities. No assurance can be provided
that the Company will obtain forgiveness of the Loan in whole or in part. In addition, details of the PPP continue to evolve regarding
which companies are qualified to receive loans pursuant to the PPP and on what terms, and the Company may be required to repay
some or all of the Loan due to these changes or different interpretations of the PPP requirements.
The
Promissory Note evidencing the PPP Loan is entered into subject to guidelines applicable to the program and contains customary
representations, warranties, and covenants for this type of transaction, including customary events of default relating to, among
other things, payment defaults and breaches of representations and warranties or other provisions of the Promissory Note. The
occurrence of an event of default may result in, among other things, the Company becoming obligated to repay all amounts outstanding.
We continue to evaluate and may still apply for additional programs under the CARES Act, there is no guarantee that we will meet
any eligibility requirements to participate in such programs or, even if we are able to participate, that such programs will provide
meaningful benefit to our business.
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. No amount was recorded for the premium for the below market rate feature of the note as it was
immaterial. The note is secured by a deed of trust on the property. The Company performed an analysis and determined that the
rate obtained was below market, however, no premium was recorded as the Company determined it was immaterial. At June 30, 2020,
the balance due is $958,500. Currently the Company has received a verbal extension through the next quarter to procure additional
financing on this property to pay off the indebtedness.
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 June 1, 2018 and continue each month thereafter
until paid. The entire unpaid balance is due on June 1, 2020, the maturity date of the mortgage, and is secured by the underlying
property. The Company paid costs of approximately $28,000 to close on the mortgage. The mortgage terms do not allow participation
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. The note has been cross guaranteed by the CEO and Director of the Company. The amount outstanding
was $550,000 under this mortgage. In June 2020, the Company completed a refinance of this mortgage. In the refinance, the Company
entered into a mortgage, secured by the property with an additional personal guaranty of the CEO of the Company, for $700,000
with an annual interest rate of 15%, paid points at closing totaling $42,000 and a maturity date of June 30, 2022
On
April 4, 2018, the Company executed a $304,000 mortgage payable on the Powell property to acquire additional funds. At closing
$75,000 of the proceeds was put into escrow. 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 Company plaid costs of approximately $19,000 to close on the mortgage.
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. The note has been cross guaranteed by the CEO
and Director of the Company. The amount outstanding was $304,000. In January 2020, the Company completed a refinance of this mortgage.
In the refinance, the Company entered into a mortgage, secured by the property with an additional personal guaranty of the CEO
plus an assignment of the right and title in all of CEO’s common shares of the Company as collateral under the mortgage,
for $400,000 with an annual interest rate of 15%, paid points at closing totaling $24,000 and a maturity date of January 30, 2022.
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 which included the purchase price of $600,000 and an additional commitment to pay tenant improvement
costs of $675,000. In the year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The
funds from this mortgage were advanced to the Company. The advance is undocumented, non-interest bearing and due on demand. At
June 30, 2020, the balance due totals $300,000.
For
the period ended June 2020, the Company executed a $1,585,000 mortgage payable on property located in Oregon to acquire additional
funds. The mortgage bears interest at 11.55% per annum. Monthly interest only payments began April 1, 2020 and continue each month
thereafter until paid. The entire unpaid balance is due on April 1, 2023, the maturity date of the mortgage, and is secured by
the underlying property. The Company paid costs of approximately $120,000 to close on the mortgage. The mortgage terms do not
allow participation 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. The note has been cross guaranteed by the CEO and Director of the Company.
For the period ended June 30, 2020, the
Company executed a $400,000 mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at 11.55% per annum. Monthly interest only payments began May 1, 2020 and continue each month thereafter until paid. The entire
unpaid balance is due on April 1, 2022, the maturity date of the mortgage, and is secured by the underlying property. The Company
paid costs of approximately $38,000 to close on the mortgage. The mortgage terms do not allow participation 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. The note has been cross guaranteed by the CEO and Director of the Company.
Acquisition
Notes Payable
In
April 2019, the Company entered into a promissory note with a principal balance of $400,000 related to its acquisition of Yerba
Buena, Oregon LLC. The note was issued on April 8, 2019 and is due on April 8, 2021. The note has a coupon interest rate of 8%.
As of June 30, 2020, the Company has made payments of $28,093 leaving a balance of $371,907 in Short-term liabilities.
In
September 2018, the Company entered into an agreement to acquire 50% of the membership interest of YMY. In connection with this
agreement, the Company recorded a note payable of approximately $300,000. As of June 30, 2020, the Company has not made any payments
related to this note.
Other
Promissory Notes
In
January 2020, the Company issued a promissory note with a principal balance of $500,000 to accredited investors (the “Note
Holders”). The notes mature in July 2020 and has an annual rate of interest of 12%. In connection with the issuance of the
promissory notes, the Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the issuance
date, $0.85 per.
In
January 2020, the Company issued another promissory notes with a principal balance of $500,000 to accredited investors
(the “Note Holders”). The notes mature in October 2020 and has an annual rate of interest of 12%. In connection with
the issuance of the promissory notes, the Company issued the Note Holders 100,000 common stock purchase warrants with a five-year
term from the issuance date, $0.85 per.
12.
Convertible debt
8%
Convertible notes
Nine-month
term
During
the year ended September 30, 2018, the Company issued convertible promissory notes with a principal balance of $975,000 to accredited
investors (the “Note Holders”). The notes matured in June 2019 and had an annual rate of interest of 8%. Unless the
notes are prepaid, the notes will automatically convert at the maturity date into shares of the Company’s common stock at
a conversion price of $2.50 per share. In October 2018, the Company offered the convertible note holders the opportunity to receive
a reduced conversion price from $2.50 per share to $1.80 per share as an inducement for the Note Holders to convert the notes.
As of October 30, 2018, all of the convertible note holders agreed to convert at the reduced price offered by the Company. The
Company issued 541,668 shares of common stock in conversion of the notes. The Company recognized an inducement cost associated
with the conversion of the convertible promissory notes of approximately $0.368 million with a corresponding credit to additional
paid-in capital.
In
connection with the issuance of the convertible promissory notes, the Company issued the Note Holders common stock purchase warrants
with a three year term from the issuance date, providing the Note Holders the right to purchase 97,500 shares of the Company’s
common stock at $2.50 per share, with standard anti-dilution protection. After allocating issuance proceeds to the warrant liability,
the effective conversion price of the convertible promissory notes was below the quoted market price of the Company’s common
stock. As such, the Company recognized beneficial conversion feature equal to the intrinsic value of the conversion feature on
the issuance date, resulting in an additional discount to the initial carrying value of the convertible promissory notes of approximately
$0.5 million with a corresponding credit to additional paid-in capital. As of June 30, 2020, the balance of the warrant liability
for these debentures is 0.
Twelve-month
term
In
May and June 2018, the Company issued senior unsecured convertible notes with a principal balance of $1.5 million to accredited
investors (the “Note Holders”). The notes matured in May 2019 and had an annual rate of interest at 8%. Accrued interest
was payable quarterly in arrears on the fifth day of each calendar quarter. The notes ranked senior to all obligations not designated
as a primary obligation by the Company. The Note Holders were entitled to convert all or any amount of the principal balance then
outstanding into shares of the Company’s common stock at a conversion price of $2.50 per share. On November 1, 2018, the
Company reduced the conversion price from $2.50 per share to $1.80 per share as an inducement for the Note Holders to convert
the notes. Since the notes are optionally convertible by the Note Holders, were issued at par value and did not contain any detachable
instruments, the effective conversion price is equal to the stated conversion price of $1.80 per share. The Company recognized
an inducement cost associated with the conversion of the convertible promissory notes of approximately $0.9 million with a corresponding
credit to additional paid-in capital.
During
October 2018, the Note Holders fully converted the notes into 833,333 shares of the Company’s common stock and the debt
discount related to the notes was fully amortized.
Canaccord
On
December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of
up to 10,000 convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross
proceeds of up to CDN$10,000,000 (the “Offering”). The net proceeds of the Offering were used for expansion initiatives
and general corporate purposes. The Company’s functional currency is U.S. dollars.
In
December 2018 and January 2019, the Company issued 3,121 CD Special Warrants in the first closing of the Offering, at a price
of CDN $1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $3.1 million or $2.3 million USD. In connection
with this offering, the Company issued the agents in such offering 52,4June convertible debenture special warrants (the “Broker
CD Special Warrants”) as partial satisfaction of a selling commission.
On
June 14, 2019, the Company issued 962 CD Special Warrants in the second and final closing of the Offering, at a price of CDN $1,000
per CD Special Warrant, and received aggregate gross proceeds of CDN $1.0 million or $0.7 million USD. In connection with this
offering, the Company issued the agents in such offering 5,600 convertible debenture special warrants (the “Broker CD Special
Warrants”) as partial satisfaction of a selling commission.
The
total aggregate proceeds of the Offering totaled $4.1 million CDN or $3.1 million USD.
Each
CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration)
for one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third
business day after the date on which both (A) a receipt (the “Receipt”) for a (final) prospectus (the “Qualification
Prospectus”) qualifying the distribution of the Convertible Debentures (as defined below) and Warrants (as defined below)
issuable upon exercise of the CD Special Warrants has been issued by the applicable securities regulatory authorities in the Canadian
jurisdictions in which purchasers of the CD Special Warrants are resident (the “Canadian Jurisdictions”), and (B)
a registration statement (the “Registration Statement”) registering the resale of the common shares underlying the
Convertible Debentures and Warrants has been declared effective by the U.S. Securities and Exchange Commission (the “Registration”);
and (ii) the date that is nine months following the closing of the Offering. The Company has also provided certain registration
rights to purchasers of the CD Special Warrants. The CD Special Warrants were exchanged for Convertible Debenture Units after
nine months as U.S. and Canadian registrations were not effective at that time.
Each
Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible
Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant
entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of
CDN $3.90 per Warrant Share for a period of 24 months following the closing of the Offering (see Note 17).
The
Company has agreed to use its best efforts to obtain the Receipt and Registration within nine months following the closing of
the Offering. In the event that the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that
is 120 days following the closing of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof
to receive, upon the exercise thereof and at no additional cost, 1.05 Convertible Debenture Units per CD Special Warrant (instead
of 1.0 Convertible Debenture Unit per CD Special Warrant). Until the Receipt and Registration have been obtained, securities issued
in connection with the Offering (including any underlying securities issued upon conversion or exercise thereof) will be subject
to a 6-month hold period from the date of issue. Since the CD Special Warrants were exchanged for Convertible Debenture Units
after 6 months as U.S. and Canadian registrations were not effective at that time, the holders received 1.05 Convertible Debenture
Units per CD Special Warrant.
The
brokered portion of the Offering (CDN $2.5 million, $1.9 million USD) was completed by a syndicate of agents (collectively, the
“Agents”). The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the brokered
portion of the Offering. As additional consideration, the Company issued the Agents such number of non-transferable broker convertible
debenture special warrants (the “Broker CD Special Warrants”) as is equal to 7.0% of the number of CD Special Warrants
sold under the brokered portion of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD
Special Warrants, into broker warrants of the Company (the “Broker Warrants”). Each Broker Warrant entitles the holder
to acquire one Convertible Debenture Unit at an exercise price of CDN $1,000, until the date that is 24 months from the closing
date of the Offering. The distribution of the Broker Warrants issuable upon the exchange of the Broker CD Special Warrants shall
also be qualified under the Qualification Prospectus and the resale of the common shares underlying the Broker Warrants will be
registered under the Registration Statement. The Company also paid the lead agent a commission noted above of CDN$157,290, corporate
finance fee equal to CDN $50,000 in cash and as to $50,000 in common shares of the Company at a price per share of CDN $3.00 plus
additional expenses of CDN$20,000. In addition, the Company paid the trustees legal fees of CDN$181,365. In total the Company
approx. USD $0.32 million in fees and expenses associated with the offering.
The
issuance of the securities was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as
amended (the “Securities Act”), for the offer and sale of securities not involving a public offering, Regulation D
promulgated under the Securities Act, Regulation S, in Canada to “accredited investors” within the meaning of National
Instrument 45106 and other exempt purchasers in each province of Canada, except Quebec, and/or outside Canada and the United States
on a basis which does not require the qualification or registration. The securities being offered have not been registered under
the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent
registration or an applicable exemption from the registration requirements.
The
Convertible Debenture features contain the following embedded derivatives:
|
●
|
Conversion
Option - The Convertible Debentures provide the holder the right to convert all or any portion of the outstanding principal
into common shares of the Company at a conversion price of C$3.00 such that 333.33 common shares are issued for each C$1,000
of principal of Convertible Debentures converted.
|
|
●
|
Contingent
Put - Upon an Event of Default, the Convertible Debentures settle for cash at the outstanding principal and interest amount
(at discretion of the Indenture Trustee or upon request of Holders of 25% or more of principal of the Convertible Debentures).
|
|
●
|
Contingent
Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding amount and principal and interest
* 105% (where Holder accepts a Change of Control Offer).
|
The
conversion option, the contingent put feature upon an Event of Default, and the contingent put feature upon a Change in Control
should be bifurcated and recognized collectively as a compound embedded derivative at fair value at inception and at each quarterly
reporting period.
A
five percent penalty assessed for failure to timely file a registration statement to register the stock underlying the CD special
warrants.
The
Company valued the warrants granted using the Black-Scholes pricing model and determined that the value at grant date was approximately
$424,000 USD (this includes the warrants issued as part of the penalty for failure to timely file the required registration statement
under the indenture agreement). The significant assumptions used in the valuation are as follows:
Fair value of underlying common shares
|
|
$
|
1.78
to 2.10
|
|
Exercise price (converted
to USD)
|
|
$
|
1.125
|
|
Dividend yield
|
|
|
-
|
|
Historical volatility
|
|
|
115
|
%
|
Risk free interest
rate
|
|
|
1.40
to 1.90
|
%
|
The
warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not
meet the scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance
with the guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in
fair value recognized in earnings each reporting period.
The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Canaccord convertible
notes and the subsequent fair value measurement during the nine months ended June 30, 2020 in USD, (in thousands):
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
Balance
at September 30, 2019
|
|
$
|
42
|
|
|
$
|
158
|
|
Change
in fair value
|
|
|
(7
|
)
|
|
|
(21
|
)
|
Balance
at December 31, 2019
|
|
|
35
|
|
|
|
137
|
|
Change
in fair value
|
|
|
(15
|
)
|
|
|
(121
|
)
|
Balance
at March 31, 2020
|
|
|
20
|
|
|
|
16
|
|
Change
in fair value
|
|
|
50
|
|
|
|
570
|
|
Balance
at June 30, 2020
|
|
$
|
70
|
|
|
$
|
586
|
|
The
table below shows the net amount of convertible notes as of June 30, 2020 in USD (in thousands):
|
|
June
30, 2020
|
|
Principal
value of 8%, convertible at $0.84 at June 30, 2020, due December 27, 2020
|
|
|
|
|
including penalty provision of $155,239
|
|
$
|
2,901
|
|
Principal value of
10%, convertible at $1.22 at June 30, 2020, due May 30, 2021 (see note 5)
|
|
|
3,410
|
|
Debt discount
|
|
|
(557
|
)
|
Cumulative
foreign currency impact
|
|
|
242
|
|
Carrying value
of convertible notes
|
|
$
|
5,996
|
|
In
April, 2020 the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of
the Convertible Debentures to reprice the convertible securities issued in connection with the Company’s special
warrant financing, which closed on December 27, 2018 and June 14, 2019. The share purchase warrants of the Company issued in
connection with the financing will be repriced to C$1.50 per Common Share and the convertible debentures of the Company
issued in connection with the financing will be repriced to C$1.15 per common share. Additionally, the Debenture holders have
approved the following amendments to the terms of the convertible debentures: (i) an extension to the maturity date of the
convertible debentures to three years from the date of issuance; and (ii) an amendment to permit the Company to force the
conversion of the principal amount of the then outstanding convertible debentures and any accrued and unpaid interest thereof
at the new conversion price on not less than June days’ prior written notice if the closing trading price of the shares
of common stock of the Company’s common shares exceeds C$1.90 for a period of 10 consecutive trading days on the CSE.
The Warrant holders have also approved the inclusion of an early acceleration feature in accordance with the policies of the
Canadian Securities Exchange, permitting the Company to accelerate the expiry date of the warrants should the closing trading
price of the Common Shares exceed C$1.87 for a period of 10 consecutive trading days on the CSE.
13.
Fair Value Measurements
In
accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding
warrants and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value
of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair
value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable
inputs. An explanation of each level in the hierarchy is described below:
Level
1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement
date
Level
2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level
3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
The
following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy
as of June 30, 2020 (in thousands):
|
|
Fair
value measured at June 30, 2020
|
|
|
|
|
|
|
Quoted
|
|
Significant
|
|
|
|
|
|
|
|
|
|
prices in
active
markets
|
|
other
observable inputs
|
|
|
Significant
unobservable
inputs
|
|
|
Fair
value
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
|
(Level
3)
|
Warrant
liability
|
|
$
|
448
|
|
|
$
|
-
|
|
$
|
-
|
|
|
$448
|
Embedded
derivative liability
|
|
|
586
|
|
|
|
-
|
|
|
-
|
|
|
586
|
Total fair value
|
|
$
|
1,034
|
|
|
$
|
-
|
|
$
|
-
|
|
|
$1,034
|
There
were no transfers between Level 1, 2 or 3 during the nine months ended June 30, 2020.
The
following table presents changes in Level 3 liabilities measured at fair value for the nine months ended June 30, 2020. Both observable
and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3
category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that
were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long- dated volatilities) inputs (in thousands).
|
|
|
|
|
Embedded
|
|
|
|
|
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
|
Total
|
|
Balance
– September 30, 2019
|
|
$
|
283
|
|
|
$
|
158
|
|
|
$
|
441
|
|
Warrants granted for
stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change
in fair value
|
|
|
(38
|
)
|
|
|
(21
|
)
|
|
|
(59
|
)
|
Balance
- December 31, 2019
|
|
|
245
|
|
|
|
137
|
|
|
|
382
|
|
Warrants issued pursuant
to acquisition (see Note 5)
|
|
|
823
|
|
|
|
|
|
|
|
823
|
|
Warrants granted for
stock-based compensation
|
|
|
105
|
|
|
|
-
|
|
|
|
105
|
|
Change in fair value
|
|
|
254
|
|
|
|
(121
|
)
|
|
|
133
|
|
Other
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
Balance
- March 31, 2020
|
|
|
1,417
|
|
|
|
16
|
|
|
|
1,433
|
|
Change
in fair value
|
|
|
(969
|
)
|
|
|
570
|
|
|
|
(399
|
)
|
Balance
- June 30, 2020
|
|
$
|
448
|
|
|
$
|
586
|
|
|
$
|
1,034
|
|
A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of June
30, 2020 is as follows:
|
|
Warrant
Liability
|
|
|
|
As
of
June 30, 2020
|
|
Strike price
|
|
$
|
0.45
|
|
Contractual term (years)
|
|
|
1
to 3
|
|
Volatility (annual)
|
|
|
115
|
%
|
Risk-free rate
|
|
|
.29
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
Embedded
Derivative Liability
|
|
|
|
As
of
June 30, 2020
|
|
|
As
of
September, 2019
|
|
Strike
price
|
|
$
|
1.36
|
|
|
$
|
0.80
|
|
Contractual
term (years)
|
|
|
1.5
|
|
|
|
1.2
|
|
Volatility
(annual)
|
|
|
122
|
|
%
|
|
85
|
%
|
Risk-free
rate
|
|
|
1.36
|
|
%
|
|
1.68
|
%
|
Dividend
yield (per share)
|
|
|
0
|
|
%
|
|
11.12
|
%
|
The
Company used a lattice based trinomial model developed by Tsiveriotis, K. and Fernades in which the three lattices incorporate
(1) the Company’s underlying common stock price; (2) the value of the debt components of the convertible notes; and (3)
the value of the equity component of the convertible notes. The main drivers of sensitivity for the model are volatility and the
credit spread. The model used will vary by approximately 1.5% for a 4% change in volatility and will vary by less than 1% for
each 1% change in credit spread.
14.
Shareholders’ Equity
Preferred
shares
The
Company had two series of preferred shares designated with no preferred shares issued and outstanding as of June 30, 2020 and
September 30, 2019.
Common
shares
As of May 2020, the Company entered into
a Share Exchange Agreement with the NVDRE shareholders to exchange their shareholdings that represent 12.5 percent of NVDRE in
exchange for the issuance of the Company’s common stock. The exchange amounted to the issuance of 386,030 shares of the
Company’s common stock valued and recorded to investment at $196,000 (see note 5).
During
the nine months ended June 30, 2020, the Company issued 394,270 shares of its common stock in connection with a Membership Interest
Purchase Agreement for real property located in Eugene, Oregon. The agreed upon purchase price was $500 less the lien of $106.
The Company acquired the property from a related party and recorded the building at its carrying value of approximately $500.
In connection with this transaction the Company issued 394,270 common shares at $1.00 per share.
Pursuant
to the acquisition of 7LV, the Company issued 11,999,008 shares of common stock to former shareholders of 7LV. The Company also
issued an aggregate 682,000 shares and replacement 10% unsecured convertible debentures in the aggregate principal amount of C$4,571
($3,410 USD) (the “Replacement Debentures”), convertible into shares at a conversion price of C$1.67 per share at
any time prior to May 3, 2021, to former holders of unsecured convertible debentures of 7LV (see note 5).
The
Company issued 202,350 common shares for the fair value of $121 in partial payment of interest on convertible notes
in connection with the Seven Leaf Ventures Corporation acquisition.
Common
stock issuances for compensation:
During
the three months ended December 30, 2019, the Company issued 5,000 shares of its common stock related to a consulting agreement
for a fair value of approximately $4 or $0.89 per share.
During
the three months ended December 30, 2019, the Company issued 100,000 shares of its common stock related to an employment agreement
for a fair value of approximately $498.
During
the period ended June 30, 2020, the Company issued 970,416 shares of its common stock related to various consulting
agreements for a fair value of approximately $850 or $0.88 per share. During the same period, the Company cancelled 700,000
common shares related to consulting agreements.
During
the period ended June 30, 2020, the Company issued 303,756 shares of its common stock related to various
employment agreements for a fair value of approximately $47.
During the period ended June 30, 2020,
the Company issued 18,750 shares of the Company’s common stock valued at $6 as stock-based compensation.
15.
Stock Based Compensation
Stock
Options
The
fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of
the awards was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend
yield is 0%. The expected term for stock options granted with service conditions represents the average period the stock options
are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities
and Exchange Commission’s Staff Accounting Bulletin for “plain vanilla” options for options granted in 2019.
The expected term for stock options granted with performance and/or market conditions represents the period estimated by management
by which the performance conditions will be met. The Company obtained the risk-free interest rate from publicly available data
published by the Federal Reserve. The Company uses a methodology in estimating its volatility percentage from a computation that
was based on a comparison of average volatility rates of similar companies to a computation based on the standard deviation of
the Company’s own underlying stock price’s daily logarithmic returns. The fair value of options granted during the
nine months ended June 30, 2020 were estimated using the following weighted-average assumptions:
Options:
|
|
For
the Nine Months Ended
June 30, 2020
|
|
Exercise
price
|
|
|
$0.80
- $4.00
|
|
Expected
term (years)
|
|
|
.5
- 4.0
|
|
Expected
stock price volatility
|
|
|
108.8%
- 188.6
|
%
|
Risk-free
rate of interest
|
|
|
1.6
|
%
|
Expected
dividend rate
|
|
|
0
|
%
|
A
summary of option activity under the Company’s stock option plan for nine months ended June 30, 2020 is presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Total
Intrinsic Value
|
|
|
Weighted
Average Remaining Contractual Life (in years)
|
|
Outstanding
as of September 30, 2019
|
|
|
3,210,416
|
|
|
$
|
2.45
|
|
|
$
|
-
|
|
|
|
2.1
|
|
Granted
|
|
|
1,262,500
|
|
|
$
|
1.19
|
|
|
$
|
-
|
|
|
|
2.3
|
|
Outstanding
as of December 31, 2019
|
|
|
4,472,916
|
|
|
$
|
2.09
|
|
|
$
|
-
|
|
|
|
2.0
|
|
Granted
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of March 31, 2020
|
|
|
4,747,916
|
|
|
$
|
2.03
|
|
|
$
|
-
|
|
|
|
1.66
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
as of June 30, 2020
|
|
|
4,747,916
|
|
|
|
2.03
|
|
|
|
-
|
|
|
|
1.41
|
|
Options
vested and exercisable
|
|
|
4,435,416
|
|
|
$
|
2.10
|
|
|
$
|
-
|
|
|
|
1.40
|
|
Estimated
future stock-based compensation expense relating to unvested stock options was approximately $0.3 million as of June 30, 2020.
Weighted average remaining contractual life of the options is 2.0 years.
Stock-based
Compensation Expense
Stock-based
compensation expense for the three and nine months ended June 30, 2020 and 2019 was comprised of the following (in thousands):
|
|
Three
months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Stock
grants
|
|
$
|
6
|
|
|
$
|
3,995
|
|
Stock
options
|
|
|
-
|
|
|
|
135
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
Total
stock-based compensation
|
|
$
|
6
|
|
|
$
|
4,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended June 30,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Stock
grants
|
|
$
|
1,193
|
|
|
$
|
5,991
|
|
Stock
options
|
|
|
615
|
|
|
|
478
|
|
Warrants
|
|
|
105
|
|
|
|
697
|
|
Total
stock-based compensation
|
|
$
|
1,913
|
|
|
$
|
7,166
|
|
In
the 4th quarter of fiscal year ended September, 2019, the Company changed its policy for recognizing prepaid fully
vested non-employee stock-based compensation. Historically, the Company would initially record a prepaid asset based upon the
fair value of the award on the grant date and subsequently record this award over an implicit service period. The Company now
expenses at grant all fully vested non-employee stock-based compensation on the grant date as there is no substantive future service
period on the grant date. This change in accounting method was applied retrospectively, and this change resulted in an increase
in stock-based compensation of $273 for the nine months ended June 30, 2019. This change increased the loss per share by $(0.01)
from $(0.46) loss per share to $(0.47) per share for the nine months ended June 30, 2019.
16.
Commitments and Contingencies
As
noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States
Federal Government. This raises several possible issues which may impact the Company’s overall operations, not the least
of which are related to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level,
and most traditional banks are federally insured, those financial institutions will not service cannabis businesses. In states
where medical or recreational marijuana is legal, dispensary owners, manufacturers, and anybody who “touches the plant,”
continue to face a host of operational hurdles. While local, state-chartered banks and credit unions now accept cannabis commerce,
there remains a reluctance by traditional banks to do business with them. Aside from a huge inconvenience and the need to find
creative ways to manage financial flow, payroll logistics, and payment of taxes, this also poses tremendous risks to controls
as a result of operating a lucrative business in cash. This lack of access to traditional banking may inhibit industry growth.
In the period ended June 30, 2020, the Company’s accounts with a major money center bank were closed as the bank would not
allow the Company to continue to use its banking network.
Despite
the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these
risks will have a substantive impact on its planned operations in the near term.
As
of June 30, 2020, the Company has acquired interests in several entities. As part of those interests, the Company has commitments
to fund the acquisition of licenses and permits to allow for the cultivation and sale of cannabis and related products in the
United States and Eswatini. As of June 30, 2020, Company estimates that its investees will need up to approximately $2.5 million
to complete the acquisition of licenses and permits, to fund the buildout or expansion of facilities to fully operate in their
respective cannabis markets, which will encompass several years of development.
Effective
January 2019, the Company entered into a one-year Board Member agreement, and as part of that agreement for services agreed to
issue 250,000 shares of the Company’s common stock and 250,000 options priced at $1.00.
D.H.
Flamingo, Inc. v. Department of Taxation, et. al.
On
February 27, 2020, a subsidiary of the Company (YMY Ventures, LLC) was served with a Summons and Second Amended Complaint in a
matter pending in the District Court of Clark County Nevada (Case # A-19-787004-B) which is styled “D.H. Flamingo, Inc.
v. Department of Taxation, et. al.” (the DOT Litigation”). In this matter, the Plaintiff is alleging that certain
parties (including YMY Ventures, LLC) received Conditional Recreational Marijuana Establishment Licenses, while certain other
parties (including Plaintiff) were denied licenses. In the matter, Plaintiff seeks declaratory relief, injunctive relief, relief
from violation of procedural and substantive due process, violation of equal protection, unjust enrichment, judicial review of
the entire matter, together with a Petition for Writ of Mandamus. The Plaintiff seeks damages in an unspecified amount. Thereafter,
on April 20, 2020, YMY Ventures, LLC filed a Notice of Non-Participation and Request for Dismissal. The Company believes it will
ultimately be dismissed from the action without any liability exposure. Notwithstanding, there is no guarantee at this time that
this will occur, and the ultimate result of the matter could potentially be the loss of YMY Ventures, LLC’s Conditional
Recreational Marijuana Establishment License. The Company believes that this result would be highly unlikely and that the matter
will be fully resolved as to YMY Ventures, LLC in the near term.
Chord
Advisors, LLC v. Stem Holdings, Inc., et. al.
On
June 5, 2020 Chord Advisors, LLC (“Chord”) filed a Complaint in the Circuit Court of the Fifteenth Judicial District
in and for Palm Beach County, Florida (Case # 502020CA006097) alleging that Stem Holdings, Inc. owes Chord approximately $260,000
on account of fees for accounting services accrued pursuant to a Letter of Agreement dated October 2019. On July 6, 2020, the
Company filed an Answer and Affirmative Defenses to the Complaint. This matter is in its early stages and, while the Company believes
that it has meritorious defenses to the matters detailed in the Complaint, it is impossible to predict the outcome of the matter.
Lili
Enterprises, LLC adv. YMY Ventures and OPCO, LLC
In
July 2020, a dispute arose with the Company’s joint venture partner in connection with the Company’s operations in
the State of Nevada. In this regard, the Company’s joint venture partner claims that it is owed certain amounts totaling
approximately $307,500 pursuant to the joint venture Operating Agreement. On the other hand, the Company claims that the joint
venture partner is in breach of its agreements with the Company and that the Company has heretofore advanced over $1 million in
excess of its commitments under the Operating Agreement. The operative agreements require the disputes to be arbitrated. The parties
have engaged an arbitrator and the matters are set for an arbitration hearing in February 2021. Ultimately, while the Company
believes that a settlement will be reached, it is impossible to predict the outcome of the matter.
For
the period ended June 2020, the Company entered into a nine-month consulting agreement, and as part of that agreement for professional
services, agreed to issue a total of 350,000 shares of the Company’s common stock and $100,000 cash compensation. Pursuant
to the agreement, all 350,000 shares of common stock will be restricted securities.
For
the period ended 2020, the Company entered into a nine-month consulting agreement, and as part of that agreement for professional
services, agreed to issue a total of 100,000 shares of the Company’s common stock and $10,000 cash compensation. Pursuant
to the agreement, all 100,000 shares of common stock will be restricted securities.
17.
Subsequent Events
In
July 2020, the Company’s wholly owned subsidiary in Oregon received loan proceeds of $220,564 pursuant to the Paycheck Protection
Program under the CARES Act. The Loan, which was in the form of a promissory note, dated July 09, 2020, between the Company and
Cross River Bank as the lender, matures on July 09, 2022 and bears interest at a fixed rate of 1% per annum, payable monthly commencing
in six months. Under the terms of the PPP, the principal may be forgiven if the Loan proceeds are used for qualifying expenses
as described in the CARES Act, such as payroll costs, benefits mortgage interest, rent, and utilities. No assurance can be provided
that the Company will obtain forgiveness of the Loan in whole or in part. In addition, details of the PPP continue to evolve regarding
which companies are qualified to receive loans pursuant to the PPP and on what terms, and the Company may be required to repay
some or all of the Loan due to these changes or different interpretations of the PPP requirements.
The
Promissory Note evidencing the PPP Loan is entered into subject to guidelines applicable to the program and contains customary
representations, warranties, and covenants for this type of transaction, including customary events of default relating to, among
other things, payment defaults and breaches of representations and warranties or other provisions of the Promissory Note. The
occurrence of an event of default may result in, among other things, the Company becoming obligated to repay all amounts outstanding.
We continue to evaluate and may still apply for additional programs under the CARES Act, there is no guarantee that we will meet
any eligibility requirements to participate in such programs or, even if we are able to participate, that such programs will provide
meaningful benefit to our business.
The Company filed a Registration
Statement with respect to the prospective sale of up to 10,000,000 shares of Common Stock which was declared effective by the
U.S. Securities Exchange Commission on July 2, 2020. As of the date of this report, none of the registered shares have been
sold and, as a result, there are no proceeds of sales to report.”