Notes
to Unaudited Condensed Consolidated Financial Statements
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, Massachusetts, and Oklahoma. As of December 31, 2020, Stem had ownership interests in 23
state issued cannabis licenses including nine (9) licenses for cannabis cultivation, five (5) licenses for cannabis processing,
one (1) license for cannabis wholesale distribution, one (1) license for hemp production, (2) adult-use medical retailers (non
storefront), and five (5) cannabis dispensary licenses.
Stem’s
consumer brands are award-winning and nationally known, and include cultivators, TJ’s Gardens™, Travis X James™,
and Yerba Buena; retail brands, Stem, Rebelle, and TJ’s; infused product manufacturers Cannavore; and a CBD company,
Dose-ology. As of December 31, 2020, the Company has acquired nine commercial properties and leased a tenth property, located
in Oregon and Nevada, and has entered leases to related entities for these properties (see Note 17). As of December 31, 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 Holdings Agri, Inc., Stem Group Oklahoma, Inc., Opco Holdings, Inc., 7LV USA Corporation, Driven Deliveries, Inc.,
and Consolidated Ventures of Oregon, Inc.
With
the acquisition of Driven, the Company becomes an omni-channel retailer, utilizing Driven’s proprietary logistics and experience/customer
experience (“UX/CX”) technologies. The Company will be able to offer its customers in California: (i)
an “Express” delivery with a limited product selection that is usually delivered within 90 minutes or less; and (ii)
a “Next Day” scheduled delivery from a larger selection of 500+ products from a Company-operated fulfillment center.
The
Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the symbol “STEM”
and the OTCQX exchange under the symbol “STMH”.
Going
Concern
At
December 31, 2020, the Company had approximate balances of cash and cash equivalents of $3.8 million, negative working
capital of approximately $25.9 million, and an accumulated deficit of $54.6 million.
These
unaudited 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 several
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 Quarterly Report on Form 10-Q, 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 our 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 its
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 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, 2021
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, 2020 filed on December 28, 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, valuation of its long live assets for impairment testing, valuation of intangible assets, and the valuation
of inventory. 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.
Reclassifications
Certain
amounts in the Company’s condensed 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.
Principles
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 Consolidated Balance Sheets and 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 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 for the acquisition
of Consolidated Ventures of Oregon, LLC (“CVO”) and Opco Holdings, LLC (“Opco”) which comprise the
entities within the Multi Party Agreement. On September 6, 2020, the Company received the regulatory approval to transfer all
the licenses held under both CVO and Opco. Subsequently, the Company has completed the acquisition and as a result, the Company
is no longer engaged primarily in property rental operations but has taken over the operations of its primary renters, which is
the cultivation, production and sale of cannabis and related productions. Since CVO and Opco are related to the Company, the acquisition
was not accounted for as a business combination at fair value under the codification sections of ASC 805. The assets and liabilities
were transferred to the Company at their historical cost and the Company has included the operations of Opco and CVO for
all periods presented for this period ended December 31, 2020.
The
accompanying 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 Holdings Agri, Inc., Opco Holdings, Inc.,
Stem Group Oklahoma, Inc., 7LV USA Corporation, and Consolidated Ventures of Oregon, Inc., and Driven Deliveries, Inc.
In addition, the Company has consolidated YMY Ventures, SAV, LLC; WCV, LLC and NVD RE, Inc. under the variable interest requirements.
Opco Holdings, Inc. and CVO and its subsidiaries are included in the consolidated financial statements due to its historical related
party relationship. All material intercompany accounts, transactions, and profits have been eliminated in consolidation.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents.
The Company’s cash is primarily maintained in checking accounts. These balances may, at times, exceed the U.S. Federal Deposit
Insurance Corporation insurance limits. As of December 31, 2020, and 2019, the Company had no cash equivalents or short-term investments.
The Company has not experienced any losses on deposits of cash and cash equivalents.
Accounts
Receivable
Accounts
receivable are shown on the face of the consolidated balance sheets, net of an allowance for doubtful accounts. The Company analyzes
the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining
the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. As of December
31, 2020, the reserve for doubtful accounts was $39 thousand.
Inventory
Inventory
is comprised of raw materials, finished goods and work-in-progress such as pre-harvested cannabis plants and by-products to be
extracted. The costs of growing cannabis including but not limited to labor, utilities, nutrition, and irrigation, are capitalized
into inventory until the time of harvest.
Inventory
is stated at the lower of cost or net realizable value, determined using weighted average cost. Cost includes expenditures directly
related to manufacturing and distribution of the products. Primary costs include raw materials, packaging, direct labor, overhead,
shipping and the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing
overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes.
Net
realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs
of completion, disposal, and transportation. At the end of each reporting period, the Company performs an assessment of inventory
obsolescence to measure inventory at the lower of cost or net realizable value. Factors considered in the determination of obsolescence
include slow-moving or non-marketable items.
Prepaid
Expenses and Other Current Assets
Prepaid
expenses consist of various payments that the Company has made in advance for goods or services to be received in the future.
These prepaid expenses include consulting, advertising, insurance, and service or other contracts requiring up-front payments.
Property
and Equipment
Property,
equipment, and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Repairs and maintenance expenditures that do not extend the useful lives
of related assets are expensed as incurred.
Expenditures
for major renewals and improvements are capitalized, while minor replacements, maintenance, and repairs, which do not extend the
asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in operations. The Company continually monitors events and changes
in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not
be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or
changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the
carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash
flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying
amount over the fair value of the assets. See “Note 3 – Property, Equipment and Leasehold Improvements”.
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line method over the estimated
useful lives of the assets. The Company estimates useful lives 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
|
Impairment
of Long-Lived Assets
The
Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment
whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.
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. The Company does not test for impairment in the year of acquisition of properties, as 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. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value
is generally determined using the assets 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 prospectively over the newly determined
remaining estimated useful lives.
Equity
Method Investments
Investments
in unconsolidated affiliates are accounted for under the equity method of accounting, as appropriate. The Company accounts for
investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5.0% of the investee’s
outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s
investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.
During
the quarter ended December 31, 2020, the Company did not realize any investee losses related to TIL. The Company recognized an
investment gain of $200 thousand related to SOK Management (see Note 5).
Asset
Acquisitions
The
Company has 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 adopting ASU
2017-01, acquisitions of real estate and cannabis licenses do not meet the definition of a business combination and were deemed
asset acquisitions, and the Company therefore capitalized these acquisitions, including its costs associated with these acquisitions.
Goodwill
and Intangible Assets
Goodwill.
Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill
is not amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance
occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill
impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances
lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required.
If the Company concludes otherwise, the Company is required to perform the two-step impairment test. The goodwill impairment test
is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying
value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated
fair value is less than the carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing
the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill.
Intangible
Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives,
where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash
flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable
intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually,
the remaining useful life is evaluated.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent
reversal of impairment losses is not permitted.
During
the quarter ended December 31, 2020 and 2019, the Company determined that there were not any impairments related to intangible
assets.
Business
Combinations
The
Company applies the provisions of ASC 805 in the accounting for acquisitions. ASC 805 requires the Company to recognize separately
from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition
date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired
and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to
assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates
are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from
the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the
conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever
comes first, any subsequent adjustments are recorded in the consolidated statements of operations. Accounting for business combinations
requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for
intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration,
where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they
are based in part on historical experience and information obtained from management of the acquired companies and are inherently
uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates,
or actual results.
Contingent
Consideration
The
Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations” (“FASB
ASC 805”). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or
equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires
that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the
transaction. FASB ASC 805 uses the fair value definition in Fair Value Measurements, which defines fair value as 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. As defined in FASB ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree, if specified
future events occur or conditions are met or (ii) the right of the acquirer to the return of previously transferred consideration
if specified conditions are met.
Warrant
Liability
The
Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair
value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any
change in fair value is recognized in the Company’s consolidated statements of operations. The fair value of the warrants
issued by the Company has been estimated using Monte Carlo simulation model.
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s)
should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded
in the statement of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible
debt instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition.
When the Company records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective
debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.
Income
Taxes
The
provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated
United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates
at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense
are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in
deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and tax-reporting purposes. As of December 31, 2020, and 2019, such
net operating losses were offset entirely by a valuation allowance.
The
Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more
likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely
of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being
sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative
expense, respectively, on the consolidated statements of operations.
In
December 2017, the Tax Cuts and Jobs Act (TJCA or the Act) was enacted, which significantly changes U.S. tax law. In accordance
with ASC 740, “Income Taxes”, the Company is required to account for the new requirements in the period that includes
the date of enactment. The Act reduced the overall corporate income tax rate to 21.0%, created a territorial tax system (with
a one-time mandatory transition tax on previously deferred foreign earnings), broadened the tax base and allowed for the immediate
capital expensing of certain qualified property.
In
the quarter ended December 31, 2020, the Company issued a significant number of new shares in its acquisition of Driven (see Note
9). The effect of these issuances is most likely, the Company and Driven have experienced the requisite change of control as promulgated
under the US Internal Revenue Code section 382. The effect of this will be that going forward, the ability of the Company and
Driven to utilize their respective US Federal net operating loss carryforwards from prior to December 29, 2020 will be limited
in its usage. In order to determine the specific effect, the Company must perform the computations required under the Internal
Revenue Code, which have not yet been performed. The Company expects it will perform the required computations in the coming fiscal
year.
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:
Cannabis
Dispensary, Cultivation and Production
Revenue
is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation
is complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance
obligation is complete. Terms are generally between cash of delivery to 30 days for the Company’s wholesale customers.
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.
Delivery
1)
|
Identify
the contract with a customer
|
The
Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales
have commercial substance and there are no issues with collectability as the customer pays the cost of the goods at the time of
purchase or delivery.
2)
|
Identify
the performance obligations in the contract
|
The
Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and
any necessary deliveries of those products.
3)
|
Determine
the transaction price
|
The
sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the
cost that those goods are being sold for plus any additional delivery costs.
4)
|
Allocate
the transaction price to performance obligations in the contract
|
For
the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any
delivery fees that may be incurred to deliver to the customer.
5)
|
Recognize
revenue when or as the Company satisfies a performance obligation
|
For
the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.
Leases
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.
On
October 1, 2020, the Company adopted ASC 842 and elected to apply the new standard at the adoption date and recognize a cumulative
effect as an adjustment to retained earnings. Upon calculation the effect on retained earnings was immaterial and no adjustment
was deemed necessary. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements
entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease
liabilities and right of use (“ROU”) assets.
Our
lease agreements generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined
based on information available at lease commencement date for purposes of determining the present value of lease payments. We
used the incremental borrowing rate on December 31, 2020 for all leases that commenced prior to that date. In determining this
rate, which is used to determine the present value of future lease payments, we estimate the rate of interest we would pay on
a collateralized basis, with similar payment terms as the lease and in a similar economic environment.
Under
Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Lease costs were $169 for the three
months ended December 31, 2020. There was sublease rental income of $4,000 for the three months ended December 31, 2020. The Company
has eight operating leases consisting with remaining lease terms ranging from 23 months to 120 months.
Lease
Costs
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
Components of total lease costs:
|
|
|
|
|
Operating
lease expense
|
|
$
|
169
|
|
Total lease
costs
|
|
$
|
169
|
|
Lease
positions as of December 31, 2020
ROU
lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:
|
|
December
31,
2020
|
|
Assets
|
|
|
|
|
Right
of use asset
|
|
$
|
3,305
|
|
Total assets
|
|
$
|
3,305
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating
lease liabilities – short term
|
|
$
|
1,040
|
|
Operating
lease liabilities – long term
|
|
|
2,265
|
|
Total lease
liability
|
|
$
|
3,305
|
|
Lease
Terms and Discount Rate
Weighted average remaining
lease term (in years) – operating lease
|
|
|
5.00
|
|
Weighted average discount rate
– operating lease
|
|
|
9.72
|
%
|
Cash
Flows
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
December
31,
|
|
|
|
2020
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
ROU
amortization
|
|
|
169
|
|
Cash
paydowns of operating liability
|
|
|
(169
|
)
|
Supplemental
non-cash amounts of lease liabilities arising from obtaining:
|
|
|
|
|
ROU
asset
|
|
|
(3,305
|
)
|
Lease
Liability
|
|
|
3,305
|
|
|
|
|
|
|
The
future minimum lease payments under the leases are as follows:
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
1,077
|
|
2022
|
|
|
1,109
|
|
2023
|
|
|
541
|
|
2024
|
|
|
308
|
|
2025
|
|
|
312
|
|
Thereafter
|
|
|
818
|
|
Total
future minimum lease payments
|
|
|
4,165
|
|
Less:
Lease imputed interest
|
|
|
(860
|
)
|
Total
|
|
|
3,305
|
|
Disaggregation
of Revenue
In
the quarter ended December 31, 2020, 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 quarter ended December 31, 2020 and December 31, 2019, respectively:
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,120
|
|
|
$
|
480
|
|
Retail
|
|
|
4,918
|
|
|
|
1,063
|
|
Rental
|
|
|
4
|
|
|
|
-
|
|
Delivery Income
|
|
|
-
|
|
|
|
-
|
|
Dispensary Cost Reimbursement
|
|
|
-
|
|
|
|
-
|
|
Product Sales
|
|
|
229
|
|
|
|
-
|
|
Other
|
|
|
118
|
|
|
|
8
|
|
Total revenue
|
|
|
6,389
|
|
|
|
1,551
|
|
Discounts
and allowances
|
|
|
(929
|
)
|
|
|
(230
|
)
|
Net
Revenue
|
|
$
|
5,460
|
|
|
$
|
1,321
|
|
Geographical
Concentrations
As
of December 31, 2020, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational
use in 15 states and DC, with lesser legalization, such as for medical use in an additional 21 states and DC, as of the time of
these consolidated financial statements. In addition, the United States Congress has passed legislation, specifically the Agriculture
Improvement Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of hemp and associated
products from Schedule 1 of the Controlled Substances Act.
Cost
of Goods Sold
Cost
of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include
raw materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production
facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and
property taxes. The Company recognizes the cost of sales as the associated revenues are recognized.
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.
Stock-based
Compensation
The
Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock
options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the
market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options
generally vest on the grant date or over a one- year period.
The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used
in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties
and the application of management’s judgment.
Expected
Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding
based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected
Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading
prices.
Risk-Free
Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon
issues with an equivalent remaining term.
Expected
Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends
in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
Effective
January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update
(“ASU”) 2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that
vested. Prior to making this election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have a
significant history of forfeitures.
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 as of December 31, 2020
and 2019 are as follows:
Net loss per
share
|
|
|
|
at December 31, 2020
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
8,978,574
|
|
Options to purchase common stock
|
|
|
10,003,411
|
|
Unvested restricted stock awards
|
|
|
4,857,403
|
|
Warrants to
purchase common stock
|
|
|
34,184,093
|
|
|
|
|
58,023,481
|
|
Advertising
Costs
The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was $54,420 and $4,008
for the quarters ended December 31, 2020 and 2019, respectively.
Related
parties
Parties
are 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.
Segment
reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision–maker is its chief executive officer. The Company currently operate
in one segment.
Recent
Accounting Guidance
In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill
Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied
fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards
Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.
An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair
value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019. The adoption of this standard did not
have a material impact on the Company’s consolidated financial statements and related disclosures.
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
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure
requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers
and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement
uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for
the Company for annual and interim reporting periods beginning January 1, 2020. The adoption of this standard did not have a material
impact on the Company’s consolidated financial statements and related disclosures.
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 was effective for
the Company on October 1, 2019. The Company adopted the updated standard using the modified retrospective approach. The financial
information included in the Company’s 2020 Form 10-K was updated for the October 1, 2019 adoption date; this new guidance
was reflected for the first time in the Company’s 2020 Form 10-K but effective as of October 1, 2019 in that filing. 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 was adopted as of
October 1, 2020. As of December 31, 2020, the Company recognized additional operating liabilities of approximately $3.3 million,
with corresponding ROU assets of approximately the same.
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.
In
January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint
Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities,
the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies
how to account for the transition into and out of the equity method of accounting when considering observable transactions under
the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim
reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the new
guidance on our consolidated financial statements.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for
contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both Subtopics. The ASU will
be effective for annual reporting periods after December 15, 2021 and interim periods within those annual periods and early adoption
is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
3.
Property, Plant & Equipment
Property
and equipment consist of the following (in thousands):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,451
|
|
|
$
|
1,451
|
|
Automobiles
|
|
|
136
|
|
|
|
61
|
|
Signage
|
|
|
19
|
|
|
|
19
|
|
Furniture and equipment
|
|
|
2,667
|
|
|
|
2,485
|
|
Leasehold improvements
|
|
|
3,455
|
|
|
|
3,455
|
|
Buildings and property improvements
|
|
|
13,012
|
|
|
|
12,981
|
|
Computer software
|
|
|
59
|
|
|
|
59
|
|
|
|
|
20,799
|
|
|
|
20,511
|
|
Accumulated depreciation
|
|
|
(4,695
|
)
|
|
|
(4,157
|
)
|
Property and
equipment, net
|
|
$
|
16,104
|
|
|
$
|
16,354
|
|
Depreciation
expense was approximately $0.5 and $0.4 million for the quarters ended December 31, 2020 and 2019, respectively. Depreciation
expense is included in general and administrative expense.
Purchase
of Building with Common Stock
On
November 1, 2019, the Company received 100.0% interest in Empire Holdings, LLC (“EH”), a related party. The entity
has only one asset, a building. The Company treated the acquisition of EH as the purchase of the underlying building. 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.
4.
Inventory
Inventory
consists of the following (in thousands):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
415
|
|
|
$
|
222
|
|
Work-in-progress
|
|
|
199
|
|
|
|
484
|
|
Finished goods
|
|
|
1,591
|
|
|
|
1,089
|
|
Total
Inventory
|
|
$
|
2,205
|
|
|
$
|
1,795
|
|
The
Company’s inventory is related to twelve subsidiaries which are 100% 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 sent to retail locations or ready to be sold. No inventory reserve was recorded for
the quarters ended December 31, 2020 and 2019 due to management’s assessment of the inventory on hand.
5.
Equity method investments
SOK
Management, LLC
During
the quarter ended December 31, 2020, the Company sold its remaining ownership interest in SOK Management in the amount of $200,000
and was recorded as other investment income under other income on the Company’s profit and loss statement.
Tilstar
Medical, LLC
In
April 2019, the Company entered into an agreement to acquire 48% of the membership interest of Tilstar Medical, LLC (“TIL”).
TIL is a startup operation located in Laurel, Maryland and owns a project management company which assists in procuring licenses
for the production and sale of cannabis. The purchase price for the 48% interest was $550,000 to capitalize TIL which under the
operating agreement occurs upon the execution of the agreement. As of September 30, 2019, the Company had funded the $550,000
and accounted for its investment using the equity method of accounting. The Company was not made aware at time of its investment
in the type and magnitude of expenses that would be funded with its investment capital and is currently in the process of renegotiating
the terms of the operating agreement. During the year ended September 30, 2019, Tilstar Medical along with its partner, Stem Holdings,
Inc. received a letter from the Maryland Medical Cannabis commission with notification that we received stage one pre-approval
for a processor license. The Companies application ranked amongst the top nine highest scoring applications for a medical cannabis
processor license. Final awards will be issued during calendar year 2021. As of December 31, 2020, and 2019, the difference between
the investment and the percentage of net assets attributable to the Company’s investment was approximately $0.27 and $0.28
million, respectively. During the quarter ended December 31, 2020 the Company did not recognize a loss on investment related to
TIL. During the quarter ended December 31, 2019, the Company recognized a loss of $7,000 related to TIL.
Community
Growth Partners, Inc
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. A portion
of the note has been converted into 7.0 % equity leaving a balance outstanding under the note as of December 31, 2020 of approximately
$420,000.
6.
Note 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 the date that is six months after the opening of the Great Barrington Dispensary
which was opened September 2020.
On
October 1, 2020, the Company issued a $100,000 promissory note to Bushman Holdings, Inc., (“BHI”) BHI is a CBD Cannabis
holding company in Florida. Subject to the terms and conditions of the note, BHI promises to pay the Company all of the outstanding
balance on or before January 1, 2022.
7.
Consolidated Asset Acquisitions
YMY
Ventures LLC
In
September 2018, the Company entered into an agreement to acquire 50% of the membership interest of YMY Ventures LLC (“YMY”).
YMY is a startup operation located near Las Vegas, Nevada and owns licenses for the production and sale of cannabis. The purchase
price for the 50% interest was $750,000, with the first $375,000 paid into escrow upon signing, with the final $375,000 due upon
closing, which under the agreement occurs when the license is transferred by the Nevada Department of Taxation and receipt of
approval in transfer of ownership by the Division of Public and Behavioral Health of the City of North Las Vegas. As of June 30,
2019, the Company had funded the $375,000 into escrow and had provided the joint venture with additional funds primarily in the
form of payments for work performed to acquire four licenses from the Nevada Department of Taxation in the amount of approximately
$690,238. As of February 28, 2019, the Nevada Department of Taxation approved the change of ownership for four medical and recreational
cultivation and production licenses held by YMY Ventures now owned by Stem Holdings, Inc. Pursuant to the agreement, the escrowed
amount of $375,000 was released and an additional payment of $67,500 was issued in August 2019. The balance of $307,500 was
being held and negotiated with the partners due to the additional funds over and above the original obligation to provide
tenant improvements of $650,000. A $ 0.79 million non-controlling interest in connection with this asset acquisition is included
in investment in affiliates. As of the date of this filing, the balance has been paid in full including interest and attorney’s
fees.
NVD
RE Corp.
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. As of September 30, 2019, the Company paid $600,000 in cash for the real estate and not only fully
funded its commitment but invested an additional $377,000 in capital over and above its original obligation. NVD used the funds
provided to date by the Company to construct a cannabis indoor grow building and processing plant located near Las Vegas, Nevada
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 leases its facilities to YMY Ventures, LLC. $1.0 million non-controlling interest in connection with
this asset acquisition is included in investment in affiliates.
In
the fiscal 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. As of December 31, 2020, this obligation was paid in its entirety, and $400,000 in additional
proceeds were received on new mortgage.
In
May 2020, the Company acquired an additional 12.5% interest in NVD by issuing 386,035 common shares at par value of $0.001.
West
Coast Ventures
On
March 29, 2019, the Company entered into a definitive agreement to acquire Western Coast Ventures, Inc. (“WCV”). At
the time of acquisition, WCV was a shell with cash of $2,000,000 and a 51% ownership with ILCA Holdings, Inc. (“ILCA”).
At the time of acquisition of WCV, ILCA was also a shell with no operations, which has been issued a limited Conditional Use Permit
for a Marijuana Production Facility (a “MPF”) by the City of San Diego, California, which will only be granting a
total of 40 MPFs. As consideration for the acquisition, the Company issued 2,500,000 shares of its common stock, with a fair value
of approximately $4.4 million or $1.47 per share, the Company’s closing stock price on March 29, 2019. The Company recorded
$2.0 million of cash acquired and a $2.4 million investment in ILCA. The Company has recorded $3.8 million intangible assets (cannabis
licenses) in connection with the acquisition of WCV and a $1.35 million non-controlling interest in connection with this acquisition.
Included in Intangible assets, as of December 31, 2020, and 2019, the Company reported $1.35 million related to this acquisition.
8.
Non-Controlling Interests
Non-controlling
interests in consolidated entities are as follows (in thousands):
|
|
As
of September 30, 2020
|
|
|
|
NCI
Equity Share
|
|
|
Net
Loss Attributable to NCI
|
|
|
NCI
in Consolidated Entities
|
|
|
Non-Controlling
Ownership %
|
|
NVD RE Corp.
|
|
$
|
597
|
|
|
$
|
(48
|
)
|
|
$
|
549
|
|
|
|
50.0
|
%
|
ILCA
|
|
|
1,288
|
|
|
|
(240
|
)
|
|
|
1,048
|
|
|
|
49.0
|
%
|
YMY Ventures,
Inc.
|
|
|
447
|
|
|
|
(204
|
)
|
|
|
243
|
|
|
|
50.0
|
%
|
|
|
$
|
2,332
|
|
|
$
|
(492
|
)
|
|
$
|
1,840
|
|
|
|
|
|
|
|
As
of December 31, 2020
|
|
|
|
NCI
Equity Share
|
|
|
Net
Loss Attributable to NCI
|
|
|
NCI
in Consolidated Entities
|
|
|
Non-Controlling
Ownership %
|
|
NVD RE Corp.
|
|
$
|
549
|
|
|
$
|
(12
|
)
|
|
$
|
537
|
|
|
|
50.0
|
%
|
ILCA
|
|
$
|
1,048
|
|
|
|
(48
|
)
|
|
|
1,000
|
|
|
|
49.0
|
%
|
YMY Ventures,
Inc.
|
|
$
|
243
|
|
|
|
(31
|
)
|
|
|
212
|
|
|
|
50.0
|
%
|
|
|
$
|
1,840
|
|
|
$
|
(91
|
)
|
|
$
|
1,749
|
|
|
|
|
|
9.
Business Combination
Seven
Leaf Ventures Corp. (“7LV”)
In
March 2020, the Company acquired 100% of the voting interest in 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 12,085,770 shares of common stock to former shareholders of 7LV (“7LV Shares”). The Company also issued
a replacement 10% unsecured convertible debentures in the aggregate principal amount of C$3,410 ($2,540 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 31, 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.
The
table below shows the warrant liability and embedded derivative liability recorded in connection with the 7LV convertible notes
and the subsequent fair value measurement during the quarter ended December 31, 2020 in USD, (in thousands):
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
Balance as of September
30, 2020
|
|
$
|
60
|
|
|
$
|
54
|
|
Issuance
|
|
|
-
|
|
|
|
-
|
|
Change
in fair value
|
|
|
(60
|
)
|
|
|
(39
|
)
|
Balance as of
December 31, 2020
|
|
$
|
-
|
|
|
$
|
15
|
|
Purchase
Price Allocation
As
of March 6, 2020, the Company allocated the purchase consideration to the fair value of the assets acquired and liabilities assumed
as summarized in the table below (in thousands):
Consideration Paid (in thousands)
|
|
|
|
|
Estimated fair value of
common stock issued
|
|
$
|
9,552
|
|
Estimated fair value of warrants issued
|
|
|
772
|
|
Estimated fair value of debt issued
|
|
|
2,540
|
|
Estimated fair value of embedded and
bifurcated derivatives
|
|
|
244
|
|
Forgiveness of
working capital advance
|
|
|
(150
|
)
|
Total
consideration paid
|
|
$
|
12,958
|
|
|
|
|
|
|
Assets acquired: (in thousands)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
81
|
|
Fixed assets
|
|
|
54
|
|
Inventory
|
|
|
133
|
|
Goodwill
|
|
|
6,151
|
|
Intangible assets
|
|
|
7,684
|
|
Total
assets acquired
|
|
$
|
14,103
|
|
|
|
|
|
|
Liabilities assumed: (in thousands)
|
|
|
|
|
Accrued expenses
and other current liabilities
|
|
|
1,145
|
|
Total
liabilities assumed
|
|
$
|
1,145
|
|
|
|
|
|
|
Net assets acquired
(in thousands)
|
|
$
|
12,958
|
|
Pursuant
to the Asset Purchase Agreement (“APA”) between 7LV USA Corporation and the Company, upon the one-year anniversary
date of the closing the Company shall pay 7LV USA Corporation additional consideration of $1,220,000 less certain adjustments
related to revenue targets per the APA less Consultant Compensation paid to the prior owners of 7LV USA Corporation. The goodwill
of $5.9 million will not be deductible for income tax purposes.
Driven
In
December 2020, the Company, through an Agreement and Plan of Merger became the parent of an 100% wholly owned subsidiary Driven
Deliveries, Inc., (“DRVD”, “Driven” or “Driven Deliveries”), its subsidiaries, a publicly
held corporation on December 29, 2020. DRVD is an e-commerce and DaaS (delivery-as-a-service) provider with proprietary
logistics and omnichannel UX/CX technology. Driven utilizes its own fulfillment centers, drivers, and proprietary technology.
Driven provides two service levels to its customers: (i) an “Express” delivery with a limited product selection that
is usually delivered within 90 minutes or less; and (ii) a “Next Day” scheduled delivery from a larger selection of
500+ products from a Driven fulfillment center. In connection with the acquisition, the Company issued 101,968,944 shares of common
stock to the existing shareholders of Driven (“DRVD Shares”). As part of the Acquisition, the Company assumed the
Driven stock options outstanding on the closing of the acquisition in the amount of 4,530,495. Accordingly, the Company
has assumed 30,249,184 common share purchase warrants (the “Warrants”), exercisable into shares at an average exercise
price of $.54 per share. Following the completion of the acquisition, Driven is now a wholly owned subsidiary of the Company.
The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Driven convertible notes
and the subsequent fair value measurement during the quarter ended December 31, 2020 in USD, (in thousands):
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
Balance as of September 30, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrants
acquired
|
|
|
9,000
|
|
|
|
-
|
|
Change
in fair value
|
|
|
-
|
|
|
|
-
|
|
Balance as of
December 31, 2020
|
|
|
9,000
|
|
|
$
|
-
|
|
The
following unaudited proforma condensed consolidated results of operations have been prepared as if the acquisition of Driven had
occurred October 1, 2019.
|
|
Quarter
ended
|
|
|
Quarter
ended
|
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Revenue
|
|
$
|
11,142
|
|
|
$
|
3,046
|
|
Net
loss
|
|
$
|
(7,399
|
)
|
|
$
|
(16,400
|
)
|
Purchase
Price Allocation
As
of December 29, 2020, the Company allocated the purchase consideration to the fair value of the assets acquired and liabilities
assumed as summarized in the table below (in thousands):
Consideration Paid (in thousands)
|
|
|
|
|
Estimated fair value of
common stock issued
|
|
$
|
42,825
|
|
Estimated fair value of warrants issued
|
|
|
9,000
|
|
Estimated fair value of options issued
|
|
|
500
|
|
Estimated fair
value of debt assumed
|
|
|
4,389
|
|
Total
consideration paid
|
|
$
|
56,714
|
|
|
|
|
|
|
Assets acquired: (in thousands)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
Fixed assets
|
|
|
47
|
|
Other Assets
|
|
|
1,526
|
|
Goodwill
|
|
|
13,716
|
|
Intangible assets
|
|
|
48,200
|
|
Total
assets acquired
|
|
$
|
63,489
|
|
|
|
|
|
|
Liabilities assumed: (in thousands)
|
|
|
|
|
Accrued expenses
and other current liabilities
|
|
|
(6,775
|
)
|
Total liabilities
assumed
|
|
$
|
(6,775
|
)
|
Net
assets acquired (in thousands)
|
|
$
|
56,714
|
|
The
goodwill of $13.7 million will not be deductible for income tax purposes.
10.
Intangible Assets, net
Intangible
assets as of December 31, 2020 and September 2020 (in thousands):
|
|
Estimated
Useful Life
|
|
|
Cannabis
Licenses
|
|
|
Tradename
|
|
|
Customer
Relationship
|
|
|
Non-compete
|
|
|
Technology
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Balance as September 30, 2020
|
|
|
|
|
|
$
|
12,679
|
|
|
$
|
458
|
|
|
$
|
643
|
|
|
$
|
220
|
|
|
$
|
-
|
|
|
$
|
(730
|
)
|
|
$
|
13,270
|
|
YMY Ventures
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Western Coast Ventures, Inc.
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41
|
)
|
|
|
(41
|
)
|
Yerba Buena
|
|
|
3-15
years
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
(43
|
)
|
Foothill (7LV)
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(130
|
)
|
|
|
(130
|
)
|
Driven Deliveries
|
|
|
10-15
years
|
|
|
|
44,000
|
|
|
|
1,800
|
|
|
|
600
|
|
|
|
-
|
|
|
|
1,800
|
|
|
|
(18
|
)
|
|
|
48,182
|
|
Other
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as December 31, 2020
|
|
|
|
|
|
$
|
56,679
|
|
|
$
|
2,258
|
|
|
$
|
1,243
|
|
|
$
|
220
|
|
|
$
|
1,800
|
|
|
$
|
(975
|
)
|
|
$
|
61,225
|
|
Actual
amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions,
changes in useful lives or other relevant factors or changes. Amortization was recorded for the quarter ended December 31, 2020
of $245,000 and $121,000 for the quarter ended December 31, 2019.
The
following table is a runoff of expected amortization in the following 5-year period as of December 31:
2021
|
|
$
|
4,147
|
|
2022
|
|
|
4,147
|
|
2023
|
|
|
4,147
|
|
2024
|
|
|
4,147
|
|
2025
|
|
|
4,147
|
|
Thereafter
|
|
|
40,490
|
|
|
|
$
|
61,225
|
|
11.
Accounts payable and accrued expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
December
31, 2020
|
|
|
September
30, 2020
|
|
Accounts payable
|
|
|
5,640
|
|
|
$
|
1,784
|
|
Accrued credit cards
|
|
|
43
|
|
|
|
41
|
|
Accrued interest
|
|
|
186
|
|
|
|
134
|
|
Accrued payroll
|
|
|
616
|
|
|
|
616
|
|
Other
|
|
|
2,834
|
|
|
|
408
|
|
Total
Accounts Payable and Accrued Expenses
|
|
$
|
9,319
|
|
|
$
|
2,983
|
|
12.
Notes Payable and Advances
The
following table summarizes the Company’s short-term notes and advances, acquisition note payable, due to related party loans,
and long-term debt, mortgages as of the quarter ended December 31, 2020 and year ended September 30, 2020:
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2020
|
|
Equipment financing
|
|
$
|
24
|
|
|
$
|
27
|
|
Insurance financing
|
|
|
90
|
|
|
|
177
|
|
Mortgages payable
|
|
|
-
|
|
|
|
923
|
|
Promissory note
|
|
|
1,815
|
|
|
|
2,298
|
|
Settlement payable
|
|
|
250
|
|
|
|
-
|
|
Due to related
party
|
|
|
107
|
|
|
|
200
|
|
|
|
$
|
2,286
|
|
|
$
|
3,625
|
|
Acquisition notes
payable
|
|
|
2,666
|
|
|
|
665
|
|
Total
notes payable and advances
|
|
$
|
4,952
|
|
|
$
|
4,290
|
|
|
|
|
|
|
|
|
|
|
Acquisition
payable - long term
|
|
|
516
|
|
|
|
-
|
|
Long-term
mortgages
|
|
|
4,785
|
|
|
|
3,685
|
|
Total
long term debt
|
|
$
|
5,301
|
|
|
$
|
3,685
|
|
|
|
|
|
|
|
|
|
|
Equipment
financing
In
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 December 31, 2020, the obligation outstanding is $1,770. 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 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 now out of business. The obligation remains outstanding at $14,950 as of December 31, 2020 and will
be written off.
Pursuant
to the Company’s acquisition of Yerba Buena the Company assumed a note payable obligation dated July 2017 related to a tractor
which had a 60-month premium finance agreement. The principal amount was $28,905. The note bears no annual interest rate and requires
the Company to make sixty monthly payments of $482 over the term of the note. As of December 31, 2020, the obligation outstanding
is $8,167. 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
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 December 31, 2020, the obligation outstanding is $22,718.
Effective
July 31, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $53,325. The note bears an annual interest rate of 7.5%. The Company paid $15,602 as a down payment
on July 31, 2020, the note requires the Company to make 10 monthly payments of $3,772 over the remaining term of the note. As
of December 31, 2020, the obligation outstanding is $18,861.
Effective
July 31, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $78,056. The note bears an annual interest rate of 7.5%. The Company paid $22,984 as a down payment
on July 31, 2020, the note requires the Company to make 10 monthly payments of $5,507 over the remaining term of the note. As
of December 31, 2020, the obligation outstanding is $27,536.
Effective
May 24, 2020, the Company entered into a 9-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $16,777. The note bears an annual interest rate of 8.7%. The Company paid $3,485 as a down payment on
May 24, 2020, the note requires the Company to make 9 monthly payments of $1,339 over the remaining term of the note. As of December
31, 2020, the obligation outstanding is $4,618.
Effective
July 16, 2020, the Company entered into a 9-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $10,629. The note bears an annual interest rate of 11%. The Company paid $4,009 as a down payment on July
16, 2020, the note requires the Company to make 9 monthly payments of $736 over the remaining term of the note. As of December
31, 2020, the obligation outstanding is $2,942.
Effective
September 30, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $2,611. The note bears an annual interest rate of 7.0%. The Company paid $1,043 as a down payment on
September 30, 2020, the note requires the Company to make 10 monthly payments of $157 over the remaining term of the note. As
of December 31, 2020, the obligation outstanding is $1,098.
Effective
November 7, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $6,675. The note bears an annual interest rate of 11.4%. The Company paid $1,371 as a down payment
on November 7, 2020, the note requires the Company to make 10 monthly payments of $530 over the remaining term of the note. As
of December 31, 2020, the obligation outstanding is $4,243.
Effective
December 4, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $9,920. The note bears an annual interest rate of 12.8%. The Company paid $2,383 as a down payment
on December 4, 2020, the note requires the Company to make 10 monthly payments of $754 over the remaining term of the note. As
of December 31, 2020, the obligation outstanding is $7,537.
Short-term
mortgages payable
On
January 16, 2018, the Company consummated a “Contract for Sale” for a Farm Property in Mulino Oregon (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. As of December 31,
2020, the balance due of $922,500 including interest and fees in the amount of $144,486 was satisfied in full through the Company
obtaining a new mortgage on the property (see Long-term mortgages below).
Promissory
note
In
January 2020, the Company issued two promissory notes 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 share. As of July 2020, in consideration of the warrants being amended to $0.45 per share with an extended the
term from five to a ten-year term, the maturity date has been extended to December 13, 2020. In May 2020, the Company made a principal
payment of $20,000. As of December 31, 2020, the obligation outstanding is $480,000 and $474,949 net of debt discount. The
noteholders have agreed to have these notes converted during the second quarter ended March 31, 2021.
In
January 2020, the Company issued two promissory notes with a principal balance of $500,000 to accredited investors (the “Note
Holders”). The note matures in October 2020 and has an annual rate of interest of 12%. In connection with the issuance of
the promissory note, the Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the
issuance date, $0.85 per. As of July 2020, in consideration of the warrants being amended to $0.45 per share with an extended
the term from five to a ten-year term, the maturity date has been extended to December 13, 2020 As of December 31, 2020, the obligation
outstanding is $500,000 and $449,449 net of debt discount. The Company was notified that the maturity dates on these notes
have been extended for the near-term.
The
below Promissory Notes evidencing the PPP Loans are 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
Notes. 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 plans to use the PPP funds received in a manner to obtain debt forgiveness.
The Company will use the funds for payroll, rent, and utilities.
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. As of December 31, 2020, the
obligation outstanding is $220,565. In January 2020, the Company received notification for complete forgiveness related to
this obligation.
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. As of December 31, 2020, the obligation outstanding
is $266,820. In January 2020, the Company received notification
for complete forgiveness related to this obligation.
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. As of December 31, 2020, the obligation outstanding
is $245,400.
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. As of December 31, 2020, the obligation outstanding
is $62,500.
The
Company’s subsidiary received loan proceeds of $140,407 pursuant to the Paycheck Protection Program under the CARES Act.
The Loan, which was in the form of a promissory note, dated July 15, 2020, between the Company and Cross River Bank as the lender,
matures on December 30, 2020 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. As of December 31, 2020, the obligation outstanding
is $140,407. In January 2020, the Company received notification for complete forgiveness related to this obligation.
Settlement
payable
As
part of the Agreement and Plan of Merger with Driven Deliveries the Company assumed a settlement payable related to an employment
claim where Driven shall pay certain employees a total of $250,451. This settlement is payable in equal bi-monthly payments over
a period of seventeen (17) Months (36 pay periods), beginning in February 2021. As of December 31, 2020, the settlement payable
is presented on the balance sheet in the amount of $250,451.
Due
to related parties
During
November 2017, one of the Company’s controlled subsidiaries entered into a Promissory Note with a face value of $80,000
with a corporate entity that has shareholders, officers and directors in common with the Company. The Note bears interest at a
rate of 6% per annuum and was due one year from the date of issue. The note currently in default is due on demand. As of December
31, 2020, the obligation outstanding is $80,000.
As
of December 31, 2020, the Company had a related party loan payable of $26,769 payable to the Company’s officer.
Acquisition
notes payable
In
April 2019, the Company entered into 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%. The note required 12 monthly payments of $2,667, then an additional
12 monthly payments of $16,667 and then a final balloon payment of the remaining principal and accrued interest. As of December
31, 2020, the Company has made payments of $42,281 leaving a balance of $357,719 in Short-term liabilities. The note holder has
called the note in default, however, has not as of the date of these financial statements, required performance of any of the
default remediation as required under the note.
In
September 2018, the Company entered into an agreement to acquire
50% of the membership interest of YMY. The purchase price for the 50% interest was approximately $0.8 million. In connection with
this agreement, as of September 30, 2019, the Company has paid approximately $500,000 and recorded a note payable of $307,500.
As of December 31, 2020, the Company has not made any payments related to this note.
As
part of the Agreement and Plan of Merger with Driven Deliveries the Company assumed a acquisition liabilities totaling $2,000,418.
These liabilities related to a California’s Private Attorney General Act (“PAGA”) labor claims, liabilities
related to a Purchase Agreement for certain assets, and a settlement related to a prior acquisition. As of December 31, 2020,
the total of the assumed liabilities is $2,516,832, the current portion of this note is $2,000,418.
Long-term
debt, mortgages
In
January 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage
bears interest at 15% per annum. Monthly interest only payments began February 1, 2020 and continue each month thereafter until
paid. The entire unpaid balance is due on January 31, 2022, the maturity date of the mortgage, and is secured by the underlying
property. 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. As of December 31, 2020, the obligation outstanding is $400,000.
In
March 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. As of December 31,
2020, the obligation outstanding is $1,585,000.
In
March 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. As of December 31, 2020, the obligation
outstanding is $400,000.
In
March 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage
bears interest at 15% per annum. Monthly interest only payments began April 1, 2020 and continue each month thereafter until paid.
The entire unpaid balance is due on March 31, 2022, the maturity date of the mortgage, and is secured by the underlying property.
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. As of December 31, 2020, the obligation outstanding is $700,000.
In
July 2020, the Company executed a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears
interest at 14% per annum. Monthly interest only payments began August 1, 2020 and continue each month thereafter until paid.
The entire unpaid balance is due on July 31, 2023, the maturity date of the mortgage, and is secured by the underlying property.
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. As of December 31, 2020, the obligation outstanding is $200,000.
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. As
of September 30, 2019, the balance due totals $300,000. In August 2020, the Company refinanced this obligation and paid the $300,000
balance. The refinanced mortgage term is 36 months and includes and interest rate of 14% and monthly interest only payments of
$4,666,67. As of December 31, 2020, the balance due totals $400,000.
In
November 2020, the Company executed a mortgage payable on property located in Mulino, Oregon to acquire additional funds. The
mortgage bears interest at 15% per annum. Monthly interest only payments began December 1, 2020 and continue each month thereafter
until paid. The entire unpaid balance is due on November 2022, the maturity date of the mortgage, and is secured by the underlying
property. 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. As of December 31, 2020, the obligation outstanding is $1,100,000.
The
following is a table of the 5-year runoff of our long-term debt as of December 31:
2021
|
|
$
|
-
|
|
2022
|
|
|
2,600
|
|
2023
|
|
|
2,185
|
|
2024
|
|
|
-
|
|
2025
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
4,785
|
|
13.
Convertible debt
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 52,430 convertible debenture special warrants (the “Broker
CD Special Warrants”) as partial satisfaction of a selling commission.
On
March 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) document (the “Qualification
Document”) 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 six 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
six 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.
The
Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the
Offering. If 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 Document 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)
|
|
$
|
2.93
|
|
Dividend yield
|
|
|
-
|
|
Historical volatility
|
|
|
85
|
%
|
Risk free interest rate
|
|
|
1.4%
to 1.9
|
%
|
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.
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.
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 quarter ended December 31, 2020 in USD, (in thousands):
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
|
|
|
|
|
|
|
Balance at September 30,
2020
|
|
$
|
67
|
|
|
$
|
592
|
|
Change
in fair value
|
|
|
(20
|
)
|
|
|
(223
|
)
|
Balance at December
31, 2020
|
|
$
|
47
|
|
|
$
|
369
|
|
As
part of the Agreement and Plan of Merger with Driven Deliveries the Company assumed a convertible promissory note with a principal
of $1,050,000. The note accrues interest at a rate of 8% per annum. The note converts to the Company’s common stock at a
rate of $0.50 per share. This note has an original issuance discount of $50,000. The proceeds of the note were paid out in two
tranches, the first for $787,500 upon the execution of the note and the second for $262,500 30 days after the original funding.
Each tranche will be due 12 months from the date of the funding. The Company can prepay the note as follows: if the note is outstanding
for less than 90 days than 105% of the principal will be paid, at 91-120 day 110% of the principal will be paid, at 121-180 days
115% of the principal will be paid, and at 181-365 days 120% of the principal will be paid. So long as this note is outstanding,
upon any issuance by the Company or any of its subsidiaries of any convertible debt security (whether such debt begins with a
convertible feature or such feature is added at a later date) with any term more favorable to the holder of such security or with
a term in favor of the holder of such security that was not similarly provided to the holder in this Note, then the Company shall
notify the holder of such additional or more favorable term and such term, at the holder’s option, shall become a part of
this note and its supporting documentation. The types of terms contained in the other security that may be more favorable to the
holder of such security include, but are not limited to, terms addressing conversion discounts, terms addressing maturity, conversion
look back periods, interest rates, original issue discount percentages and warrant coverage. The Company notes the agreement included
certain make-whole provisions related to the issuance of these shares which resulted in a liability. The Company did not record
the liability as it was determined to be trivial. As of December 31, 2020, the outstanding balance on this obligation is $1,017,110,
net of the debt discount of $23,390.
As
part of the Agreement and Plan of Merger with Driven Deliveries the Company assumed a convertible promissory note with a principal
of $50,000. The note accrues interest at a rate of 10% per annum. The note converts to the Company’s common stock at a rate
of $0.50 per share. The interest on the promissory note is to be paid quarterly in arrears on the fifth day of each calendar quarter.
The principal amount of the note is due on the maturity date of June 30, 2021. As of December 31, 2020, the outstanding balance
on this obligation is $50,000.
The
table below shows the net amount of convertible notes as of December 31, 2020 in USD (in thousands):
|
|
December
31, 2020
|
|
Principal value of 8%, convertible at $0.90 at December 31, 2020,
due December 27, 2021
|
|
|
|
|
including penalty provision
of $155,239
|
|
$
|
3,123
|
|
Principal value of 10%, convertible
at $1.31 at December 31, 2020, due May 30, 2021 (see Note 9)
|
|
|
2,754
|
|
Principal value of various convertible notes, convertible at
$0.50 at December 31, 2020, due June – August, 2021
|
|
|
1,067
|
|
Debt discount
|
|
|
(125
|
)
|
Cumulative foreign
currency impact
|
|
|
(24
|
)
|
Carrying value of convertible notes
|
|
$
|
6,795
|
|
Additionally,
as part of the Agreement and Plan of Merger with Driven Deliveries the Company assumed a convertible promissory note with a principal
of $805,000 payable to a related party. The note accrues interest at a rate of 10% per annum. The note converts to the Company’s
common stock at a rate of $0.50 per share. Beginning January 1, 2021, $15,000 of principal is payable per month in addition to
50% of owed interest. Beginning April 1, 2021, 10% of the Company’s monthly cash flow, as defined will also be paid and
applied to the principal of the note. The principal amount of the note along with accrued interest is due on the maturity date
of June 1, 2025. As of December 31, 2020, the outstanding balance on this obligation is $805,000.
14.
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 December 31, 2020 (in thousands):
|
|
Fair
value measured at December 31, 2020
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
prices in active markets
|
|
|
other
observable
inputs
|
|
|
unobservable inputs
|
|
|
|
Fair
value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Warrant liability
|
|
$
|
9,178
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,178
|
|
Embedded derivative
liability
|
|
|
384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
384
|
|
Total fair value
|
|
$
|
9,562
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,562
|
|
There
were no transfers between Level 1, 2 or 3 during the quarter ended December 31, 2020.
The
following table presents changes in Level 3 liabilities measured at fair value for the quarter ended December 31, 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, 2020
|
|
$
|
257
|
|
|
$
|
592
|
|
|
$
|
849
|
|
Warrants granted
for services
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
Warrants issued
pursuant to acquisition (see Note 9)
|
|
|
9,000
|
|
|
|
-
|
|
|
|
9,000
|
|
Change
in fair value
|
|
|
(90
|
)
|
|
|
(208
|
)
|
|
|
(298
|
)
|
Balance –
December 31, 2020
|
|
$
|
9,178
|
|
|
$
|
384
|
|
|
$
|
9,562
|
|
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 December
31, 2020 and September 30, 2020 is as follows:
|
|
|
Warrant
Liability
|
|
|
|
|
As
of
|
|
|
|
As
of
|
|
|
|
|
December
31, 2020
|
|
|
|
September
30, 2020
|
|
Strike price
|
|
$
|
0.58
|
|
|
$
|
0.36
to 2.96
|
|
Contractual term (years)
|
|
|
2.85
|
|
|
|
1
to 3
|
|
Volatility (annual)
|
|
|
124
|
%
|
|
|
100
|
%
|
Risk-free rate
|
|
|
0.67
|
%
|
|
|
0.28
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
Embedded
Derivative Liability
|
|
|
|
|
As
of
December 31, 2020
|
|
|
|
As
of
September 30, 2020
|
|
Strike price
|
|
$
|
1.08
|
|
|
$
|
1.12
|
|
Contractual term (years)
|
|
|
.99
|
|
|
|
1.5
|
|
Volatility (annual)
|
|
|
112
|
%
|
|
|
101
|
%
|
Risk-free rate
|
|
|
0.10
|
%
|
|
|
0.25
|
%
|
Dividend yield (per share)
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Credit spread
|
|
|
14%
to 16
|
%
|
|
|
11.21
|
%
|
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.
15.
Shareholders’ Equity
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.
Preferred
shares
The
Company had two series of preferred shares designated with no preferred shares issued and outstanding as of December 31, 2020
and September 30, 2020.
Common
shares
During
the three months ended December 31, 2019, 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 $500,000 less the
lien of $105,732. The Company acquired the property from a related party and recorded the building at its carrying value of approximately
$500,000. In connection with this transaction the Company issued 394,270 common shares at $1.00 per share.
During
the three months ended December 31, 2019, the Company issued 5,000 shares of its common stock related to a consulting agreement
for a fair value of approximately $4,000 or $0.89 per share.
During
the quarter ended December 31, 2020, the Company issued 1,868,750 shares of its common stock valued at $561,000 as stock-based
compensation.
During
the quarter ended December 31, 2020, the Company issued 1,569,570 shares of its common stock related to various consulting agreements
for a fair value of approximately $589,000 or $0.38 per share.
During
the quarter ended December 31, 2020, the Company cancelled 525,400 common shares related convertible notes.
During
the quarter ended December 31, 2020, the Company converted $91,459 of its accrued interest related to convertible debt in exchange
for 207,861 shares of the company’s common stock. The Company also issued 293,700 common shares in satisfaction of
rent payments owed of $117,480.
As
part of the Agreement and Plan of Merger with Driven Deliveries the Company issued 101,968,994 common shares.
Pursuant
to the effectiveness of the Company’s S-1 registration statement the Company has received offers and has been tendered $2.87
million and will issue 6,833,069 common shares.
16.
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. During
the quarter ended December 31, 2020, pursuant to an employment agreement the Company issued 100,000 stock options.
The
fair value of options granted during the quarters ended December 31, 2020 and 2019 were estimated using the following weighted-average
assumptions:
Options:
|
|
For
the Three Months Ended
|
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Exercise price
|
|
$
|
.40
|
|
|
$
|
0.89
- $1.25
|
|
Expected term (years)
|
|
|
2.8
|
|
|
|
2.0
- 4.0
|
|
Expected stock price volatility
|
|
|
103.86%
- 127.35
|
%
|
|
|
105.8%
- 115.9
|
%
|
Risk-free rate of interest
|
|
|
1.88%
- 2.79
|
%
|
|
|
2
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
A
summary of option activity under the Company’s stock option plan for the three months ended December 31, 2020 is presented
below:
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Total
Intrinsic Value
|
|
|
Weighted
Average Remaining Contractual Life (in years)
|
|
Outstanding as of October 1, 2019
|
|
|
3,210,416
|
|
|
$
|
2.45
|
|
|
$
|
-
|
|
|
|
2.1
|
|
Granted
|
|
|
2,362,500
|
|
|
|
0.33
|
|
|
|
-
|
|
|
|
2.89
|
|
Outstanding
as of September 30, 2020
|
|
|
5,572,916
|
|
|
$
|
1.77
|
|
|
$
|
-
|
|
|
|
1.4
|
|
Granted
|
|
|
100,000
|
|
|
$
|
0.40
|
|
|
$
|
-
|
|
|
|
2.8
|
|
Outstanding
as of December 31, 2020
|
|
|
5,672,916
|
|
|
$
|
1.73
|
|
|
$
|
-
|
|
|
|
1.2
|
|
Estimated
future stock-based compensation expense relating to unvested stock options was nominal as of December 31, 2020 and 2019. Weighted
average remaining contractual life of the options is 1.2 years.
Stock-based
Compensation Expense
Stock-based
compensation expense for the three months ended December 31, 2020 and 2019 was comprised of the following (in thousands):
|
|
Three
months ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock
grants
|
|
$
|
1,151
|
|
|
$
|
82
|
|
Stock options
|
|
|
61
|
|
|
|
415
|
|
Warrants
|
|
|
132
|
|
|
|
-
|
|
Total
stock-based compensation
|
|
$
|
1,344
|
|
|
$
|
497
|
|
17.
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, his 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 December 31, 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. The Company is in the process of creating a banking relationship
with another institution.
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.
In
July 2016, the Company entered into a 10-year lease for a commercial building from an unrelated third party in Springfield, Oregon.
The lease requires the Company to pay a starting 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 starting rate of $3,525 a month that escalates after the first year. The
Company subleases this property to a related party (see disclosures below under “Springfield Suites”). As of December
31, 2020, Company eliminates this rental income in consolidation.
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 with yearly increases thereafter.
All taxes, maintenance and utilities are billed separately. This space is currently being sub-leased for the reminder, which terminates
in February 2021.
In
September 2019, the Company entered into a 4-year lease for the occupancy of the Company’s new corporate office located
in Boca Raton, Florida. The lease requires the Company to pay a starting base rental fee of $4,285 per month with yearly increases
thereafter.
In
January 2019, the Company entered into a 5-year lease for the occupancy of real estate and a building located in Hillsboro, Oregon.
The lease requires the Company to pay a starting base rental fee of $9,696 per month with yearly increases thereafter.
As
of December 31, 2020, the Company has acquired interests in several entities more fully described in Note 5 and Note 7. 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. As of December 31, 2020, Company estimates that its investees will
need up to approximately $2 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.
In
December 2020, the Company filed a preliminary short form document with the securities regulatory authorities in each of the provinces
of British Columbia, Alberta and Ontario in connection with a marketed public offering of units of the Company. The Offering is
being led by Canaccord Genuity Corp. Each Unit shall be comprised of one common share in the capital of the Company and one common
share purchase warrant of the Company Each Warrant is exercisable into one common share at an exercise price to be determined
in the context of the market. The final pricing of each Unit, the exercise price of each Warrant, and the term of each Warrant
will be determined in the context of the market prior to the filing of the final short form document in respect of the Offering.
The net proceeds raised under the Offering will be used for working capital and general corporate purposes.
The
Company, as of December 31, 2020 executed an Agency Agreement and in consideration of the services rendered by the Agent and in
connection with the Offering, the Company has agreed to pay the Agent, on the Closing Date a commission equal to 7% of the gross
proceeds of the Offering (including in respect of any exercise of the Over-Allotment Option, if any) payable in cash (the “Agent’s
Commission”), subject to a reduced fee equal to 1% for Units sold to certain purchasers designated by the Company
on a president’s list (the “President’s List”). In addition the Agent will receive a
number of share purchase warrants (the “Broker Warrants”) to purchase up to that number of shares of common
stock of the Company (each, a “Broker Share”) that is equal to 7% of the aggregate number of Units issued under
the Offering (including any Additional Units (as hereinafter defined) issued upon exercise of the Over-Allotment Option,
if any), subject to a reduced number of Broker Warrants equal to 3.5% of the Units sold to purchasers on the President’s
List, at an exercise price of $0.55 CAD per Broker Share, exercisable for a period of 24 months following the Closing
Date. Pursuant to the Agency Agreement, the Company also agreed to pay to the Agent a corporate finance fee of $100,000 CAD
(the “Corporate Finance Fee”), such Corporate Finance Fee to be payable as to $50,000 CAD in cash
and as to $50,000 CAD by the issuance of 90,909 shares of common stock of the Company (the “Corporate Finance
Fee Shares”) at the Offering Price. After deducting the Agent’s Commission (assuming no President’s
List purchasers), the estimated expenses of the Offering of $350,000 CAD and the cash portion of the Corporate Finance
Fee, which will be paid out of the general funds of the Company. The Company has also granted to the Agent an over-allotment
option (the “Over-Allotment Option”), exercisable in whole or in part, at the Agent’s sole discretion,
to purchase up to an additional 15% of the number of Units sold pursuant to the Offering, being up to an additional 2,590,909
Units in the case of the Maximum Offering (the “Additional Units”), each Additional Unit to be comprised of
one Unit Share and one Warrant, at the Offering Price to cover the Agent’s over-allocation position, if any, and for market
stabilization purposes. The Over-Allotment Option is exercisable, in whole or in part, at any time or times until the date that
is 30 days immediately following the Closing Date. A purchaser who acquires Additional Units forming part of the Agent’s
over-allocation position acquires such Additional Units under this Prospectus, regardless of whether the over-allocation position
is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. If the Over-Allotment Option
is exercised in full, the total Price to the Public, Agent’s Commission and Net Proceeds to the Company (before deducting
expenses of the Offering and assuming no President’s List purchasers) will be $9,200,000 CAD, $644,000 CAD
and $8,556,000 CAD, respectively, in the case of the Minimum Offering and, $10,925,000 CAD, $764,750 CAD
and $10,160,250 CAD, respectively, in the case of the Maximum Offering. Pursuant to the terms of the Agency Agreement,
all subscription funds received from subscribers will be retained in trust by the Agent until the Minimum Offering is obtained.
Once the Minimum Offering has been obtained, the sale of the Units shall be completed in accordance with the Agency Agreement.
To date, all funds have been subscribed and will be held in escrow for final approval.
Legal
Proceedings
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. The Company has now settled with
its joint venture partner with respect to the operating agreement, however, the Company is now in negotiating with its partner
on recovering the amount of money spent in excess of its obligation for over funding the operation for tenant improvements.
18.
Subsequent events
Stem
is conducting the U.S. Offering under the terms of registration statements on Form S-1 filed with the SEC under the U.S. Securities
Act on June 17, 2020, October 21, 2020, January 5, 2021 and February 12,2021. Pursuant to the U.S. Offering, the Company is offering
for sale up to $418,000 of U.S. Offering Units, each comprised of one share of common stock and one share purchase warrant
of the Company, at the Offering Price. The U.S. Offering Units will not be offered or sold in Canada and are not being qualified
for distribution under this Prospectus. The Agent will not be acting as agent in respect of the U.S. Offering and will not be
paid a fee in respect thereof.
Subsequent
to December 31, 2020, the Company tendered its obligation in the amount of $307,500 related to the YMY acquisition note
payable. The total amount paid of $361,361 included interest and legal fees.
Subsequent
to December 31, 2020, the Company received notification for complete forgiveness related to three obligations totaling $627,792
as of December 31, 2020 (see Note12).
Subsequent
to December 31, 2020, pursuant to certain employment and consulting agreements the Company issued 1,150,000 common shares.
Subsequent
to December 31, 2020, the Company has raised an additional $6.8 million in funds that are presently held in escrow which will
be released upon the registration of the securities becoming effective.