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 and is a leading
omnichannel, vertically-integrated cannabis branded products and technology company with state-of-the-art cultivation, processing, extraction,
retail, distribution, and delivery-as-a-service (DaaS) operations throughout the United States. Stem’s family of award-winning
brands includes TJ’s Gardens™, TravisxJames™, and Yerba Buena™ flower and extracts; Cannavore™ edible confections;
Doseology™, a CBD mass-market brand launching in 2021; as well as DaaS brands Budee™ and Ganjarunner™ through the acquisition
of Driven Deliveries. Budee™ and Ganjarunner™ e-commerce platforms provide direct-to consumer proprietary logistics and an
omnichannel UX (user experience)/CX (customer experience).
The
Company 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, New York, and Michigan.
As of June 30, 2021, Stem had ownership interests in 23 state issued cannabis licenses including eight (8) licenses for cannabis cultivation,
four (4) licenses for cannabis processing, one (1) license for cannabis wholesale distribution, two (2) licenses for hemp production,
three (3) adult-use medical retailers (non-storefront), five (5) cannabis dispensary licenses.
As
of June 30, 2021, the Company has acquired eight commercial properties and leases two properties, located in Oregon
and Nevada, and has entered into leases for these related entities (see Note 18). As of June 30, 2021, 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 Oregon Acquisitions 2, Corp., 7LV USA Corporation, Driven Deliveries, Inc., and Stem Oregon Acquisitions 1,
Corp.
With
the acquisition of Driven, the Company becomes an omni-channel retailer, utilizing Driven’s proprietary logistics and user 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 60 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”.
In June 2021, the Company’s
shareholders approved a proposal to amend the Company’s Articles of Incorporation to increase the number of authorized common shares
from 300,000,000 shares to 750,000,000 shares.
Going
Concern
At
June 30, 2021, the Company had approximate balances of cash and cash equivalents of $9.1
million, negative working capital of approximately
$2.3 million,
and an accumulated deficit of $60.5
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, former 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 U.S. 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 June 30, 2021.
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., 7LV USA Corporation, and
Consolidated Ventures of Oregon, Inc., and Driven Deliveries, Inc. In addition, the Company has consolidated YMY Ventures, WCV, LLC and
NVD RE, Inc. under the variable interest requirements.
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 June 30, 2021, and 2020, 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 is 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 June 30, 2021, the reserve
for doubtful accounts was $79 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:
Schedule of Estimated Useful Life of Assets
|
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 June 30, 2021, the Company recognized an investment loss of $ thousand related to TIL and CGP (see Note 6).
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 June 30, 2021, and 2020, 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 a Black Scholes 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 June 30, 2021, and 2020, 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 (TCJA 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
December 2020, the Company issued a significant number of new shares in its acquisition of Driven (see Note 10). 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
U.S. 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 on 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 June 30, 2021 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 $337
thousand and $763
thousand, respectively for the three and nine
months ended June 30, 2021. There was sublease rental income of $8
thousand and $17
thousand, respectively for the three and nine
months ended June 30, 2021. The Company has eleven operating leases consisting with remaining lease terms ranging from 23
months to 180
months.
Lease
Costs
Schedule of Lease Costs
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
June 30, 2021
|
|
|
Components of total lease costs:
|
|
|
|
|
|
Operating lease expense
|
|
$
|
337
|
|
|
Total lease costs
|
|
$
|
337
|
|
Lease
positions as of June 30, 2021
ROU
lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:
Schedule of ROU Lease Assets and Lease Liabilities
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
Assets
|
|
|
|
|
|
Right of use asset
|
|
$
|
6,927
|
|
|
Total assets
|
|
$
|
6,927
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Operating lease liabilities – short term
|
|
$
|
1,509
|
|
|
Operating lease liabilities – long term
|
|
|
5,401
|
|
|
Total lease liability
|
|
$
|
6,910
|
|
Lease
Terms and Discount Rate
Schedule of Lease Terms and Discount Rate
|
Weighted average remaining lease term (in years) – operating lease
|
|
|
10
|
|
|
Weighted average discount rate – operating lease
|
|
|
9.40
|
%
|
Cash
Flows
Schedule of Cash Flow Related to Lease
|
|
|
Nine Months
|
|
|
|
|
Ended
|
|
|
|
|
June 30,2021
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
ROU amortization
|
|
$
|
763
|
|
|
Cash paydowns of operating liability
|
|
$
|
(763
|
)
|
|
Supplemental non-cash amounts of lease liabilities arising from obtaining:
|
|
|
|
|
|
ROU asset
|
|
$
|
6,927
|
|
|
Lease Liability
|
|
$
|
6,910
|
|
The future minimum lease payments under the leases are as follows:
Schedule of Future Minimum Lease Payments
|
|
|
|
|
|
|
2021
|
|
$
|
391
|
|
|
2022
|
|
|
1,676
|
|
|
2023
|
|
|
1,249
|
|
|
2024
|
|
|
899
|
|
|
2025
|
|
|
851
|
|
|
Thereafter
|
|
|
5,871
|
|
|
Total future minimum lease payments
|
|
|
10,937
|
|
|
Less: Lease imputed interest
|
|
|
(4,027
|
)
|
|
Total
|
|
$
|
6,910
|
|
Disaggregation
of Revenue
In
the three and nine months ended June 30, 2021, revenue reported is primarily from the sale of cannabis and related products accounted
for under ASC 606.
The
following table illustrates our revenue by type related to the three months ended June 30, 2021, and 2020, respectively:
Schedule of Disaggregation of Revenue
|
Three Months Ended June 30,
|
|
2021
|
|
|
2020
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,555
|
|
|
$
|
1,597
|
|
|
Retail
|
|
|
10,795
|
|
|
|
4,516
|
|
|
Rental
|
|
|
8
|
|
|
|
11
|
|
|
Other
|
|
|
78
|
|
|
|
17
|
|
|
Total revenue
|
|
|
12,436
|
|
|
|
6,141
|
|
|
Discounts and returns
|
|
|
(1,850
|
)
|
|
|
(943
|
)
|
|
Net Revenue
|
|
$
|
10,586
|
|
|
$
|
5,198
|
|
The
following table illustrates our revenue by type related to the nine months ended June 30, 2021, and 2020, respectively:
|
Nine Months Ended June 30,
|
|
2021
|
|
|
2020
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
3,879
|
|
|
$
|
2,904
|
|
|
Retail
|
|
|
26,721
|
|
|
|
7,365
|
|
|
Rental
|
|
|
17
|
|
|
|
26
|
|
|
Product Sales
|
|
|
229
|
|
|
|
-
|
|
|
Other
|
|
|
336
|
|
|
|
20
|
|
|
Total revenue
|
|
|
31,182
|
|
|
|
10,315
|
|
|
Discounts and returns
|
|
|
(4,609
|
)
|
|
|
(1,498
|
)
|
|
Net Revenue
|
|
$
|
26,573
|
|
|
$
|
8,817
|
|
Geographical
Concentrations
As
of June 30, 2021, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational use in
15 states and D.C., with lesser legalization, such as for medical use in an additional 21 states and D.C., 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.
Earnings
(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 only incurred losses for the nine months ended June 30, 2021 and the three and nine months ended June 30, 2020,
basic and diluted net loss per share is the same.
The
following table provides a reconciliation of the numerators and denominators used to determine basic and diluted net income (loss) per
common share for the three months ended June 30, 2021 and 2020:
Schedule
of Basic and Diluted Net Income (Loss) Per Share
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Three
Months Ended June 30,
|
|
|
(Amounts
in thousands, except per share data)
|
|
2021
|
|
|
2020
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Stem Holdings
|
|
$
|
2,655
|
|
|
$
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding, basic
|
|
|
208,137,694
|
|
|
|
66,410,900
|
|
|
Dilutive
impact of share-based instruments
|
|
|
77,312,563
|
|
|
|
-
|
|
|
Weighted-average
common shares outstanding, diluted
|
|
|
285,450,257
|
|
|
|
66,410,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share attributable to Stem Holdings
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
Diluted
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
Securities
that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share for the
nine months ended June 30, 2021 are as follows:
Schedule
of Potentially Dilute Securities Excluded From Computation of Diluted Loss Per Share
|
Potentially dilutive share-based instruments
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
4,547,597
|
|
|
Options to purchase common stock
|
|
|
8,418,411
|
|
|
Unvested restricted stock awards
|
|
|
-
|
|
|
Warrants to purchase common stock
|
|
|
64,346,555
|
|
|
|
|
|
77,312,563
|
|
Advertising
Costs
The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was $430 thousand and $22
thousand three months ended June 30, 2021, and 2020, respectively. Advertising expense was $749 thousand and $47 thousand for nine months
ended June 30, 2021, and 2020, 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 operates 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
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
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 June 30, 2021, the Company
recognized additional operating liabilities of approximately $6.2 million, with corresponding ROU assets of approximately $6.9 million.
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 beginning
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):
Schedule of Property, Plant and Equipment
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,451
|
|
|
$
|
1,451
|
|
|
Automobiles
|
|
|
113
|
|
|
|
61
|
|
|
Signage
|
|
|
19
|
|
|
|
19
|
|
|
Furniture and equipment
|
|
|
2,945
|
|
|
|
2,485
|
|
|
Leasehold improvements
|
|
|
3,568
|
|
|
|
3,455
|
|
|
Buildings and property improvements
|
|
|
10,173
|
|
|
|
12,981
|
|
|
Computer software
|
|
|
59
|
|
|
|
59
|
|
|
Property and equipment, gross
|
|
|
18,328
|
|
|
|
20,511
|
|
|
Accumulated depreciation
|
|
|
(5,230
|
)
|
|
|
(4,157
|
)
|
|
Property and equipment, net
|
|
$
|
13,098
|
|
|
$
|
16,354
|
|
Depreciation
expense was approximately $0.5 and $0.5 million for the three months ended June 30, 2021 and 2020, respectively. Depreciation expense
was approximately $1.4 and $1.3 million for the nine months ended June 30, 2021 and 2020, respectively. Depreciation expense is included
in general and administrative expense.
4.
Inventory
Inventory
consists of the following (in thousands):
Schedule of Inventory
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
640
|
|
|
$
|
222
|
|
|
Work-in-progress
|
|
|
257
|
|
|
|
484
|
|
|
Finished goods
|
|
|
1,934
|
|
|
|
1,089
|
|
|
Total Inventory
|
|
$
|
2,831
|
|
|
$
|
1,795
|
|
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 three
and nine months ended June 30, 2021 and 2020 due to management’s assessment of the inventory on hand.
5.
Prepaid expenses and other current assets
Prepaid
expenses and other current assets are assets and payments previously made, that benefit future periods. The balance as of June 30, 2021
includes the Employee Retention Tax Credit (“ERTC”) program from the U.S Treasury, as part of the COVID-19 stimulus package.
The ERTC program refunds a portion of taxes paid for payroll. We accrued the amounts that we qualify for, and this reduced our payroll
expenses during the quarter applied for.
Prepaid
and other current assets comprised of the following:
Schedule of Prepaid Expenses and Other Current Assets
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
615
|
|
|
$
|
249
|
|
|
ERTC credits
|
|
|
2,471
|
|
|
|
-
|
|
|
Deposits and other current assets
|
|
|
1,050
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
4,136
|
|
|
$
|
452
|
|
6.
Equity method investments
SOK
Management, LLC
During
the nine months ended June 30, 2021, 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 June 30, 2021, and September 30, 2020, the
difference between the investment and the percentage of net assets attributable to the Company’s investment was approximately
$0.29 and
$0.28 million,
respectively. During the three and nine months ended June 30, 2021 the Company recognized a minimal loss on investment related to
TIL. During the three and nine months ended June 30, 2020, the Company recognized a loss of $0.01 million and
$0.14 million,
respectively related to TIL.
Community
Growth Partners, Inc
On
January 6, 2020,
Kaya
Holdings, Corp.
On
April 13, 2021, the Company executed an Investors’ Rights Agreement in conjunction with a Subscription Agreement with Kaya Holdings,
Corp. The Company purchased 2,875,000 shares of Class B common stock of Kaya Holdings, Corp for a total investment of $230,000. In addition
to the purchased Class B shares, the Company received 500,000 founder Class B shares resulting in a total of 3,375,000 Class B shares.
7.
Note Receivable
On
January 4, 2020, the Company issued a $ 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. As of June 30, 2021 the principal and interest balance of the note is $.
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. During the nine months ended June 30, 2021, the Company issued additional promissory
notes totaling $210,000.
Subject to the terms and conditions of the notes, BHI promises to pay the Company all outstanding balances on or before January 1, 2022.
As of June 30, 2021, the outstanding balance of the promissory notes is $310,000.
On April 5, 2021, the Company issued
a $250,000 non-negotiable convertible promissory note (“Note”) to Blake, Inc. The Note has a maturity date which is six months
after the close of the Arkannabis, a Colorado grow facility. The note has annual interest rate of 5.75%. Per the terms of the note, the
principal balance and related interest shall be made in immediately available funds in lawful currency. The terms of the note call for
automatic conversion upon the closing of the Arkannabis business of the outstanding principal and interest on this Note and will convert
into that number of shares of the equity securities equivalent to a non-dilitive 12.5% of the issued and outstanding shares of the Arkannabis
business.
8.
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. Non-controlling interest of
$790,000, 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. $1.2 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 26.25% interest in NVD by issuing 386,035 common shares at par value of $0.001 which resulted
in a total investment of 63.75%.
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 June 30, 2021,
and September 30, 2020, the Company reported $1.35 million related to this acquisition.
Michigan
RE 1
On
January 4, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with Michigan RE 1, Inc. (“MRE1”)
pursuant to a private placement offering of up to an aggregate amount of $510 comprising up to 510 shares of MRE1’s common stock.
On January 5, 2021, the Company was party to an Asset Purchase Agreement between Leoni Wellness, LLC (“Seller”) and Organic
Guyz, LLC (“Purchaser”) whereas the Seller is engaged in the recreational cannabis business and the Purchaser desires to
purchase the local municipal license to operate an adult use retailer in the City of Kalamazoo, Michigan. The purchase price to be paid
by the Purchaser is $400,000. A non-refundable deposit of $250,000, except in the event of a material breach of the SPA, is due within
three days of the executed SPA. The deposit will be acknowledged by an execution of a joint escrow agreement. At closing the Purchaser
will pay $250,000 to the Seller by cashiers check or wire transfer. The remaining $150,000 shall be paid by the Purchaser to the Seller
in accordance with a promissory note to be executed at closing. The promissory note shall be paid in full on the earlier of the date
the Purchaser purchases the real property located at 3928 Portage Street, Kalamazoo, Michigan or eighteen months from the closing date.
The promissory note shall be secured by an escrow agent whereby three hundred thousand (300,000) shares (“Shares”) of Stem
Holdings shall be held in the benefit of Seller and a Collateral Assignment of Licenses and Permits whereby upon default on the promissory
note, the Purchaser shall assign the marijuana business permit back to the Seller. Upon the maturity date of the promissory note, in
the event that the borrower has not paid the principal balance of the note in full, Seller shall have the option to receive the Shares
as payment or $150,000 by wire transfer. Included in Investments in affiliates, as of June 30, 2021, the Company reported $235,467 related
to this investment.
9.
Non-Controlling Interests
Non-controlling
interests in consolidated entities are as follows (in thousands):
Schedule of Non-Controlling Interests in Consolidated Entities
|
|
|
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
|
%
|
|
Western Coast Ventures, Inc.
|
|
|
1,288
|
|
|
|
(240
|
)
|
|
|
1,048
|
|
|
|
49.0
|
%
|
|
YMY Ventures, Inc.
|
|
|
447
|
|
|
|
(204
|
)
|
|
|
243
|
|
|
|
50.0
|
%
|
|
|
|
$
|
2,332
|
|
|
$
|
(492
|
)
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
|
|
|
|
|
NCI Equity Share
|
|
|
|
Net Loss Attributable to NCI
|
|
|
|
NCI in Consolidated Entities
|
|
|
|
Non-Controlling Ownership %
|
|
|
NVD RE Corp.
|
|
$
|
578
|
|
|
$
|
(25
|
)
|
|
$
|
553
|
|
|
|
63.8
|
%
|
|
Western Coast Ventures, Inc.
|
|
$
|
1,048
|
|
|
|
(150
|
)
|
|
|
898
|
|
|
|
49.0
|
%
|
|
YMY Ventures, Inc.
|
|
$
|
243
|
|
|
|
30
|
|
|
|
273
|
|
|
|
50.0
|
%
|
|
Michigan RE 1, Inc.
|
|
$
|
-
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
51.0
|
%
|
|
|
|
$
|
1,869
|
|
|
$
|
(170
|
)
|
|
$
|
1,699
|
|
|
|
|
|
10.
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 June 30, 2021 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 June 30, 2021 in USD, (in thousands):
Schedule of Level 3 Liabilities Measured at Fair Value
|
|
|
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
|
|
|
Issuance
|
|
|
-
|
|
|
|
-
|
|
|
Change in fair value
|
|
|
-
|
|
|
|
-
|
|
|
Balance as of March 31, 2021
|
|
|
-
|
|
|
|
15
|
|
|
Issuance
|
|
|
-
|
|
|
|
|
|
|
Change in fair value
|
|
|
-
|
|
|
|
(15
|
)
|
|
Balance as of June 30, 2021
|
|
$
|
-
|
|
|
$
|
-
|
|
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):
Schedule of Purchasre Consideration to Fair value of assets Aquired and Liabilities Assumed
|
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
|
)
|
|
Estimated fair value of options issued
|
|
|
-
|
|
|
Estimated fair value of debt assumed
|
|
|
-
|
|
|
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
|
|
|
Other Assets
|
|
|
-
|
|
|
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 nine months ended June 30, 2021 in USD, (in thousands):
Schedule of Level 3 Liabilities Measured at Fair Value
|
|
|
Warrant Liability
|
|
|
Derivative Liability
|
|
|
Balance as of September 30, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Warrants acquired
|
|
|
9,000
|
|
|
|
-
|
|
|
Warrants converted into equity
|
|
|
(4,589
|
)
|
|
|
|
|
|
Change in fair value
|
|
|
(210
|
)
|
|
|
-
|
|
|
Balance as of June 30, 2021
|
|
$
|
4,201
|
|
|
$
|
-
|
|
The
following unaudited proforma condensed consolidated results of operations have been prepared as if the acquisition of Driven had occurred
October 1, 2019.
Schedule of Proforma Condensed Consolidated Results of Operations
|
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
Revenue
|
|
$
|
31,396
|
|
|
$
|
18,410
|
|
|
Net income (loss)
|
|
$
|
(10,206
|
)
|
|
$
|
(20,406
|
)
|
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)
Schedule of Purchasre Consideration to Fair value of assets Aquired and Liabilities Assumed
|
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
|
|
|
10,840
|
|
|
Intangible assets
|
|
|
48,200
|
|
|
Total assets acquired
|
|
$
|
60,613
|
|
|
|
|
|
|
|
|
Liabilities assumed: (in thousands)
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
(3,899
|
)
|
|
Total liabilities assumed
|
|
$
|
(3,899
|
)
|
|
Net assets acquired (in thousands)
|
|
$
|
56,714
|
|
During the quarter ended June 30, 2021, goodwill
was increased by $1.0 million, resulting from the discovery of unrecorded Driven liabilities at the time of acquisition.
The
goodwill of $10.8
million will not be deductible for income
tax purposes.
11.
Intangible Assets, net
Intangible
assets as of June 30, 2021 and September 2020 (in thousands):
Schedule of Intangible Assets
|
|
|
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
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(38
|
)
|
|
|
(38
|
)
|
|
Western Coast Ventures, Inc.
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(122
|
)
|
|
|
(122
|
)
|
|
Yerba Buena
|
|
|
3-15 years
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(129
|
)
|
|
|
(129
|
)
|
|
Foothill (7LV)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
)
|
|
Driven Deliveries
|
|
|
10-15 years
|
|
|
|
44,000
|
|
|
|
1,800
|
|
|
|
600
|
|
|
|
-
|
|
|
|
1,800
|
|
|
|
(1,694
|
)
|
|
|
46,506
|
|
|
Other
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance as June 30, 2021
|
|
|
|
|
|
$
|
56,679
|
|
|
$
|
2,258
|
|
|
$
|
1,243
|
|
|
$
|
220
|
|
|
$
|
1,800
|
|
|
$
|
(3,105
|
)
|
|
$
|
59,095
|
|
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 expense for the three and nine months ended June 30, 2021
was $1,086 and $2,380, respectively. Amortization expense for the three and nine months ended June 30, 2020 was $172 and $430, respectively.
The
following table is a runoff of expected amortization in the following 5-year period as of June 30:
Schedule of Expected Amortization
|
|
|
|
|
|
|
2021
|
|
$
|
1,037
|
|
|
2022
|
|
|
4,147
|
|
|
2023
|
|
|
4,147
|
|
|
2024
|
|
|
4,147
|
|
|
2025
|
|
|
4,147
|
|
|
Thereafter
|
|
|
41,470
|
|
|
Intangible assets
|
|
$
|
59,095
|
|
12.
Accounts payable and accrued expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
Schedule of Accounts Payable and Accrued Expenses
|
|
|
June 30, 2021
|
|
|
September 30, 2020
|
|
|
Accounts payable
|
|
|
3,399
|
|
|
$
|
1,784
|
|
|
Accrued credit cards
|
|
|
36
|
|
|
|
41
|
|
|
Accrued interest
|
|
|
152
|
|
|
|
134
|
|
|
Accrued payroll
|
|
|
928
|
|
|
|
616
|
|
|
Other
|
|
|
3,616
|
|
|
|
408
|
|
|
Total Accounts Payable and Accrued Expenses
|
|
$
|
8,131
|
|
|
$
|
2,983
|
|
13.
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 June 30, 2021, and year ended September 30, 2020:
Schedule of Short-term Notes and Advances
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Equipment financing
|
|
$
|
32
|
|
|
$
|
27
|
|
|
Insurance financing
|
|
|
229
|
|
|
|
177
|
|
|
Mortgages payable
|
|
|
-
|
|
|
|
923
|
|
|
Promissory note
|
|
|
425
|
|
|
|
2,298
|
|
|
Settlement payable
|
|
|
95
|
|
|
|
-
|
|
|
Due to related party
|
|
|
1
|
|
|
|
200
|
|
|
Short-term notes and advances
|
|
$
|
782
|
|
|
$
|
3,625
|
|
|
Acquisition notes payable
|
|
|
538
|
|
|
|
665
|
|
|
Total notes payable and advances
|
|
$
|
1,320
|
|
|
$
|
4,290
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term mortgages
|
|
|
3,200
|
|
|
|
3,685
|
|
|
Total long-term debt
|
|
$
|
3,200
|
|
|
$
|
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 June 30, 2021, the obligation outstanding is $442. 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, consequently, the Company recorded the balance of the note payable of $14,950 as a gain on
forgiveness of debt in the nine months ended June 30, 2021.
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 June 30, 2021, the obligation outstanding is $5,757.
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.
January
2021, the Company entered into a promissory note in the amount of $27,880 for the acquisition of a truck. The promissory note bears an
interest rate of 13.29% per annum and is secured by the financed vehicle. The note has a sixty-month term with monthly payment of $642.
As of June 30, 2021, the balance outstanding is $26,176.
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. This note was paid
in full in January 2021.
Effective
February 17, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $243,284. The note bears an annual interest rate of 7.46%. The Company paid $47,100 as a down payment on February
17, 2021, the note requires the Company to make 10 monthly payments of $17,835 over the remaining term of the note. As of June 30, 2021,
the obligation outstanding is $124,845.
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 June 30, 2021, the obligation
was paid in full.
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 June 30, 2021, the obligation
was paid in full.
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. This note was paid in full in January
2021.
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 June 30, 2021, the obligation was
paid in full.
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 June 30, 2021,
the obligation outstanding is $157.
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 June 30, 2021, the
obligation outstanding is $1,061.
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 June 30, 2021, the
obligation outstanding is $3,014.
Effective
February 9, 2021, the Company entered into a 12-month premium finance agreement in consideration for an insurance policy in the principal
amount of $22,391. In April 2021, the Company added an additional location to the policy which increased the policy premium by $7,575.
The revised policy premium is $29,967. The note bears an annual interest rate of 8.5%. The Company paid $2,488 as a down payment on March
9, 2021, the note requires the Company to make 8 monthly payments of $3,435 over the remaining term of the note. As of June 30, 2021,
the obligation outstanding is $16,227.
Effective
February 24, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $13,694.
The note bears an annual interest rate of 7.369%.
The Company paid $3,424
as a down payment on April 19, 2021, the note
requires the Company to make 9 monthly payments of $1,199
over the remaining term of the note. As of June
30, 2021, the obligation outstanding is $8,392.
Effective
April 10, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $78,750.
The note bears an annual interest rate of 8.35%.
The Company paid $15,750
as a down payment on May 10, 2021, the note requires
the Company to make 9 monthly payments of $7,271
over the remaining term of the note. As of June
30, 2021, the obligation outstanding is $50,898.
Effective
April 17, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $23,014.
The note bears an annual interest rate of 11.98%.
The Company paid $4,871
as a down payment on March 16, 2021, the note
requires the Company to make 10 monthly payments of $1,814
over the remaining term of the note. As of June
30, 2021, the obligation outstanding is $10,886.
Effective
May 31, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $8,906.
The note bears an annual interest rate of 10.25%. The Company paid $2,537 as a down payment on May 28, 2021, the note requires the Company
to make 9 monthly payments of $741 over the remaining term of the note. As of June 30, 2021, the obligation outstanding is $6,667.
Effective
July 16, 2021, the Company entered into a 9-month premium finance agreement in partial consideration for an insurance policy in the principal
amount of $10,650. The note bears an annual interest rate of 11%. The Company paid $4,113 as a down payment on June 30, 2021, the note
requires the Company to make 9 monthly payments of $726 over the remaining term of the note. As of June 30, 2021, the obligation outstanding
is $6,538.
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 June 30, 2021, 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 June
30, 2021, these obligations were converted into equity.
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 June 30, 2021, the obligation outstanding is $500,000 and the balance
is $425,523, net of debt discount of $74,477. The Company was notified that the maturity dates on these notes have been extended for
the near-term.
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 June 30, 2021, the settlement payable is presented on the balance
sheet in the amount of $95,451.
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. On June 1, 2021, the note was forgiven and fully cancelled by the issuer. As of June
30, 2021, the obligation outstanding is zero.
As
of June 30, 2021, the Company had a related party loan payable of $1,000 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. In March 2021, the Company paid $61,860 of the principal balance of the promissory note. The remaining balance
of $295,859 was converted into equity.
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. In January 2021, the Company paid the $307,500 balance of the note payable.
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. In February 2021, the Company executed a settlement
agreement to remove $850,000 of debt and retire 5,000,000,000 warrants in exchange for 500,000 common shares of restricted stock. In
March 2021, the Company paid $612,291 of debt and recorded forgiveness of debt of $37,708 related to another settlement agreement. As
of June 30, 2021, the total assumed liabilities are $930,763, the current portion of this obligation is $537,931.
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 June 30, 2021, 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. On May 14, 2021, the Company exercised the
purchase leaseback option of the original lease and sold the property back to the original owner. As of June 30, 2021, there was no
obligation related to this property.
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 June 30, 2021, 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
June 30, 2021, 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
June 30, 2021, 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 $4,667.
As of June 30, 2021, 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 June 30, 2021, 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:
Schedule of Maturities of Long Term Debt
|
|
|
|
|
|
|
2021
|
|
$
|
-
|
|
|
2022
|
|
|
2,600
|
|
|
2023
|
|
|
600
|
|
|
2024
|
|
|
-
|
|
|
2025
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
long-term debt
|
|
$
|
3,200
|
|
14.
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 six (6)-month hold period from the date of
issue. Since the CD Special Warrants were exchanged for Convertible Debenture Units after six (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:
Schedule of Assumptions Value Warrant Granted
|
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. As of June 30, 2021, the convertible debt related to the above debentures is $3,001 thousand.
The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Canaccord convertible notes
and the subsequent fair value measurement during the nine months ended June 30, 2021 in USD, (in thousands):
Schedule of Convertible Notes
|
|
|
Warrant Liability
|
|
|
Derivative Liability
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
$
|
67
|
|
|
$
|
592
|
|
|
Change in fair value
|
|
|
(20
|
)
|
|
|
(223
|
)
|
|
Balance at December 31, 2020
|
|
|
47
|
|
|
|
369
|
|
|
Change in fair value
|
|
|
(18
|
)
|
|
|
(34
|
)
|
|
Balance at March 31, 2021
|
|
|
29
|
|
|
|
335
|
|
|
Change in fair value
|
|
|
(27
|
)
|
|
|
(199
|
)
|
|
Balance at June 30, 2021
|
|
$
|
2
|
|
|
$
|
136
|
|
7LV
During
this quarter the Company tendered a repayment of the entire principal amount of its 10% unsecured convertible debentures, being C$3,260,000,
through the issuance of 5,258,053 shares of common stock of the Corporation to the holders of the Debentures in accordance with the terms
of the trust indenture between the Corporation and Olympia Trust Company dated December 27, 2018, as amended and supplemented. The Corporation
also made a cash payment of approximately US$30,000 to the holders of the Debentures in respect of accrued and unpaid interest as of
May 3, 2021, being the maturity date of the Debentures.
Driven
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. On February 26, 2021, the Company executed a conversion and satisfaction agreement resulting in the conversion
of $831,110 principal balance of this promissory note. As of June 30, 2021, the outstanding balance on this obligation is $186,000, net
of the debt discount of $21,802. As of the date of this filing the balance of this obligation has been fully converted.
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 June 30, 2021, the outstanding balance on this obligation is $50,000.
The
table below shows the net amount of convertible notes as of June 30, 2021 in USD (in thousands):
Schedule of Convertible Notes
|
|
|
June 30, 2021
|
|
|
Principal value of 8%, convertible at $0.91 at June 30, 2021, due December 27, 2021 including penalty provision of $155,239
|
|
$
|
2,954
|
|
|
Principal value of 10%, convertible at $1.32 at June 30, 2021, due May 30, 2021 (see Note 10), as of the date of this filing the balance of this obligation has been fully converted
|
|
|
-
|
|
|
Principal value of various convertible notes, convertible at $0.50 at June 30, 2021, due June – August, 2021
|
|
|
100
|
|
|
Debt discount
|
|
|
-
|
|
|
Cumulative foreign currency impact
|
|
|
47
|
|
|
Carrying value of convertible notes
|
|
$
|
3,101
|
|
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
June 30, 2021, the outstanding balance on this obligation is $805,000.
15.
Fair Value Measurements
In
accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants
and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value of the liability.
ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives
the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each
level in the hierarchy is described below:
Level
1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement
date
Level
2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level
3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
The
following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy
as of June 30, 2021 (in thousands):
Schedule of Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
Fair value measured at June 30,
2021
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant
other observable
|
|
|
Significant
unobservable
|
|
|
|
|
|
|
|
active markets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
Fair value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Warrant liability
|
|
$
|
4,444
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,444
|
|
|
Embedded derivative liability
|
|
|
136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
Total fair value
|
|
$
|
4,580
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,580
|
|
There
were no transfers between Level 1, 2 or 3 during the quarter ended June 30, 2021.
The
following table presents changes in Level 3 liabilities measured at fair value for the nine months ended June 30, 2021. 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).
Schedule of Level 3 Liabilities Measured at Fair Value
|
|
|
|
|
|
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 10)
|
|
|
9,000
|
|
|
|
-
|
|
|
|
9,000
|
|
|
Change in fair value
|
|
|
(90
|
)
|
|
|
(208
|
)
|
|
|
(298
|
)
|
|
Balance – December 31, 2020
|
|
|
9,178
|
|
|
|
384
|
|
|
|
9,562
|
|
|
Change in fair value
|
|
|
6,278
|
|
|
|
(34
|
)
|
|
|
6,244
|
|
|
Warrants forfeited due to settlement agreement
|
|
|
(4,590
|
)
|
|
|
-
|
|
|
|
(4,590
|
)
|
|
Balance – March 31, 2021
|
|
|
10,866
|
|
|
|
350
|
|
|
|
11,216
|
|
|
Warrants issued pursuant to subscription agreement (see Note 13)
|
|
|
59
|
|
|
|
-
|
|
|
|
59
|
|
|
Final change due to completed conversion of debt
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
Change in fair value
|
|
|
(6,481
|
)
|
|
|
(199
|
)
|
|
|
(6,680
|
)
|
|
Balance – June 30, 2021
|
|
$
|
4,444
|
|
|
$
|
136
|
|
|
$
|
4,580
|
|
A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of June 30, 2021
and September 30, 2020 is as follows:
Summary of Weighted Average Significant Unobservable Inputs
|
|
|
Warrant
Liability
|
|
|
|
|
As
of
|
|
|
As
of
|
|
|
|
|
June
30, 2021
|
|
|
September
30, 2020
|
|
|
Strike
price
|
|
$
|
0.48
|
|
|
$
|
0.36
to 2.96
|
|
|
Contractual
term (years)
|
|
|
2.82
|
|
|
|
1
to 3
|
|
|
Volatility
(annual)
|
|
|
85
|
%
|
|
|
100
|
%
|
|
Risk-free
rate
|
|
|
0.9
|
%
|
|
|
0.28
|
%
|
|
Dividend
yield (per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
Embedded
Derivative Liability
|
|
|
|
|
As
of
June 30, 2021
|
|
|
As
of
September 30, 2020
|
|
|
Strike
price
|
|
$
|
0.93
|
|
|
$
|
1.12
|
|
|
Contractual
term (years)
|
|
|
1.1
|
|
|
|
1.5
|
|
|
Volatility
(annual)
|
|
|
133
|
%
|
|
|
101
|
%
|
|
Risk-free
rate
|
|
|
0.07
|
%
|
|
|
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.
16.
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.
Pursuant
to the shareholders meeting on June 25, 2021, the Company has amended its certificate of incorporation to increase the number of authorized
Company Common Shares from 300,000,000 to 750,000,000.
Preferred
shares
The
Company had two series of preferred shares designated with no preferred shares issued and outstanding as of June 30, 2021 and September
30, 2020.
Common
shares
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 101,968,944 common shares.
During
the quarter ended March 31, 2021, the Company issued 1,464,009 shares of its common stock valued at $868,250 as stock-based compensation.
During
the quarter ended March 31, 2021, the Company issued 1,262,500 shares of its common stock related to various consulting agreements for
a fair value of approximately $1,097,500 or $0.87 per share.
During
the quarter ended March 31, 2021, the Company issued 300,000 shares of its common stock with a fair value of $210,000 on behalf of its
Michigan joint venture partner into escrow pursuant to a security agreement related to the commercial lease.
During
the quarter ended March 31, 2021, the Company converted $1,975,965 of principal balance related to convertible debt in exchange for 4,054,206
shares of the company’s common stock. The Company also issued 164,366 common shares in satisfaction of interest payments owed of
$121,631.
During
the quarter ended March 31, 2021, the Company issued 500,000 shares of its common stock in connection with a settlement agreement for
settlement liability of $5,439,855.
Pursuant
to a prospectus the Company has been tendered $1.0 million and will issue 2,332,506 common shares.
During
the quarter ended March 31, 2021, the Company raised $4,934,376 for the issuance of 12,097,065 shares of its common stock in connection
with a private placement memorandum.
During
the quarter ended June 30, 2021, the Company raised $630,000 for the issuance of 1,523,257 shares of its common stock in connection with
a private placement memorandum.
During
the quarter ended June 30, 2021, the Company issued 950,000 shares of its common stock related to various consulting agreements for a
fair value of approximately $525,000 or $0.55 per share.
During
the quarter ended June 30, 2021, the Company issued 581,750 shares of its common stock valued at $246,000 as stock-based compensation.
During
the quarter ended June 30, 2021, the Company converted $2,838,000 of principal balance related to convertible debt in exchange for 5,426,053
shares of the company’s common stock.
During
the quarter ended June 30, 2021, the Company issued 10,000 shares of its common stock in connection with the exercise of the company’s
stock option plan.
During
the quarter ended June 30, 2021, the Company issued 90,909 shares of its common stock valued at $40,000 in connection with commission
expense.
During
the quarter ended June 30, 2021, the Company cancelled 694,233 common shares related to investment.
During
the quarter ended June 30, 2021, the Company issued 16,942,350 shares of its common stock valued at $7,278,000 pursuant to its Canadian
prospectus.
17.
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 nine months ended June 30, 2021, pursuant to an employment agreement the Company issued 100,000 stock options.
The
fair value of options granted during the nine months ended June 30, 2021, and 2020 were estimated using the following weighted-average
assumptions:
Schedule of Fair Value of Options Granted
Options:
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
Exercise price
|
|
$
|
0.40
|
|
|
$
|
0.80 - $4.00
|
|
|
Expected term (years)
|
|
|
3.5
|
|
|
|
0.5 - 4.0
|
|
|
Expected stock price volatility
|
|
|
93
|
%
|
|
|
108.8% - 188.6
|
%
|
|
Risk-free rate of interest
|
|
|
0.28
|
%
|
|
|
1.56
|
%
|
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0%
|
Summary of Stock Option Activity
|
|
|
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
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2020
|
|
|
5,572,916
|
|
|
$
|
1.77
|
|
|
$
|
-
|
|
|
|
1.6
|
|
|
Granted
|
|
|
100,000
|
|
|
$
|
0.40
|
|
|
$
|
-
|
|
|
|
2.8
|
|
|
Outstanding as of December 31, 2020
|
|
|
5,672,916
|
|
|
$
|
1.73
|
|
|
$
|
-
|
|
|
|
1.4
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Outstanding as of March 31, 2021
|
|
|
5,672,916
|
|
|
$
|
1.73
|
|
|
$
|
-
|
|
|
|
1.18
|
|
|
Granted
|
|
|
250,000
|
|
|
$
|
0.40
|
|
|
$
|
-
|
|
|
|
3.94
|
|
|
Expired
|
|
|
(2,285,000
|
)
|
|
$
|
2.39
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Outstanding as of June 30, 2021
|
|
|
3,637,916
|
|
|
$
|
2.13
|
|
|
$
|
-
|
|
|
|
1.57
|
|
A
summary of option activity under the Company’s stock option plan for the nine months ended June 30, 2021 is presented below:
Estimated
future stock-based compensation expense relating to unvested stock options was nominal as of June 30, 2021 and 2020. Weighted average
remaining contractual life of the options is .9 years.
Stock-based
Compensation Expense
Stock-based
compensation expense for the three months ended June 30, 2021 and 2020 was comprised of the following (in thousands):
Schedule of Stock-based Compensation Expenses
|
|
|
Three months ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Stock grants
|
|
$
|
525
|
|
|
$
|
6
|
|
|
Stock options
|
|
|
353
|
|
|
|
-
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
Total stock-based compensation
|
|
$
|
878
|
|
|
$
|
6
|
|
Stock-based
compensation expense for the nine months ended June 30, 2021 and 2020 was comprised of the following (in thousands):
18.
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 June 30, 2021, the Company’s has accounts with a
Florida bank and several credit unions located in Washington and California.
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 June 30, 2021, Company eliminates this rental income in consolidation.
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.
As of November 23, 2020, the Company added an additional 2,000 rentable square feet to its current lease under the same terms and conditions.
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.
Pursuant
to the execution of a sale lease back agreement with the Company’s Wallis property, a/k/a Never Again, the Company in May 2021,
entered into a 15-year lease for the Wallis commercial building from an unrelated third party located in New York, NY. The lease requires
the Company to pay a starting base rental fee of $31,500 plus an additional estimated triple net charges per month including real estate
taxes in which the base rental fee escalates each year by approximately 2.5%. All taxes (including reconciling real estate taxes), maintenance
and utilities are included and paid monthly and reserved until payments are due. In addition, the Company also remitted $60,000 for a
security deposit to the landlord.
As
of June 30, 2021, the Company has acquired interests in several entities more fully described in Note 6 and Note 8. 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 June 30, 2021, Company estimates that its investees will need up to approximately $200,000 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 June 30, 2021 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.
During
the quarter ended June 30, 2021 the Company entered into an offering led by Canaccord Genuity Corp. (the “Agent”) on a ‘commercially
reasonable efforts’ basis and consisted of the sale of 16,926,019 Units (including 1,471,291 Units pursuant to the partial exercise
of the over-allotment option by the Agent) at a price of C$0.55 per Unit for aggregate gross proceeds of C$10,309,210 (including C$809,210.05
pursuant to the partial exercise of the over-allotment option by the Agent). Each Unit is comprised of one share in the common stock
of the Company (each a “Unit Share”) and one share purchase warrant of the Company (each, a “Warrant”). Each
Warrant is exercisable to acquire one share in the common stock of the Company (each, a “Warrant Share”) until April 23,
2023 at a price per Warrant Share of C$0.68, subject to adjustment in certain events. The net proceeds raised under the Offering will
be used for working capital and in furtherance of some or all of the business objectives described in the final short form prospectus
of the Company dated April 19, 2021 (the “Final Prospectus”). The Company has given notice to list the Unit Shares and the
Warrant Shares on the Canadian Securities Exchange (the “Exchange”). Listing will be subject to the Company fulfilling all
of the requirements of the Exchange. Concurrent with the Offering, the Company also conducted a non-brokered offering in the United States
of 972,092 units of the Company at a price of US$0.43 per unit for aggregate gross proceeds of approximately US$420,000 under the terms
of a registration statement on Form S-1, as amended, filed with the United States Securities and Exchange Commission under the U.S. Securities
Act on January 5, 2021.
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. As of April 16, 2021, a joint stipulation for the order of dismissal with prejudice was recorded.
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.
Herbalcure
vs Driven Deliveries, Inc.
On
May 6, 2021, Herbalcure Corporation filed a Complaint for preliminary and permanent injunction in the Superior Court of California Central
District County of Los Angeles (Case # 21STCV17099) alleging that Driven Deliveries owes Herbalcure Corporation approximately $1,700,000
on account of gross receipts tax, sales tax, and services accrued. Currently, the Company is in negotiations to mitigate the alleged
amount owed. The Company settled the gross receipts and sales tax liability that was owed.
TrueFarma
This arbitration
arose from the plaintiff’s claim that Driven adversely impacted their business. The total damages that the plaintiff is seeking
is $1.0mm, which management believes has absolutely no merit. Additionally, management believes the Company can resolve this with a dismissal
before costs are incurred.
19.
Subsequent events
Subsequent
to June 30, 2021, the Company entered into an Advisory Services Agreement, and as part of that agreement for services agreed to compensation
of $12,500 a month, the issuance of 90,000 shares of the Company’s common stock and 750,000 options priced at $0.36.
Subsequent
to June 30, 2021, the Company entered into a 12-month professional services agreement, and as part of that agreement for services agreed
to issue 500,000 shares of the Company’s common stock.
Subsequent
to June 30, 2021, the Company tendered the amount of $555,054 including principal and interest in payment of a note leaving a net principal
balance totaling $352,862.
Subsequent
to June 30, 2021, the Company issued 181,190 shares as payment in kind for six months of accrued interest on convertible notes.
Subsequent
to June 30, 2021, the Company issued 866,000 for various consulting and service agreements.
Subsequent
to June 30, 2021, Treevana Wellness, a Georgia based company was awarded a Medical Cannabis License of which the Company has a 2.5% equity
investment in consideration for services.