UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2019

 

or

 

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

 

For the transition period from _________ to __________.

 

Commission File Number: 000-12350

 

EVIO, INC.

(Exact name of registrant as specified in its charter)

 

Colorado   47-1890509
(State of Incorporation)   (I.R.S. Employer Identification No.)
     

2654 W. Horizon Ridge Pkwy, Suite B5-208

Henderson, NV

 

 

89052

(Address of principal executive offices)   (Zip Code)

 

(702) 748-9944

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

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

 

Large accelerated filer [  ] Non-accelerated filer [  ]
Accelerated filer [  ] Smaller reporting company [X]
    Emerging growth company [X]

 

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

 

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

 

As of September 3, 2020, there were 89,142,473 shares of common stock outstanding.

 

 

 

 

 

 

EVIO, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED DECEMBER 31, 2019

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements (Unaudited)  
  Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and September 30, 2019 3
  Consolidated Statements of Operations for the Three Months Ended December 31, 2019, and 2018 (Unaudited) 4
  Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2019, and 2018 (Unaudited) 5
  Consolidated Statements of Stockholders Equity for the Three Months December 31, 2019, and 2018 (Unaudited) 6
  Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
  Critical Accounting Policies and Estimates 30
  Results of Operations 30
  Liquidity and Capital Resources 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Control and Procedures 32
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Mine Safety Disclosures 33
Item 5. Other Information 33
Item 6. Exhibits 33

 

2

 

 

PART I — FINANCIAL INFORMATION

 

EVIO, INC.

Consolidated Balance Sheets

 

    December 31,     September 30,  
    2019     2019  
             
ASSETS                
Current assets:                
Cash and cash equivalents   $ 125,554     $ 110,325  
Accounts receivable, net     193,808       133,022  
Prepaid expenses     163,771       190,460  
Other current assets     11,818       9,689  
Note receivable, current portion     538,904       538,904  
Total current assets     1,033,855       982,400  
Right of use assets     2,307,150       2,543,976  
Capital assets, net     1,305,028       1,383,828  
Land     212,550       212,550  
Property and equipment, net     3,028,017       3,080,426  
Security deposits     178,260       178,918  
Prepaid expenses, net     989       4,061  
Total assets   $ 8,065,849     $ 8,386,159  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued liabilities   $ 4,369,145     $ 3,811,237  
Client deposits     51,666       108,418  
Interest payable     1,430,573       1,387,642  
Capital lease obligation, current     963,316       957,673  
Derivative liability     2,125,702       2,545,735  
Convertible notes payable, net of discounts     3,051,499       3,695,484  
Loans payable, net of discounts, current     785,931       762,476  
Total current liabilities     12,777,832       13,268,665  
Convertible debentures, net of loan discounts     2,403,970       1,734,890  
Lease liabilities     2,356,425       2,594,726  
Capital lease obligation, net     307,346       381,786  
Loans payable, net     726,733       657,603  
Loans payable, related party, net     1,575,950       1,560,849  
Total liabilities     20,148,256       20,198,519  
                 
Commitments and contingencies     -       -  
                 
Stockholders’ Equity:                
Series B convertible preferred stock, $0.0001 par value. 5,000,000 authorized; 5,000,000 shares issued and outstanding at December 31, 2019 and September 30, 2019, respectively     500       500  
Series C convertible preferred stock, $0.0001 par value. 500,000 authorized; 500,000 shares issued and outstanding at December 31, 2019 and September 30, 2019, respectively     50       50  
Series D convertible preferred stock, $0.0001 par value. 1,000,000,000 authorized; 349,500 and 349,500 shares issued and outstanding at December 31, 2019 and September 30, 2019, respectively     34       34  
Common stock, $0.0001 par value. 1,000,000,000 authorized; 54,192,080 and 29,314,419 shares issued and outstanding at December 31, 2019 and September 30, 2019, respectively     5,419       2,931  
Stock subscriptions receivable     -       -  
Additional paid-in capital     28,531,100       26,498,076  
Retained earnings (accumulated deficit)     (40,089,990 )     (37,775,183 )
Accumulated other comprehensive income     (354,320 )     (353,090 )
Total stockholders’ equity     (11,907,207 )     (11,626,682 )
Noncontrolling interest     (175,199 )     (185,678 )
Total equity     (12,082,406 )     (11,812,360 )
Total liabilities and equity   $ 8,065,850     $ 8,386,159  

 

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

 

3

 

 

EVIO, INC.

Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

    Three Months Ended December 31,     Three Months Ended December 31,  
    2019     2018  
             
Revenues                
Testing revenue   $ 1,332,956     $ 1,187,238  
Consulting revenue     -       -  
Total revenues     1,332,956       1,187,238  
                 
Cost of revenue                
Testing services     946,760       1,013,980  
Consulting services     -       -  
Depreciation and amortization     255,554       290,448  
Total cost of revenue     1,202,314       1,304,428  
                 
Gross margin     130,642       (117,190 )
                 
Operating expenses:                
Selling, general and administrative     1,267,924       1,496,640  
Depreciation and amortization     28,230       58,866  
Total operating expenses     1,296,154       1,555,506  
                 
Income (loss) from operations     (1,165,512 )     (1,672,696 )
                 
Other income (expense)                
Interest income (expense), net     (1,562,871 )     (1,764,878 )
Other income (expense)     4,021       (64,095 )
Gain (loss) on settlement of debt     -       -  
Impairment charge     -       -  
Gain (loss) on change in fair market value of derivative liabilities     420,033       852,628  
Total other income (expense)     (1,138,817 )     (976,345 )
Income (loss) before income taxes     (2,304,329 )     (2,649,041 )
                 
Provision for income taxes (benefit)     -       2,356  
                 
Net income (loss)     (2,304,329 )     (2,651,397 )
Net income (loss) attributable to noncontrolling interest     10,479       (54,738 )
Net income (loss) attributable to EVIO, Inc. shareholders   $ (2,314,808 )   $ (2,596,659 )
                 
Basic and diluted earnings (loss) per common share   $ (0.07 )   $ (0.10 )
                 
Weighted-average number of common shares outstanding:                
Basic and diluted     33,979,456       24,753,397  
                 
Comprehensive loss:                
Net income (loss)   $ (2,304,329 )   $ (2,651,397 )
Foreign curreny translation adjustment     (1,230 )     (179,822 )
Comprehensive income (loss)   $ (2,305,559 )   $ (2,831,219 )

 

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

 

4

 

 

EVIO, INC.

Consolidated Statements of Cash Flows (Unaudited)

 

    Three Months Ended December 31,     Three Months Ended December 31,  
    2019     2018  
Cash flows from operating activities of continuing operations:                
Net income (loss)   $ (2,304,329 )   $ (2,651,397 )
Adjustments to reconcile net loss to cash used in operating activities:                
Amortization of debt discount     1,244,194       1,519,971  
Common stock issued in exchange for fees and services     16,730       143,823  
Default penalties and other covenant adjustments on convertible debentures     62,500       -  
Depreciation and amortization     283,784       349,424  
Loss on disposal of assets     2,979       64,095  
Provision for doubtful accounts     (1,670 )     18,310  
Stock based compensation     360,958       205,797  
Unrealized (gain) loss on derivative liability     (420,033 )     (852,628 )
Changes in operating assets and liabilities:                
Accounts receivable     (56,828 )     (39,437 )
Prepaid expenses     29,762       (64,142 )
Other current assets     (2,129 )     (32,422 )
Security deposits     1,000       (4,470 )
Operating lease right of use assets     (1,475 )     47,123  
Accounts payable and accrued liabilities     747,859       918,795  
Customer deposits and deferred revenues     (56,752 )     (126,688 )
Interest payable     215,107       256,126  
Net cash provided by (used in) operating activities     121,657       (247,720 )
                 
Cash flows from investing activities:                
Purchase of fixed assets     (33,124 )     (554,731 )
Net cash provided by (used in) financing activities     (33,124 )     (554,731 )
                 
Cash flows from financing activities:                
Proceeds from issuance of common stock, net of issuance costs     -       103,000  
Proceeds from issuance of convertible debentures     -       910,413  
Proceeds from issuance of convertible notes, net of issuance costs     204,407     -  
Proceeds from related party advances     33,587       53,325  
Repayments of capital leases     (81,399 )     (61,379 )
Repayments of convertible debentures     -       (61,595 )
Repayments of loans payable     (12,840 )     (7,947 )
Repayments of related party loans payable     (31,951 )     (1,941 )
Net cash provided by (used in) financing activities     111,804       933,876  
                 
Effect of exchange rates on cash and cash equivalents     (185,108 )     (3,076 )
Net increase (decrease) in cash and cash equivalents     15,229       128,349  
Cash and cash equivalents at beginning of period     110,325       81,735  
Cash and cash equivalents at end of period   $ 125,554     $ 210,084  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ -     $ -  
Cash paid for income taxes   $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Conversion of convertible note and accrued interest into common stock   $ 1,414,004     $ 708,089  
Settlement of account payable for common stock   $ 6,000     $ -  
Debt discount recorded on convertible notes and debentures payable upon initial measurement of derivative liability   $ -     $ 350,039  
Debt discounts recorded for beneficial conversion features on convertible debentures and notes payable   $ 175,320     $ -  
Debt discounts recorded for original issue discounts on convertible debentures   $ -     $ 280,144  
Vehicles financed through notes payable   $ 105,424     $ -  
Equipment financed through capital leases   $ -     $ 308,613  

 

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

 

5

 

 

EVIO, INC.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

    Series B Preferred Stock     Series C Preferred Stock     Series D Preferred Stock     Common Stock     Additional Paid-in     Retained     Accumulated Other Comprehensive     Total Stockholders’     Noncontrolling     Total  
    Shares     Value     Shares     Value     Shares     Value     Shares     Value     Capital     Earnings     Income     Equity     Interest     Equity  
                                                                                     
Balance, September 30, 2018     5,000,000     $ 500       500,000     $ 50       552,500     $ 55       23,255,411     $ 2,326     $ 21,495,621     $ (19,226,462 )   $ (263,985 )   $ 2,008,105     $ 1,934,634     $ 3,942,739  
                                                                                                                 
Net income (loss)     -       -       -       -       -       -       -       -       -       (2,596,659 )     -       (2,596,659 )     (54,738 )     (2,651,397 )
Change in foreign currency translation     -       -       -       -       -       -       -       -       -       -       (179,822 )     (179,822 )     -       (179,822 )
Issuance of common stock in connection with the conversion of Series D preferred stock     -       -       -       -       (38,000 )     (4 )     95,000       10       (6 )     -       -       -       -       -  
Issuance of common stock in connection with sales made under private offerings     -       -       -       -       -       -       200,000       20       105,980       -       -       106,000       -       106,000  
Issuance of common stock as compensation to employees, officers and/or directors     -       -       -       -       -       -       50,000       5       35,870       -       -       35,875       -       35,875  
Issuance of common stock in exchange for consulting, professional and other services provided     -       -       -       -       -       -       250,000       25       128,375       -       -       128,400       -       128,400  
Issuance of common stock in connection with the conversion of loans payable     -       -       -       -       -       -       779,808       78       317,022       -       -       317,100       -       317,100  
Issuance of common stock in connection with the conversion of debentures     -       -       -       -       -       -       669,362       66       387,934       -       -       388,000       -       388,000  
Issuance of common stock in connection with the conversion  of interest payable     -       -       -       -       -       -       10,163       1       2,987       -       -       2,988       -       2,988  
Issuance of common stock in connection with the conversion of interest payable     -       -       -       -       -       -       -       -       12,423       -       -       12,423       -       12,423  
Common stock options issued under employee equity incentive plan     -       -       -       -       -       -       -       -       169,922       -       -       169,922       -       169,922  
Recognition of beneficial conversion features related to convertible debt instruments     -       -       -       -       -       -       -       -       280,144       -       -       280,144       -       280,144  
                                                                                                                 
Balance, December 31, 2018     5,000,000     $ 500       500,000     $ 50       514,500     $ 51       25,309,744     $ 2,531     $ 22,936,272     $ (21,823,121 )   $ (443,807 )   $ 672,476     $ 1,879,896     $ 2,552,372  

 

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

 

6

 

 

EVIO, INC.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

    Preferred Stock     Preferred Stock     Preferred Stock     Common Stock     Additional Paid-in     Retained     Accumulated Other Comprehensive     Total Stockholders’     Noncontrolling     Total  
    Shares     Value     Shares     Value     Shares     Value     Shares     Value     Capital     Earnings     Income     Equity     Interest     Equity  
                                                                                     
Balance, September 30, 2019     5,000,000     $ 500       500,000     $ 50       339,500     $ 34       29,314,419     $ 2,931     $ 26,498,076     $ (37,775,183 )   $ (353,090 )   $ (11,626,682 )   $ (185,678 )   $ (11,812,360 )
                                                                                                                 
Net income (loss)     -       -       -       -       -       -       -       -       -       (2,314,808 )     -       (2,314,808 )     10,479       (2,304,329 )
Change in foreign currency translation     -       -       -       -       -       -       -       -       -       -       (1,230 )     (1,230 )     -       (1,230 )
Issuance of common stock as compensation to employees, officers and/or directors     -       -       -       -       -       -       422,500       42       234,335       -       -       234,377       -       234,377  
Issuance of common stock in exchange for consulting, professional and other services provided     -       -       -       -       -       -       359,212       36       16,694       -       -       16,730       -       16,730  
Issuance of common stock in satisfaction of debt issuances costs     -       -       -       -       -       -       2,285,449       229       62,271       -       -       62,500       -       62,500  
Issuance of common stock in connection with the settlement of accounts payable     -       -       -       -       -       -       26,666       3       5,997       -       -       6,000       -       6,000  
Issuance of common stock in connection with the conversion of debentures     -       -       -       -       -       -       18,317,481       1,832       1,239,950       -       -       1,241,782       -       1,241,782  
Issuance of common stock in connection with the conversion of interest payable     -       -       -       -       -       -       3,466,353       346       171,876       -       -       172,222       -       172,222  
Recognition of beneficial conversion features related to convertible debt instruments     -       -       -       -       -       -       -       -       175,320       -       -       175,320       -       175,320  
Stock based compensation related to employee stock options     -       -       -       -       -       -       -       -       126,581       -       -       126,581       -       126,581  
                                                                                                                 
Balance, December 31, 2019     5,000,000     $ 500       500,000     $ 50       339,500     $ 34       54,192,080     $ 5,419     $ 28,531,100     $ (40,089,991 )   $ (354,320 )   $ (11,907,208 )   $ (175,199 )   $ (12,082,407 )

 

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

 

7

 

 

EVIO, INC.

Notes To Unaudited Consolidated Financial Statements

For The Three Month Periods Ended December 31, 2019, And 2018

 

NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

EVIO, Inc., a Colorado corporation and its subsidiaries provide analytical testing and advisory services to the emerging legalized cannabis industry. EVIO, Inc. was originally incorporated in the State of New York, December 12, 1977, under the name 3171 Holding Corporation. On February 22, 1979, the name was changed to Electronomic Industries Corp. and on February 23, 1983, the name was changed to Quantech Electronics Corp. The Company was reincorporated in the State of Colorado on December 15, 2003. On August 29, 2014, the Company completed a reverse merger with Signal Bay Research, Inc., a Nevada Corporation, and assumed its operations. In September 2014, the Company changed its name from Quantech Electronics Corp. to Signal Bay, Inc. then to EVIO, INC. in August 2018. The Company has selected September 30 as its fiscal year-end. The Company is domiciled in the State of Colorado, and its corporate headquarters are located in Henderson, Nevada.

 

As a part of and prior to the consummation of the reverse merger, William Waldrop and Lori Glauser, principals of Signal Bay Research, Inc., purchased 80% of the issued and outstanding common stock from WB Partners. The merger between the Company and Signal Bay Research was finalized and closed contemporaneously with the share purchase. As part of this share purchase, Mr. Waldrop and Ms. Glauser became the officers and directors of the Company. Immediately after the reverse, WB Partners owned less than 5% of the common stock. The company filed a Form 10-12G on November 25, 2014, and was determined to be a shell company by the SEC as per the Form 10-12G/A which went effective on January 24, 2015. On January 29, 2015, the company filed an 8-K stating it entered into a material agreement and was no longer a shell company.

 

After the reverse merger, Signal Bay Research, Inc. continues to operate as a wholly-owned subsidiary providing compliance, research, and advisory services for Signal Bay, Inc.

 

Signal Bay Services was formed on January 25, 2015, as the management services division of EVIO.

 

On September 17, 2015, EVIO entered into a share exchange agreement with CR Labs, Inc., an Oregon Corporation, pursuant to which the Company acquired 80% of the outstanding common stock of CR Labs, Inc.

 

EVIO Inc. was formed on April 4, 2016, to become the holding company for all laboratory operations.

 

EVIO Labs Eugene was formed on May 23, 2016, as a wholly-owned subsidiary of EVIO Inc. Subsequently, on May 24, 2016, EVIO Labs Eugene acquired all of the assets of Oregon Analytical Services, LLC, inclusive of client lists, equipment, trade names, and personnel.

 

On June 1, 2016, EVIO Inc. entered into a share purchase agreement to purchase 80% of the outstanding common stock of Smith Scientific Industries, Inc. d/b/a Kenevir Research in Medford, OR.

 

On October 19, 2016, the Company entered into a Membership Interest Purchase Agreement to purchase 100% of the ownership of GreenHaus Analytical Labs, LLC.

 

On October 26, 2016, the Company entered into an Asset Purchase Agreement with Green Style Consulting, LLC which was closed on November 1, 2016.

 

The Company entered into a Membership Interest Purchase Agreement with Viridis Analytics MA, LLC which was closed on August 1, 2018.

 

8

 

 

On December 29, 2018, the Company entered into a Membership Purchase Agreement to purchase 60% of the outstanding shares of C3 Labs, LLC which closed On January 1, 2019.

 

On June 27, 2018, Greenhaus Analytical Labs LLC, a wholly-owned subsidiary of EVIO, Inc. entered into a Purchase and Sale Agreement with Michael G. Myers for the property located at 14775 SW 74th Ave., Tigard, OR 97224.

 

On June 27, 2018, Greenhaus Analytical Labs, LLC, a wholly-owned subsidiary of EVIO, Inc., entered into an Asset Purchase Agreement with MRX Labs LLC which closed on July 5, 2019.

 

On April 29, 2018, the Company entered into an Asset Purchase Agreement with Leaf Detective, LLC which was closed on the same date.

 

On May 2, 2018, the Company entered into a Stock Purchase Agreement with Keystone, Labs, Inc. to purchase 50% of the outstanding shares of Keystone Labs which was closed on the same date.

 

Management’s Representation of Interim Financial Statements

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.

 

Basis of Presentation

 

The consolidated financial statements of the Company have been prepared in accordance with GAAP and are expressed in United States dollars. For the three months ended December 31, 2019, and 2018, and the year ended September 30, 2019, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

 

The subsidiaries of EVIO, Inc. are as follows:

 

Trade Name (dba)   Company Name   State of
Incorporation
  Ownership %   Acquisition Month  
EVIO Labs Medford   Smith Scientific Industries, LLC   Oregon     80 %   June 2016  
EVIO Labs Portland   Greenhaus Analytical Labs   Oregon     100 %   October 2016  
EVIO Labs MA   Viridis Analytics   Massachusetts     100 %   August 2017  
EVIO Labs Berkeley   C3 Labs, LLC   California     90 %   January 2018  
Keystone Labs   Keystone Labs, Inc.   Ontario, Canada     50 %   May 2018  

 

9

 

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

  Step 1: Identify the contract with the customer
  Step 2: Identify the performance obligations in the contract
  Step 3: Determine the transaction price
  Step 4: Allocate the transaction price to the performance obligations in the contract
  Step 5: Recognize revenue when the company satisfies a performance obligation

 

The Company generates revenue from consulting services, licensing agreements, and testing of cannabis and hemp products for medicinal and adult-use consumption.

 

The Company accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.

 

The Company evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The Company’s services included in its contracts are distinct from one another.

 

The Company determines the transaction price for each contract based on the consideration it expects to receive for the distinct services being provided under the contract.

 

The Company recognizes revenue as performance obligations are satisfied and the customer obtains control of the services provided. In determining when performance obligations are satisfied, the Company considers factors such as contract terms, payment terms, and whether there is an alternative future use of the service.

 

The Company recognizes revenue from testing services upon delivery of its testing results to the client. Customer orders for testing services are generally completed within two weeks of receiving the order.

 

Consulting engagements may vary in length and scope, but will generally include the review and/or preparation of regulatory filings, business plans, and financial models, operating plans, and technology support to customers within the same industry. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting agreement.

 

The Company recognizes revenue from the right of use license agreements upon transfer of control of the functional intellectual property. In certain licensing agreements, the Company may receive royalty revenues based upon performance metrics which are recognized as earned over time.

 

Stock-Based Compensation

 

In accordance with ASC No. 718, Compensation-Stock Compensation (“ASC 718”), the Company measures the cost of stock-based compensation arrangements based on the grant date fair value and recognizes the cost in the financial statements over the period during which employees are required to provide services. Stock-based compensation arrangements may include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans.

 

The Company utilizes the Black Scholes option pricing model, which was developed for use in estimating the fair value of options. Option pricing models require the input of highly complex and subjective variables including the expected life of options granted and the expected volatility of the Company’s stock price over a period equal to or greater than the expected life of the options.

 

10

 

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at their original invoice amounts. We regularly review collectability and establish an allowance for uncollectible amounts as necessary based on our experience with historical collectability. Management recognized an allowance for uncollectible amounts, of $154,836 and $215,593 for the periods ended December 31, 2019, and September 30, 2019, respectively.

 

Foreign Currency Translation

 

The functional currency of the Company’s subsidiary in Canada is the Canadian Dollar. The subsidiary’s assets and liabilities have been translated to U.S. Dollars using the exchange rates in effect at the balance sheet dates. Statements of operations amounts have been translated using the average exchange rate for each period. Resulting gains or losses from translating foreign currency financial statements are recorded as other comprehensive income (loss).

 

Fair Value of Financial Instruments

 

The Company has adopted the guidance under ASC Topic 820 for financial instruments measured on fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Net Income (Loss) Per Share

 

Basic loss per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. There were 33,979,456 and 13,266,226 potentially dilutive common shares outstanding as of December 31, 2019 and 2018, respectively. Because of the net losses incurred during the three months ended December 31, 2019, and 2018, the impacts of dilutive instruments would have been anti-dilutive for the period presented and have been excluded from the diluted loss per share calculations.

 

Recently Issued Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which revises the definition of a business. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company notes that this guidance will impact its acquisitions beginning January 1, 2018. Management believes recently issued accounting pronouncements will have no impact on the financial statements of the Company.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718) which simplifies certain aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Certain areas of the simplification apply only to nonpublic entities. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments of the ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

11

 

 

In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update, and Simplification. Under the final rule Company’s must now analyze changes in stockholders’ equity in the form of a reconciliation, for the current and comparative year-to-date, with subtotals for each interim period.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

 

Note 2 – Going concern

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have an established source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

 

In the coming year, the Company’s foreseeable cash requirements will relate to the continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.

 

Historically, it has mostly relied upon convertible debentures, convertible promissory notes, internally generated funds such as shareholder loans and advances to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future public or private offerings of the Company’s stock or loans from private investors, although there can be no assurance that it will be able to obtain such financing. Additionally, due to the onset of COVID-19 obtaining financing may be more difficult to obtain currently compared to historic levels. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.

 

Note 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company has adopted the guidance under ASC Topic 820 for financial instruments measured on a fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

ASC Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or  liabilities.
   
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
   
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

12

 

 

The Company’s financial instruments consist principally cash, accounts payable, and accrued liabilities. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. Also, the fair value of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes simulation model.

 

The Company’s derivative liabilities were adjusted to fair market value at the end of each reporting period, using Level 3 inputs.

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on December 31, 2019:

 

    Level 1     Level 2     Level 3     Total  
Liabilities                                
Derivative financial instruments   $ -     $ -     $ 2,125,702     $ 2,125,702  

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on September 30, 2019:

 

    Level 1     Level 2     Level 3     Total  
Liabilities                                
Derivative financial instruments   $ -     $ -     $ 2,545,735     $ 2,545,735  

 

Note 4 –leases

 

The Company determines if an arrangement is a lease at inception and has lease agreements for warehouses, office facilities, and equipment. These commitments have remaining non-cancelable lease terms, with lease expirations that range from 2020 to 2024.

 

As a result of the adoption of ASC 842, certain real estate and equipment operating leases have been recorded on the balance sheet with a lease liability and right-of-use asset (“ROU”). Application of this standard resulted in the recognition of ROU assets of $2,307,150, net of accumulated amortization, and a corresponding lease liability of $2,356,425. Accounting for finance leases is substantially unchanged.

 

Operating leases are included in operating lease ROU assets, operating lease obligations, current, and operating lease obligations, long term on the condensed consolidated balance sheets. Finance leases are included in property and equipment, finance lease obligations, short term, and finance lease obligations, long term, on the condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available.

 

13

 

 

Amortization of lease assets is included in general and administrative expenses. The future minimum lease payments of lease liabilities as of December 31, 2019, are as follows:

 

For the years ended September 30,   Operating Leases     Financing Leases  
2020     970,425       433,087  
2021     697,436       514,152  
2022     549,390       183,020  
2023     347,745       206,674  
2024 and thereafter     27,911       5,022  
Total lease payments     2,592,907       1,341,955  
Less: Payments Made     (236,482 )     (71,333 )
Total Lease Liabilities   $ 2,356,425       1,270,622  

 

Note 5 – INTANGIBLE ASSETS

 

The Company’s intangible assets consist of customer lists, testing licenses, favorable leases, and websites. The components of intangible assets as of December 31, 2019, and September 30, 2019 consist of:

 

    December 31, 2019     September 30, 2019  
Customer list   $         -     $ 854,014  
License     -       503,000  
Favorable lease     -       3,100  
Domains & Websites     -       49,516  
Non-compete agreements     -       182,388  
Assembled Workforce     -       50,750  
Intellectual Property     -       342,610  
Total     -       1,977,661  
Accumulated amortization     -       (1,977,661 )
Net value   $ -     $ -  

 

The Company had fully amortized all intangible assets during the fiscal year ended September 30, 2019.

 

Note 6 – Concentration of Credit Risk

 

Instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits, notes receivable and accounts receivable. As of December 31, 2019, the Company did not hold cash at any financial institution in excess of the amount insured by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000.

 

No individual client represents greater than 10% of the annual revenue.

 

During the three months ended December 31, 2019, and December 31, 2018, there were no customers that represented over 10% of the Company’s revenues.

 

14

 

 

As of December 31, 2019, the Company had total accounts receivable net of allowances of $13,808. Five clients comprised a total of 36% of this balance as follows:

 

    Balance     Percent of Total  
Customer 1   $ 48,606       14 %
Customer 2     20,336       6 %
Customer 3     20,321       6 %
Customer 4     18,746       5 %
Customer 5     18,622       5 %
All others     222,014       64 %
Total     348,645       100 %
Allowance for doubtful accounts     (154,836 )        
Net accounts receivable   $ 193,809          

 

As of September 30, 2019, the Company had total accounts receivable, net of allowances, of $133,022. Five separate clients comprised a total of 41% of this balance as follows:

 

    Balance     Percent of Total  
Customer 1   $ 48,606       14 %
Customer 2     33,572       10 %
Customer 3     20,336       6 %
Customer 4     20,321       6 %
Customer 5     20,208       6 %
All others     246,456       59 %
Total     348,955       100 %
Allowance for doubtful accounts     (215,933 )        
Net accounts receivable   $ 133,022          

 

Note 7 – Property and Equipment

 

Property and equipment are carried at cost. Expenditures for maintenance and repairs are expensed in the period incurred. Renewals and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period.

 

Depreciation is computed for financial statement purposes on a straight-line basis over estimated useful lives of the related assets and the modified accelerated cost recovery system for federal income tax purposes. The estimated useful lives of depreciable assets are:

 

     Estimated
    Useful Lives
Building   39 years
Laboratory and Computer Equipment   5 years
Furniture and Fixtures   7 years
Software   3 years
Domains   15 years

 

15

 

 

The Company’s property and equipment consisted of the following as of December 31, 2019, and September 30, 2019:

 

    December 31, 2019     September 30, 2019  
Assets Not-In-Service   $     $ -  
Capital Assets     1,815,416       1,800,347  
Land     212,550       212,550  
Buildings & Real Estate     941,857       941,857  
Furniture and Equipment     152,933       152,933  
Laboratory Equipment     2,217,485       2,188,828  
Software     79,653       78,996  
Computers     35,086          
Leasehold Improvements     704,627       697,333  
Vehicles     183,589       83,915  
Total     6,343,196       6,188,777  
Accumulated depreciation     (1,797,597 )     (1,511,973 )
Net value   $ 4,545,599     $ 4,676,804  

 

Note 8 – Related Party Transactions

 

During the periods ended December 31, 2019 and September 30, 2019 the Company received loans from its Chief Operating Officer totaling $3,283 and $194,820, respectively, and made repayments totaling $5,400 and $1,040, respectively. There was $141,662 and $143,780 due as of December 31, 2019, and September 30, 2019, respectively, and are included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties. The loans carry a 0% interest rate and are due on demand.

 

During the periods ended December 30, 2019 and September 30, 2019 the Company received loans from its Chief Executive Officer totaling $0 and $75,000, respectively, and made repayments totaling $0 and $19,200, respectively. There was $55,800 and $55,800 due as of December 31, 2019, and September 30 2019, respectively, and are included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties. The loans carry a 0% interest rate and are due on demand.

 

During the periods ended December 31, 2019, and September 30, 2019, the Company made payments to Sara Lausmann, associated with the asset purchase of Oregon Analytical Services, LLC, totaling $2,000 and $0, respectively. There was $566,289 and $568,299 of principal due as of December 31, 2019 and September 30, 2019, respectively. The note carries interest at a rate of 5% per annum and had accrued interest totaling $115,036 and $107,899 due as of December 31, 2019, and September 30, 2019, respectively.

 

During the periods ended December 31, 2019, and September 30, 2019, the Company made payments to Anthony Smith, our Chief Science Officer, associated with the purchase of 80% of Smith Scientific Industries, totaling $24,551 and $55,090, respectively. There was $156,359 and $180,910 of principal due as of December 31, 2019 and September 31, 2019, respectively. The note carries interest at a rate of 5% per annum and had accrued interest totaling $40,122 and $41,600 due as of December 31, 2019, and September 30, 2019, respectively.

 

During the periods ended December 31, 2019, and September 30, 2019, the Company made repayments to Henry Grimmett, prior Company Director (retired April 2018), on an outstanding loan from member assumed by the Company, totaling a note payable of Greenhaus Analytical Services, LLC, totaling $0 and $3,859, respectively. There was $113,554 and $113,554 of principal due as of December 31, 2019 and September 30, 2019, respectively. The note bears interest at 0% per annum and requires repayments of $25,000 quarterly.

 

During the periods ended December 31, 2019, and September 30, 2019, the Company made no payments to Henry Grimmett, prior Company Director (retired April 2018), associated with the acquisition of Greenhaus Analytical Services, LLC. The Company entered into a $340,000 note payable as part of its acquisition of Greenhaus Analytical Services, LLC. The note carries interest at a rate of 6% per annum and matures on October 16, 2020. During the year ended September 30, 2019, a third party purchased $170,000 of the note from Henry Grimmett, refer to Note 10, Convertible Notes; Noteholder 14. There was $170,000 and $170,000 of principal due as of December 31, 2019 and September 30, 2019, respectively. Unamortized debt discount of $20,159 and $25,563 as of December 31, 2019 and September 30, 2019, respectively and $31,982 and $59,412 of accrued interest due as of December 31, 2019 and September 30, 2019, respectively.

 

16

 

 

During the periods ended December 31, 2019 and September 30, 2019, the Company received loans from a related party associate with Keystone Labs totaling $30,796 and $191,515 and made repayments totaling $19,248 of $9,034. There was $372,538 and $354,050 due as of December 31, 2019 and September 30, 2019, respectively. Amounts have been adjusted for USD. The advances are non-interest bearing and due on demand and is included in the accompanying consolidated balance sheets as a current portion of notes payable to related parties.

 

Note 9 – STOCKHOLDERS’ EQUITY

 

Series A Convertible Preferred Stock

 

The Company has -0- shares of Series A Convertible Stock issued and outstanding as of December 31, 2019, and September 30, 2019.

 

Series B Convertible Preferred Stock

 

The Company designated 5,000,000 shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with a par value of $0.0001 per share. The Company has 5,000,000 shares of Series B Convertible Stock issued and outstanding as of December 31, 2019, and September 30, 2019. These shares converted to common stock at a rate of 1 common share per each share of Series B Convertible Preferred Stock.

 

Series C Convertible Preferred Stock

 

The Company designated 500,000 shares of Series C Convertible Preferred Stock (“Series C Preferred Stock”) with a par value of $0.0001 per share. There were 500,000 shares of Series C Convertible Stock issued and outstanding as of December 31, 2019, and September 30, 2019. These shares converted to common stock at a rate of 5 common shares per each share of Series C Convertible Preferred Stock.

 

Series D Convertible Preferred Stock

 

The Company designated 1,000,000 shares of Series D Convertible Preferred Stock (“Series D Preferred Stock”) with a par value of $0.0001 per share. These shares converted to common stock at a rate of 2.5 common shares per each share of Series D Convertible Preferred Stock.

 

During the Year Ended September 30, 2019, the Company received conversion notices from Series D Preferred Stockholders resulting in a total of 532,500 shares of common stock being issued for the conversion of 213,000 shares of Series D Preferred Stock.

 

There were 349,500 shares of Series D Convertible Stock issued and outstanding as of December 31, 2019, and September 30, 2019, respectively.

 

Common Stock

 

During the three months ended December 31, 2019, the Company issued the following common shares:

 

Number of

Shares issued

    Description   $   Value  
  422,500     Issuance of shares as compensation to employees, officers/directors     234,377  
  359,212     Issuance of shares in exchange for consulting, professional and services     16,730  
  2,285,449     Shares issued in satisfaction of debt issuance costs     62,500  
  26,666     Shares issued in settlement of accounts payable     6,000  
  18,317,481     Issuance of shares in connection with the conversion of debentures     1,241,782  
  3,466,353     Issuance of shares in connection with the conversion of interest payable     172,222  
                 
  Total    24,877,661         $ 1,733,611  

 

17

 

 

During the year ended September 30, 2019, the Company issued 1,038,017 common shares valued at $336,891 for services; 1,415,000 common shares for cash proceeds of $586,000; 287,500 common shares valued at $397,980 as compensation to employees; 31,579 common shares for the settlement of $15,000 of accounts payable; 2,054,887 common shares for the settlement of $687,200 of convertible notes payable; 10,163 for the conversion of $25,110 of convertible accrued interest; 20,000 common shares for issuance of a stock purchase agreement valued at $11,760; 669,362 common shares for the settlement of $388,000 debenture conversions, and 532,500 common shares for the conversion of Preferred Series D stock. All conversions of outstanding principal and accrued interest on convertible notes payable were done so at contractual terms.

 

There were 54,192,080 and 29,314,419 shares of common stock issued and outstanding at December 31, 2019, and September 30, 2019

 

Note 10 – LOANS PAYABLE

 

The Company had the following loans payable outstanding as of December 31, 2019, and September 30, 2019:

 

    December 31, 2019     September 30, 2019  
             
On March 16, 2018, the Company executed notes payable for the purchase of three vehicles. The notes carry interest at 6.637% annually and mature on March 31, 2023.     44,082       47,551  
                 
On June 28, 2018, the Company executed a note payable for $650,000 for the purchase of the building at 14775 SW 74th Ave, Tigard, OR. The note carries interest at 8% annually and is due on June 28, 2021.     616,302       622,523  
                 
On July 5, 2018, the Company executed a note payable for $750,000 for the asset purchase of MRX Labs. The note carries interest at 8% annually and is due on January 5, 2019. (This note is in default as of 7/5/2019, which resulted in a 5% penalty on outstanding amount.)     750,000       750,000  
                 
On October 20, 2019, the Company executed notes payable for the purchase of four vehicles. The notes carry interest at 5.990% annually and mature on December 31, 2023.     102,280       -  
Total loans payable     1,512,664       1,420,079  
Less: current portion of loans payable     785,931       762,476  
                 
Long-term portion of loans payable   $ 726,733     $ 657,603  

 

As of December 31, 2019 and September 30, 2019, the Company accrued interest of $89,425 and $74,301 respectively

 

Note 11 – Convertible NOTES PAYABLE

 

The Company has entered into convertible notes payable that convert to common stock of the Company at variable conversion prices. As further discussed in Note 13 – Derivative Liability, the Company analyzed the conversion features of the agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

18

 

 

The following table summarizes all convertible notes outstanding as of December 31, 2019:

 

Holder   Issue Date   Due Date   Principal     Unamortized
Debt Discount
    Carrying Value     Accrued Interest  
                                 
Noteholder #1   04/24/18   04/24/19     500,000       -       500,000       -  
Noteholder #2   07/01/19   09/30/19     675,930       -       675,930       34,191  
Noteholder #3   08/01/18   01/01/19     396,000       -       396,000       84,457  
Noteholder #3   10/02/18   01/01/19     264,000       -       264,000       45,070  
Noteholder #5   09/17/18   09/17/19     5,371       -       5,371       10,260  
Noteholder #6   11/15/18   11/15/19     -       -       -       15,564  
Noteholder #6   01/14/19   01/14/20     131,250       (12,945 )     118,305       10,010  
Noteholder #6   02/04/19   02/04/20     230,000       (22,055 )     207,945       19,159  
Noteholder #6   08/08/19   08/08/20     33,092       (7,266 )     25,826       1,052  
Noteholder #6   11/04/19   11/04/20     33,516       (16,018 )     17,498       419  
Noteholder #6   12/23/19   12/23/20     137,375       (134,372 )     3,003       241  
Noteholder #7   12/27/18   12/27/19     20,000       -       20,000       2,898  
Noteholder #7   02/05/19   02/05/20     131,250       (15,103 )     116,147       9,262  
Noteholder #7   03/15/19   03/15/20     70,913       -       70,913       4,523  
Noteholder #7   08/08/19   08/08/20     33,092       (7,266 )     25,826       1,052  
Noteholder #7   11/04/19   11/04/20     33,516       (16,018 )     17,498       419  
Noteholder #8   02/08/19   02/08/20     498,498       (31,554 )     466,944       30,962  
Noteholder #10   03/15/19   03/15/20     70,913       -       70,913       4,523  
Noteholder #11   08/30/19   05/30/20     110,000       (60,620 )     49,380       2,965  
                                         
            $ 3,374,716     $ (323,217 )   $ 3,051,499     $ 277,027  

 

The following table summarizes all convertible notes outstanding as of September 30, 2019:

 

Holder   Issue Date   Due Date   Principal     Unamortized
Debt Discount
    Carrying Value     Accrued Interest  
                                 
Noteholder #1   04/24/18   04/24/19     500,000       -       500,000       -  
Noteholder #2   07/01/19   09/30/19     825,930       -       825,930       18,983  
Noteholder #3   08/01/18   01/01/19     396,000       -       396,000       76,471  
Noteholder #3   10/02/18   01/01/19     264,000       -       264,000       40,634  
Noteholder #4   09/06/18   09/06/19     145,000       -       145,000       15,575  
Noteholder #5   09/17/18   09/17/19     82,500       -       82,500       8,586  
Noteholder #6   11/15/18   11/15/19     222,600       (28,054 )     194,546       15,564  
Noteholder #6   01/14/19   01/14/20     131,250       (46,027 )     85,223       7,364  
Noteholder #6   02/04/19   02/04/20     265,000       (92,205 )     172,795       13,824  
Noteholder #6   03/15/19   03/15/20     70,913       -       70,913       3,093  
Noteholder #6   08/08/19   08/08/20     33,092       (10,291 )     22,801       384  
Noteholder #7   12/27/18   12/27/19     105,000       (25,603 )     79,397       18,204  
Noteholder #7   02/05/19   02/05/20     131,250       (48,185 )     83,065       6,616  
Noteholder #7   03/15/19   03/15/20     70,913       -       70,913       3,093  
Noteholder #7   08/08/19   08/08/20     33,092       (10,291 )     22,801       384  
Noteholder #8   02/08/19   02/08/20     783,724       (208,357 )     575,367       89,627  
Noteholder #9   03/15/19   03/15/20     70,913       -       70,913       3,093  
Noteholder #10   03/15/19   03/15/20     70,913       -       70,913       3,093  
Noteholder #11   08/29/19   05/29/20     100,000       (150,146 )     (50,146 )     964  
Noteholder #11   08/30/19   05/30/20     110,000       (97,555 )     12,445       747  
                                         
            $ 4,412,090     $ (716,714 )   $ 3,695,376     $ 326,145  

 

19

 

 

Noteholder #1

 

On April 24, 2018, the Company entered into a convertible note payable totaling $500,000 in exchange for 100% of the assets of Leaf Detective LLC. The note bears no interest, matures on April 24, 2019, and automatically converted to common stock at $1.25 per share on the maturity date. In the event the average lowest trading price of the Company’s common stock during the five days prior to maturity is less than $1.25 per share, the Company will pay the noteholder the difference between $1.25 and the average lowest trading price during the preceding five days per share converted in cash. On or about April 30, 2020, Michele Malaret and Gordon Griswold filed, filed a breach of contract in the original principal amount of $500,000, with the Superior Court of California, County of Humboldt. The Company currently recognizes the full liability on its balance sheet. There is no interest due associated with the note.

 

Noteholder #2

 

On July 2, 2018, the Company sold and issued a convertible promissory note to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount resulting in cash proceeds to the Company of $200,000 pursuant to the terms of a securities purchase agreement. The note, together with accrued interest at the annual rate of 8%, was due on October 1, 2018. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share. This note was replaced on July 1, 2019.

 

On September 13, 2018, the Company entered into an exchange agreement with an unrelated party for the principal amount $585,000, of which the loan payable to Palliatech, dated August 1, 2017, outstanding and principal of $549,652 would be assumed by the new note holder, with the difference of $35,348 to be treated as an original issue discount. The new convertible note payable carries an interest rate of 0% per annum is convertible into common stock of the Company at the option of the noteholder immediately at 80% of the lowest volume-weighted average price of the Company’s common stock in the preceding 20 trading days. This note was replaced on July 1, 2019.

 

On July 1, 2019, the two previous notes were replaced for the aggregate principal amount of $825,890. This included a default penalty of $150,000 for non-payment of the prior two notes. The note, together with accrued interest at the annual rate of 8%, is due on September 30, 2019. The note is convertible into common stock of the Company at the option of the noteholder at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $675,930 of principal and $34,191 of accrued interest on December 31, 2019.

 

Noteholder #3

 

On August 1, 2018, the Company sold and issued a convertible promissory note to an unrelated party for the principal amount of $330,000 of which $30,000 was an original issue discount resulting in cash proceeds to the Company of $300,000 pursuant to the terms of a securities purchase agreement. The note, together with accrued interest at the annual rate of 8%, was due on October 1, 2018. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On September 30, 2019, a fee for payment default of $66,000 was added to the principal. There was $396,000 of principal and $84,457 of accrued interest due on December 31, 2019.

 

20

 

 

On October 2, 2018, the Company sold and issued a convertible promissory note to an unrelated party for the principal amount of $220,000 of which $20,000 was an original issue discount resulting in cash proceeds to the Company of $200,000 pursuant to the terms of a securities purchase agreement. The note, together with accrued interest at the annual rate of 8%, is due on January 1, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.50 per share or a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On September 30, 2019, a fee for payment default of $44,000 was added to the principal. There was $264,000 of principal and $45,070 of accrued interest on December 31, 2019.

 

Noteholder #4

 

On September 6, 2018, the Company sold and issued a convertible promissory note to an unrelated party for the principal amount of $125,000 of which $15,000 was an original issue discount resulting in cash proceeds to the Company of $110,000 pursuant to the terms of a securities purchase agreement. The note, together with accrued interest at the annual rate of 10%, is due on September 6, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On July 5, 2019, a fee for payment default of $20,000 was added to the principal. There was no note principal or accrued interest due on December 31, 2019.

 

Noteholder #5

 

On September 6, 2018, the Company sold and issued a convertible promissory note to an unrelated party for the principal amount of $62,500 of which $6,250 was an original issue discount resulting in cash proceeds to the Company of $56,250 pursuant to the terms of a securities purchase agreement. The note, together with accrued interest at the annual rate of 10%, is due on September 6, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. On July 5, 2019, a fee for payment default of $20,000 was added to the principal. There was $5,371 of principal and $10,260 of accrued interest due on December 31, 2019.

 

Noteholder #6

 

On November 15, 2018, the Company sold and issued a convertible promissory note to an unrelated party for the principal amount of $222,600 of which $12,600 was an original issue discount resulting in cash proceeds to the Company of $210,000 pursuant to the terms of a securities purchase agreement. The note, together with accrued interest at the annual rate of 8%, is due on November 15, 2019. The principal amount of the note and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at the lower of a conversion price of $0.50 per share or at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $00 of principal and $15,564 of accrued interest due on December 31, 2019.

 

On January 14, 2019, the Company entered into a convertible note payable with an unrelated party for $131,250 of which included $6,250 in third party fees resulting in net cash proceeds to the Company of $125,000. The convertible note payable carries interest at a rate of 8% per annum, is due on January 14, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $131,250 of principal and $10,010 of accrued interest due on December 31, 2019.

 

On February 4, 2019, the Company entered into a convertible note payable with an unrelated party for $265,000 of which $15,000 was an original issue discount and $10,000 in third party fees resulting in net cash proceeds to the Company of $240,000. The convertible note payable carries interest at a rate of 8% per annum, is due on February 4, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $230,000 of principal and $19,159 accrued interest due on December 31, 2019.

 

21

 

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was no note principal or accrued interest due on December 31, 2019.

 

On August 8, 2019, the Company entered into a convertible note agreement with an unrelated party for $33,092 of which $1,576 in third party fees resulting in net cash proceeds to the Company of $31,516. The convertible note payable carries interest at a rate of 8% per annum, is due on August 8, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $33,092 of principal and $1,052 of accrued interest due on December 31, 2019.

 

Noteholder #7

 

On December 27, 2018, the Company sold and issued a Convertible Promissory to an unrelated party for the principal amount of $105,000 pursuant to the terms of a Securities Purchase Agreement of even date therewith. The Note, together with accrued interest at the annual rate of 8%, is due on December 27, 2019, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $20,000 of principal and $2,898 of accrued interest due on December 31, 2019.

 

On February 5, 2019, the Company entered into a convertible note payable with an unrelated party for $131,250 of which included $6,250 in third party fees resulting in net cash proceeds to the Company of $125,000. The convertible note payable carries interest at a rate of 8% per annum, is due on February 5, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $131,250 of principal and $9,262 of accrued interest due on December 31, 2019.

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $70,913 of principal and $4,523 of accrued interest due on December 31, 2019.

 

On August 8, 2019, the Company entered into a convertible note agreement with an unrelated party for $33,092 of which $1,576 in third party fees resulting in net cash proceeds to the Company of $31,516. The convertible note payable carries interest at a rate of 8% per annum, is due on August 8, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $33,092 of principal and $1,052 of accrued interest due on December 31, 2019.

 

Noteholder #8

 

On February 8, 2019, the Company entered into an exchange agreement with an unrelated party for $580,537, of which the loan payable to Palliatech, dated September 1, 2017, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 10% per annum, with one-year interest guaranteed, is due on February 8, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 30% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. A principal non-pay default was applied in the amount of $203,188. There was $498,498 of principal and $30,962 of accrued interest due on December 31, 2019.

 

22

 

 

Noteholder #9

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was no note principal or accrued interest due on December 31, 2019.

 

Noteholder #10

 

On March 15, 2019, the Company entered into an exchange agreement with an unrelated party for $70,913, of which the loan payable to Noteholder 2, dated July 2, 2018, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum is due on March 15, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $70,913 of principal and $4,523 of accrued interest due on December 31, 2019.

 

Noteholder #11

 

On August 30, 2019, the Company entered into a convertible note payable with an unrelated party for $110,000 which included $10,000 original issue discount resulting in net cash proceeds to the Company of $100,000. The convertible note payable carries interest at a rate of 8% per annum, is due on May 30, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was $110,000 of principal and $2,965 of accrued interest due on December 31, 2019.

 

On August 29, 2019, the Company entered into an exchange agreement with an unrelated party for $170,000, of which the loan payable to Henry Grimmett, dated October 16, 2016, outstanding and principal would be assumed by the new note holder. The new convertible note payable carries an interest rate of 8% per annum, is due on May 29, 2020, and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days. There was no note principal or accrued interest due on December 31, 2019.

 

NOTE 12 – CONVERTIBLE DEBENTURES

 

On January 29, 2018, the Company issued a total of 5,973 units of 8% unsecured convertible debentures. Each unit consists of one convertible debenture with a principal face value of $1,000 and 250 warrants. The gross proceeds were $5,973,000. Each warrant entitles the holder thereof to purchase one additional common share of the Company at an exercise price of $0.80 per warrant for 24 months. The convertible debentures have a maturity date of 36 months from issuance. Simple interest will be paid at a rate of 8% per annum in arrears until maturity or until conversion. The principal amount of the debentures and any accrued interest thereon are convertible at the option of the holder into common shares of the Company at any time at a conversion price of $0.60 per share.

 

In addition to the warrants associated with the convertible debentures, the Company issued an additional 597,300 warrants to purchase common stock of the Company as offering costs representing an equivalent of 6% of the fully converted debentures. The warrants are exercisable at $0.60 per share for two years.

 

The Company also issued three separate debentures under the same terms for additional cash proceeds of $610,000. The additional debentures carry an additional 152,500 warrants to purchase additional common shares of the Company at $0.80 per share. Additionally, the outstanding principal and interest may be converted to common stock of the Company at $0.60 per share.

 

23

 

 

Note 13 – Derivative Liability

 

As of December 31, 2019 and September 30, 2019, Company had a derivative liability balance of $2,125,702 and $2,545,735 on the balance sheets and recorded unrealized gains of $420,033 and $852,628 from derivative liability fair value adjustments during the three months ended December 31, 2019 and 2018, respectively.

 

On November 15, 2018, the Company issued a $222,600 convertible promissory note to an unrelated party that matures on November 15, 2019. Refer to Noteholder 8 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15, Derivatives and Hedging and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

The embedded derivative for the note is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the embedded derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the note was $220,463 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $184,957 which was up to the face value of the convertible note with the excess fair value at an initial measurement of $35,506 being recognized as a loss on derivative fair value measurement.

 

On December 27, 2018, the Company issued a $105,000 convertible promissory note to an unrelated party that matures on December 27, 2019. Refer to Noteholder 9 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes is subject to a variable conversion rate.

 

The aggregate fair value of the derivative at the issuance date of the note was $98,091 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $38,365 which was up to the face value of the convertible note with the excess fair value at an initial measurement of $59,725 being recognized as a loss on derivative fair value measurement.

 

On January 14, 2019, the Company issued a $131,250 convertible promissory note to an unrelated party that matures on February 5, 2020. Refer to Noteholder 8 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

 

The aggregate fair value of the derivative at the issuance date of the note was $144,752 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $14,423 which was up to the face value of the convertible note with the excess fair value at an initial measurement of $130,329 being recognized as a loss on derivative fair value measurement

 

On February 4, 2019, the Company issued a $265,000 convertible promissory note to an unrelated party that matures on February 4, 2020. Refer to Noteholder 8 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

 

24

 

 

The aggregate fair value of the derivative at the issuance date of the note was $322,521 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $322,521 on derivative fair value measurement.

 

On February 5, 2019, the Company issued a $131,250 convertible promissory note to an unrelated party that matures on February 11, 2020. Refer to Noteholder 9 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

 

The aggregate fair value of the derivative at the issuance date of the note was $228,916 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $228,916 on derivative fair value measurement.

 

On July 1, 2019, the Company issued a $825,930 convertible promissory note to an unrelated party that matures on September 30, 2019. Refer to Noteholder 3 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

 

The aggregate fair value of the derivative at the issuance date of the note was $1,807,875 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $1,807,875 on derivative fair value measurement.

 

On August 29, 2019, the Company issued a $170,000 convertible promissory note to an unrelated party that matures on May 29, 2020. Refer to Noteholder 14 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

 

The aggregate fair value of the derivative at the issuance date of the note was $143,951 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $65,965 on derivative fair value measurement.

 

On August 30, 2019, the Company issued a $110,000 convertible promissory note to an unrelated party that matures on May 30, 2020. Refer to Noteholder 14 under “Note 12 – Convertible Debentures” for more information. The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

 

The aggregate fair value of the derivative at the issuance date of the note was $109,936 which was recorded as a derivative liability on the balance sheet. The Company recognized a loss of $79,183 on derivative fair value measurement.

 

At December 31, 2019, the Company marked-to-market the fair value of the derivative liabilities related to conversion features and determined an aggregate fair value of $2,125,050 and recorded a $238,869 gain from change in fair value for the three months ended December 31, 2019. The fair value of the embedded derivatives was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 144%, (2) risk-free interest rate of 1.59%, (3) exercise prices of $0.027 - $0.034, and (4) expected lives of 0.10 – 1.00 of a year.

 

On October 2, 2018, the Company issued a total of $220,000 convertible debenture to an unrelated party that matures on January 1, 2019. The Company issued a total of 100,000 warrants to purchase additional shares of common stock of the Company in connection with the convertible debenture. The Company analyzed the issued warrants for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the warrants should be classified as a derivative because the Company is unable to ascertain there will be adequate unissued authorized shares of common stock to fulfill its obligations should the warrants be exercised. In accordance with AC 815, the Company has recorded a derivative liability related to the warrants.

 

The derivative for the warrants is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the derivative using the Black-Scholes option pricing model. The aggregate fair value of the derivative at the issuance date of the warrants was $57,014 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $53,333 which was up to the face value of the convertible debentures with the excess fair value at an initial measurement of $3,681 being recognized as a loss on derivative fair value measurement.

 

25

 

 

As discussed in “Note 12 – Convertible Debentures”, the Company issued a total of $374,000 of convertible debentures to unrelated parties that mature on dates ranging from October 17, 2020 to October 23, 2020. The Company issued a total of 187,000 warrants to purchase additional shares of common stock of the Company in connection with the convertible debentures. The Company analyzed the issued warrants for derivative accounting consideration and determined that the warrants should be classified as a derivative. The aggregate fair value of the derivative at the issuance date of the warrants was $73,383 which was recorded as a derivative liability on the balance sheet, for which the Company recorded an equivalent debt discount to the convertible debentures.

 

At December 31, 2019, the Company marked-to-market the fair value of the derivative liabilities related to warrants and determined an aggregate fair value of $652 and recorded a $181,164 gain from change in fair value for the three months ended December 31, 2019. The fair value of the derivatives was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 144%, (2) risk-free interest rate of 1.59%, (3) exercise prices of $0.60 to $0.80, and (4) expected lives of 0.08 – 0.81 years.

 

The following table summarizes the change in derivative liabilities included in the balance sheet at December 31, 2019:

 

Fair Value of Embedded Derivative Liabilities:      
Balance, September 30, 2019   $ 2,545,735  
Change in fair market value     (420,033 )
Balance, December 31, 2019   $ 2,125,702  

 

The following table summarizes the gain (loss) on derivative liability included in the income statement for the three months ended December 31, 2019 and 2018, respectively.

 

    Three Months Ended December 31,  
    2019     2018  
Day one loss due to derivatives on convertible debt   $ -       (98,912 )
Change in fair value of derivatives     420,033       951,540  
Total derivative gain (loss)   $ 420,033       852,628  

 

NOTE 14 – STOCK OPTIONS AND WARRANTS

 

The following tables summarize all stock option and warrant activity for the three months ended December 31, 2019:

 

    Shares    

Weighted-

Average

Exercise Price

Per Share

 
Outstanding, September 30, 2019     5,484,970       0.742  
Granted     -       -  
Exercised     -       -  
Forfeited     -       -  
Expired     -       -  
Outstanding, December 31, 2019     5,484,970       0.742  

 

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The following table discloses information regarding outstanding and exercisable options and warrants at December 31, 2019:

 

      Outstanding     Exercisable  
Exercise Prices     Number of Option Shares     Weighted Average Exercise Price     Weighted Average Remaining Life (Years)     Number of Option Shares     Weighted Average Exercise Price  
$ 0.225       200,000     $ 0.225       4.46       200,000     $ 0.225  
$ 0.400       110,000     $ 0.400       1.62       110,000     $ 0.400  
$ 0.420       330,000     $ 0.420       4.05       330,000     $ 0.420  
$ 0.500       165,000     $ 0.500       1.70       162,500     $ 0.500  
$ 0.600       627,220     $ 0.600       0.11       627,220     $ 0.600  
$ 0.650       145,000     $ 0.650       2.82       36,250     $ 0.650  
$ 0.800       3,482,750     $ 0.800       1.43       3,095,250     $ 0.800  
$ 0.850       100,000     $ 0.850       3.29       -     $ 0.850  
$ 1.050       25,000     $ 1.050       3.79       -     $ 1.050  
$ 1.260       220,000     $ 1.260       2.50       110,000     $ 1.260  
$ 1.300       10,000     $ 1.300       1.80       7,500     $ 1.300  
$ 1.386       60,000     $ 1.386       2.50       30,000     $ 1.386  
$ 1.666       10,000     $ 1.666       2.59       5,000     $ 1.666  
  Total       5,484,970     $ 0.742       1.95       4,713,720     $ 0.718  

 

Compensation related to stock-based compensation was $126,581 and $169,922, respectively, for the three months ended December 31, 2019 and 2018.

 

Note 15 – Subsequent Events

 

Common Stock Issuances

 

The Company made the following issuances of common stock subsequent to September 30, 2019:

 

35,170,123 common shares for the conversion of $1,518,022 of principal on convertible debentures.
   
4,452,443 common shares for the conversion of $203,820 of interest on convertible debentures
   
681,183 common shares issued for the conversion of debt conversion fees of $23,000
   
7,353,538 common shares issued for deferral of executive compensation
   
385,000 common shares issued for vesting of restricted stock grants for officers and directors
   
3,930,000 common shares issued for services
   
144,928 common shares issued for settlement of lawsuit
   
26,666 common shares issued for settlement of accounts payable.

 

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On January 13, 2020, the Company entered into a convertible note payable with an unrelated party for $52,500 which included $2,500 third party fees resulting in net cash proceeds to the Company of $50,000. The convertible note payable carries interest at a rate of 8% per annum, is due on January 13, 2021 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

On April 13, 2020, the Company entered into a convertible note payable with an unrelated party for $66,000 which included $6,000 originator issuer discount resulting in net cash proceeds to the Company of $60,000. The convertible note payable carries interest at a rate of 12% per annum, is due on November 30, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 35% discount from the lowest trading price of the Company’s common stock in the preceding 15 trading days.

 

Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

On May 9, 2019, Stephanie Head, a former part-time lab administrator for EVIO Labs Eugene, LLC, filed a wrongful termination lawsuit with the US District Court - District of Oregon, Eugene Division, Case No. 6:19-CV-00681, against EVIO Labs Eugene, LLC, EVIO, Inc., and Lori Glauser. In December 2018, EVIO Labs Eugene, LLC terminated Stephanie Head because she was not available to work full-time. In February 2019, Ms. Head filed a complaint to the Oregon Bureau of Labor & Industries (“BOLI”) with allegations that she was discriminated against and unlawfully terminated. In October 2019 BOLI found substantial evidence of unlawful employment on the basis of protected whistle-blowing, but found no substantial evidence of Ms. Head’s seven other allegations of unlawful employment practice. In April 2019, BOLI notified EVIO Labs Eugene, LLC that BOLI elected not to pursue the charges further and closed the file. On January 28, 2020, the case was settled for $35,000, $25,000 payable in cash, and $10,000 in EVIO Common Stock.

 

On February 6, 2020, MC CRE Investments, LLC landlord for the Palm Desert location, filed a Breach of Lease Agreement with the Superior Court of the State of California, County of Riverside. EVIO Labs Palm Desert has vacated the space and turned it back over to the landlord. The Company has expensed past due rents and late fees and these items are included in the liabilities in the balance sheet.

 

On or about March 5, 2020, Paul Tomaso, and Jonah Barber beneficiaries for MRX Labs, LLC, filed a Breach of Promissory Note in the original principal amount of $750,000, plus late fees and penalties, with the Circuit Court of the State in Oregon, in Multnomah County against Greenhaus Analytical Labs, LLC. The Company has expensed penalties and late fees and these items are included in the liabilities in the balance sheet.

 

On or about April 30, 2020, Michele Malaret and Gordon Griswold filed, filed a Breach of Contract in the original principal amount of $500,000, with the Superior Court of California, County of Humboldt. The Company currently recognizes the full liability on its balance sheet. There is no interest due associated with the note.

 

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained herein involve risks and uncertainties, including statements as to:

 

  our future operating results;
  our business prospects;
  our contractual arrangements and relationships with third parties;
  the dependence of our future success on the general economy;
  our possible financings; and
  the adequacy of our cash resources and working capital.

 

These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives, or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

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

 

Overview

 

We operate as a Colorado corporation and through our subsidiaries which provide analytical testing and advisory services to the emerging legalized cannabis industry.

 

Our active subsidiaries as of December 31, 2019, are as follows:

 

Trade Name (dba)   Company Name   State of
Incorporation
  Ownership%   Acquisition Month  
EVIO Labs Medford   Smith Scientific Industries, LLC   Oregon     80 %   June 2016  
EVIO Labs Portland   Greenhaus Analytical Labs   Oregon     100 %   October 2016  
EVIO Labs MA   Viridis Analytics   Massachusetts     100 %   August 2017  
EVIO Labs Berkeley   C3 Labs, LLC   California     90 %   January 2018  
Keystone Labs   Keystone Labs, Inc.   Ontario, Canada     50 %   May 2018  

 

In addition to the wholly-owned subsidiaries, the Company has entered into license agreements with independent testing laboratories in Florida and Colorado. Under the terms of the agreements, the independent laboratories are granted non-transferable and non-exclusive rights to use the Company’s trademarks and trade name.

 

Going Concern

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have an established source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

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The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

 

In the coming year, the Company’s foreseeable cash requirements will relate to the continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.

 

Historically, it has mostly relied upon private offerings and internally generated funds such as shareholder loans and advances to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.

 

Critical Accounting Policies and Estimates.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

 

RESULTS OF OPERATIONS

 

Three Months Ended December 31, 2019, compared to Three Months Ended December 31, 2018

 

COVID-19

 

On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most US states and many countries have issued policies intended to stop or slow the further spread of the disease.

 

COVID-19 and the US’s response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business, or our operations.

 

Revenues

 

For the three months ended December 31, 2019, we generated revenues of $1,332,956 compared to $1,187,238 for the three months ended December 30, 2018, an increase of $145,758 or approximately 12.3%. The increase was due primarily to increased testing sales in Oregon, partially offset by decreased testing revenue in California. California revenues decreased due to increased regulatory requirements which necessitated changes in instrumentation and associated methods for pesticide testing.

 

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Gross Profit

 

For the three months ended December 31, 2019, the gross profit margin was $130,642 compared to a gross loss of $(117,190) for the three months ended December 2018 an increase of $247,832. The increase was primarily attributed to increased revenue and decreased operating costs in Oregon and Massachusetts.

 

Operating Expenses

 

For the three months ended December 31, 2019, total operating expenses were $1,296,153 compared to $1,555,506 for the three months ended December 31, 2018, a decrease of $259,353. The decrease is primarily attributable to consolidated operations in Oregon, and lower operating expenses in Massachusetts.

 

Other (Expense)

 

For the three months ended December 30, 2019, other expense, net was $1,138,817, compared to other expense, net of $976,345 for the three months ended December 31, 2018. The increase in other income, net of $162,472, was primarily attributable to a decrease of interest expense of $202,007, offset by a reduction in the gain on the change in the fair market value of derivative liabilities of $432,595.

 

Net Loss

 

Net loss during the three months ended December 31, 2019, was $1,684,109, compared to a net loss of $2,596,659 during the three months ended December 31, 2018. The reduction of $912,550 in net loss is the result of an increase in gross margin, a reduction in operating expenses, and a reduction in other expenses, net.

 

Liquidity and Capital Resources

 

During the three months ended December 2019, the Company provided $121,657 in cash from operating activities compared to cash used in operating activities of $(247,720) for the three months ended December 31, 2018. The improvement of $369,377 is primarily attributable to a reduction in operating losses in 2019.

 

During the three months ended December 31, 2019, the Company used $33,124 in investing activities compared to $554,731 used in investing activities during the same period ended December 31, 2018. The reduction of $521,607 is attributable to a decrease in the purchase of fixed assets

 

During the three months ended December 31, 2019, net cash from financing activities was $111,804 compared to $933,876 during the same three month period ended December 31, 2018. The decrease in the 2019 period is primarily attributable a decrease in proceeds from the sale convertible notes of $910,413 and the sale of common stock of $103,000 in the 2018 period; compared to the sale of $204,407 in convertible notes and $-0- in common stock, respectively, during the 2019 period.

 

Dividends

 

The Company has never declared dividends.

 

Critical Accounting Policies and Estimates.

 

Our Critical Accounting Policies can be found in Note 1. ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES to our consolidated financial statements.

 

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Our Website.

 

Our website can be found at www.eviolabs.com.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company, as a smaller reporting company, as defined by Rule 229.10(f)(1), is not required to provide the information required by this Item.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report for the reasons disclosed in our annual report on Form 10-K.

 

This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to Rule 308(b) of Regulation S-K, which permits the Company to provide only management’s report in this Quarterly Report.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no changes in Internal Controls over financial reporting during the three months ended December 31, 2019. Upon hiring additional financial staff, EVIO will prepare written policies and procedures for accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity transactions, and prepare, review, and submit SEC filings in a timely manner.

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

On May 9, 2019, Stephanie Head, a former part-time lab administrator for EVIO Labs Eugene, LLC, filed a wrongful termination lawsuit with the US District Court - District of Oregon, Eugene Division, Case No. 6:19-CV-00681, against EVIO Labs Eugene, LLC, EVIO, Inc., and Lori Glauser. In December 2018, EVIO Labs Eugene, LLC terminated Stephanie Head because she was not available to work full-time. In February 2019, Ms. Head filed complaint to Oregon Bureau of Labor & Industries (“BOLI”) with allegations that she was discriminated against and unlawfully terminated. In October, 2019 BOLI found substantial evidence of unlawful employment on the basis of protected whistle-blowing, but found no substantial evidence of Ms. Head’s seven other allegations of unlawful employment practice. In April 2019, BOLI notified EVIO Labs Eugene, LLC that BOLI elected not to pursue the charges further and closed the file. On January 28, 2020, the case was settled for $35,000, $25,000 payable in cash, and $10,000 in EVIO Common Stock.

 

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On August 29, 2019, the Company issued FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC (“Creditor”) a Promissory Note in the original principal amount of $220,000.00 (the “Note”). The Company failed to timely pay certain sums under the Note and, as a result of the Breach, on or about August 7, 2019, Creditor filed a Complaint - Breach of Promissory Note in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Since such filing, the Company and Creditor have entered into a Settlement Agreement and Stipulation, pursuant to which the Company has agreed to issue the Creditor 1,000,000 shares of its common stock under 3(a)(10) of the Securities Act of 1933 in settlement for all claims. The settlement was approved by the court on August 27, 2019. The shares were issued on September 6, 2019.

 

On February 6, 2020, MC CRE Investments, LLC landlord for the Palm Desert location, filed a Breach of Lease Agreement with the Superior Court of the State of California, County of Riverside. EVIO Labs Palm Desert has vacated the space and turned it back over to the landlord. The Company has expensed past due rents and late fees and these items are included in the liabilities in the balance sheet.

 

On or about March 5, 2020, Paul Tomaso, and Jonah Barber beneficiaries for MRX Labs, LLC, filed a Breach of Promissory Note in the original principal amount of $750,000, plus late fees and penalties, with the Circuit Court of the State in Oregon, in Multnomah County against Greenhaus Analytical Labs, LLC. The Company has expensed penalties and late fees and these items are included in the liabilities in the balance sheet.

 

On or about April 30, 2020, Michele Malaret and Gordon Griswold filed, filed a Breach of Contract in the original principal amount of $500,000, with the Superior Court of California, County of Humboldt. The Company currently recognizes the full liability on its balance sheet. There is no interest due associated with the note.

 

ITEM 1A. RISK FACTORS

 

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

 

The above statement notwithstanding, shareholders and prospective investors should be aware that certain risks exist with respect to the Company and its business, including those risk factors contained in our most recent Registration Statements on Form S-1 and Form 10, as amended. These risks include, among others: limited assets, lack of significant revenues, and only losses since inception, industry risks, dependence on third party manufacturers/suppliers and the need for additional capital. The Company’s management is aware of these risks and has established the minimum controls and procedures to ensure adequate risk assessment and execution to reduce loss exposure.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

There was no other information during the quarter ended December 31, 2019, which was not previously disclosed in our filings during that period.

 

ITEM 6. EXHIBITS

 

31.1   Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002
31.2   Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002
32.1   Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002
32.2   Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 8, 2020.

 

  EVIO, INC.
     
  By: /s/ William Waldrop
    William Waldrop
    Chief Executive Officer, Interim Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on September 8, 2020.

 

  By: /s/ William Waldrop
    William Waldrop
    Director & Principal Executive Officer
     
  By: /s/ Lori Glauser
    Lori Glauser
    Director

 

34