Notes
to Consolidated Financial Statements
(Unaudited)
1.
The Company and Going Concern
Stem Holdings, Inc. (the “Company”)
is a Nevada corporation incorporated on June 7, 2016. The Company purchases, improves, and leases properties for use in the cannabis
production, distribution and sales industry as well as an investment in a cultivator providing cannabis and cannabis-infused products
licensed under the laws of the state of Nevada. As of March 31, 2019, the Company has acquired 3 commercial properties and leased
a fourth property and has entered into leases to related entities for these four properties.
The Company is also currently working towards
acquiring additional entities and assisting certain joint ventures with obtaining licenses and permits for cannabis production,
distribution and sale in additional US states and foreign countries. Should it be successful in these endeavors, the Company will
transform into a multi-state and worldwide, vertically integrated, cannabis company that purchases, improves, leases, operates
and invests in properties for use in the production, distribution and sales of cannabis and cannabis-infused products licensed
under the laws of the states of Oregon, Nevada, California and Oklahoma. As of March 31, 2019, these potential partners had ownership
interests in 26 state issued cannabis licenses including six (6) licenses for cannabis cultivation, three (3) licenses for cannabis
production, five (5) licenses for cannabis processing, one (1) license for cannabis wholesale distribution, one (1) license for
hemp production and ten (10) cannabis dispensary licenses.
Stem’s potential partner consumer
brands are award-winning and nationally known, and include: cultivators, TJ’s Gardens and Yerba Buena; retail brands, Stem
and TJ’s; infused product manufacturers, Cannavore and Supernatural Honey; and a CBD company, Dose-ology.
The Company has incorporated 6 wholly onwed
subsidiaries –Stem Group Oklahoma, Inc., Stem Holdings Florida, Inc. Stem Holdings Oregon, Inc., Stem Holdings IP, Inc.,
Opco, LLC, and Stem Agri, LLC.
The Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the
symbol “STEM” and the OTCQB exchange under the symbol “STMH”.
Going
Concern
These
unaudited financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize
its assets and discharge its liabilities in the normal course of business. While the recreational use of cannabis is legal under
the laws of certain States, where the Company has and is working towards further finalizing the acquisition of entities or investment
in entities that directly produce or sell cannabis, the use and possession of cannabis is illegal under United States Federal
law for any purpose, by way of Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, otherwise known as
the Controlled Substances Act of 1970 (the “ACT”). Cannabis is currently included under Schedule 1 of the Act, making
it illegal to cultivate, sell or otherwise possess in the United States.
On
January 4, 2018 the office of the Attorney General published a memo regarding cannabis enforcement that rescinds directives promulgated
under former President Obama that eased federal enforcement. In a January 8, 2018 memo, Jefferson B. Sessions, then Attorney General
of the United States, indicated enforcement decisions will be left up to the U.S. Attorney’s in their respective states
clearly indicating that the burden is with
“federal prosecutors deciding which cases to prosecute by weighing all relevant
considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent
effect of federal prosecution, and the cumulative impact of particular crimes on the community.”
Subsequently, in April
2018, President Trump promised to support congressional efforts to protect states that have legalized the cultivation, sale and
possession of cannabis, however, a bill has not yet been finalized in order to implement legislation that would, in effect, make
clear the federal government cannot interfere with states that have voted to legalize cannabis. Further in December 2018, the
US Congress passed legislation, which the President signed on December 20, 2018, removing hemp from being included with Cannabis
in Schedule I of the Act.
These
conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Should the United States
Federal Government choose to begin enforcement of the provisions under the Act, the Company through its wholly owned subsidiaries
could be prosecuted under the Act and the Company may have to immediately cease operations and/or be liquidated upon its closing
of the acquisition or investment in entities that engage directly in the production and or sale of cannabis.
The
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts,
or amount and classification of liabilities that might result from this uncertainty.
2.
Summary of significant accounting policies
Basis
of preparation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”). The condensed financial statements included herein are unaudited. Such financial
statements, in the opinion of management, contain all adjustments necessary to present fairly the financial position and results
of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results
are not necessarily indicative of the results to be expected for the year ending September 30, 2019 or for any other period. Certain
information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission, and because of this, for further information, readers should refer to the financial statements and footnotes
included in our Form 10K for the fiscal year ended September 30, 2018 filed with the Securities and Exchange Commission on January
14, 2019. The Company believes that the disclosures are adequate to make the interim information presented not misleading.
Principals
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Stem Holdings, Inc. and its wholly-owned or controlled
operating subsidiaries, Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri, LLC., Stem Group Oklahoma, Inc.
and Stem Holdings Florida, Inc. All material intercompany accounts, transactions, and profits have been eliminated in consolidation.
Revenue
Recognition
The
Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases
attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably
assured.
The
Company makes estimates of the collectability of its tenant receivables related to base rents, straight-line rent and other revenues.
In the current fiscal year, the Company began significant rental operations. The Company considers such things as historical bad
debts, tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments relevant
to a tenant’s business, and changes in tenants’ payment patterns in its analysis of accounts receivable and its evaluation
of the adequacy of the allowance for doubtful accounts. Specifically, for straight-line rent receivables, the Company’s
assessment includes an estimation of a tenant’s ability to fulfill its rental obligations over the remaining lease term.
Real
Estate Acquisition Valuation
All
assets acquired and liabilities assumed in an acquisition of real estate are measured at their acquisition date fair values. The
acquisition value of land, building and improvements are included in real estate investments on the accompanying consolidated
balance sheets. Acquisition pursuit costs associated with asset acquisitions are capitalized. The Company has adopted ASU 2017-01,
which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as businesses acquisitions. As a result of adopting ASU 2017-01, real estate acquisitions
did not meet the definition of a business combination and were deemed asset acquisitions, and the Company therefore capitalized
its acquisition pursuit costs associated with these acquisitions.
Reclassifications
Certain
amounts in the Company’s consolidated financial statements for prior periods have been reclassified to conform to the current
period presentation. These reclassifications have not changed the results of operations of prior periods.
Use
of estimates
The
preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets, liabilities, income and expenses. Estimates and judgments used are
based on management’s experience and the assumptions used are believed to be reasonable given the circumstances that exist
at the time the financial statements are prepared. The significant estimates included in these financial statements are those
associated with the assumptions used to value equity instruments, valuation of its properties for impairment testing and the deferral
of rents. Actual results may differ from these estimates.
Instruments
to Purchase Common Stock and Other Derivative Financial Instruments
We
classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement
or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our
own stock. We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share settlement). We assess the classification of instruments
issued to purchase our common stock and any other financial instrument at each reporting date to determine whether a change in
classification between assets and liabilities is required.
Cash
and cash equivalents
Cash
and cash equivalents include short-term investments with original maturities of three months or less and are recorded at cost,
which approximates fair market value given the short-term nature.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and our
deferred rents. As of March 31, 2019, the Company had deposits in a major financial institution in excess of the FDIC insurance
limit of $250,000. As of March 31, 2019, the total amount exceeding such limit was $8,018,757 (see Note 12).
As
of March 31, 2019, the Company had deferrals of rent due to free rent periods of approximately $2.1 million as it completes the
buildout of three of its properties, which was finalized for all of the Company properties in the quarter ended March 31, 2019.
Going forward into the quarter ended June 30, 2019 and beyond, the Company will derive payment of rents from all of its properties.
The Company is currently in the process of acquiring the entities that it currently rents to and believes as of the date of these
financial statements that it will acquire those entities (see Note 10).
Geographical
Concentrations
As
of March 31, 2019, the Company primarily rents to entities engaged in the production and sale of cannabis, which is only legal
for recreational use in 10 states, with lesser legalization, such as for medical use in an additional 21 states, as of the time
of these financial statements. In addition, the United States Congress has passed legislation, specifically the Agriculture Improvement
Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of hemp and associated products
from Schedule 1 of the Controlled Substances Act.
Carrying
value, recoverability and impairment of long-lived assets
The
Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’)
360 to evaluate its long-lived assets with determinate lives. The Company’s long-lived assets, which include property and
equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company does not test for impairment in the year of acquisition of properties so long as those properties
are acquired from unrelated third parties.
The
Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated
with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective
carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair
value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable.
If long- lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter
than originally estimated, the net book values of the long-lived assets are depreciated and amortized over the newly determined
remaining estimated useful lives.
The
Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant
under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant
changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired
assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv)
increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time;
and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently
upon the occurrence of such events.
Capitalization
of Project Costs
The
Company’s policy is to capitalize all costs that are directly identifiable with a specific property, would be capitalized
if the Company had already acquired the property, and when the property, or an option to acquire the property, is being actively
sought after, and either funds are available or will likely become available in order to exercise their option. All amounts shown
capitalized prior to acquisition of a property are included under the caption of Project Costs within the “Deposits and
other assets” line item in the balance sheet.
Income
Taxes
Income
taxes are provided for the tax effects of transactions reported in the financial statements and consist of currently due plus
deferred taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting carrying amounts
and the respective tax bases of assets and liabilities and are measured using tax rates and laws that are expected to be in effect
when the differences are expected to be recovered or settled. Valuation allowances are provided against deferred tax assets if
it is more likely than not that the deferred tax assets will not be realized.
The
Company follows the guidance of FASB ASC 740-10 which relates to the Accounting for Uncertainty in Income Taxes, which seeks to
reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation
prescribes a comprehensive model for financial statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns.
Fair
value of financial instruments
As
defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
To
estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can
be readily observable, market corroborated or generally unobservable.
The
authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1”
measurements) and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair
value hierarchy are as follows:
Level
1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 — Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs
which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level
3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about
how market participants would price the assets and liabilities.
In
instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level
input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of
a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset
or liability.
Beneficial
Conversion Feature
The
Company issued convertible notes that have conversion prices that create an embedded beneficial conversion feature on the issuance
date. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common
stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering
the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments
were granted with the debt, on a relative fair market basis. The Company estimates the fair value of its common stock using the
most recent selling price available. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with
a corresponding amount to additional paid-in capital. The debt discount is amortized to interest expense over the life of the
note using the effective interest method.
Earnings
per share
The
Company presents basic and diluted per share amounts (“EPS”) data for its common shares. Basic EPS is calculated by
dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares
outstanding during the period. Diluted loss per share is calculated based on the weighted-average number of outstanding common
shares plus the effect of dilutive potential common shares, using the treasury stock method. The Company’s calculation of
diluted net loss per share excludes potential common shares as of March 31, 2019 as the effect would be anti-dilutive (i.e. would
reduce the loss per share).
As
of March 31, 2019, the Company has 6,544,742 shares issuable upon note conversion, options and warrants exercisable into the common
stock of the Company outstanding.
Advertising
Costs
The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was $18,880 for the
six months ended March 31, 2018 and $25,222 for the six months ended March 31, 2019.
Emerging
Growth Company
The
Company has elected to be an emerging growth company as defined under the Jumpstart Our Business Startups Act of 2012 (“Jobs
Act”). Included with this election, the Company has also elected to use the provisions within the Jobs Act that allow companies
that go public to continue to use the private company adoption date rules for new accounting policies. Should the Company obtain
revenues in excess of $1 billion on an annual basis, have its non-affiliated market capitalization increase to over $700 million
as of the last day of its second quarter, or raise in excess of $1 billion in public offerings of its equity or instruments directly
convertible into its equity, it will forfeit its status under the Jobs Act as an emerging growth company.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and is depreciated using the straight-line method over the assets’
estimated useful life as follows:
Buildings
|
20
years
|
Leasehold
improvements
|
Shorter
of term of lease or economic life of improvement
|
Furniture
and equipment
|
5
years
|
Signage
|
5
years
|
Software
and related
|
5
years
|
Normal
maintenance and repairs for equipment are charged to expense as incurred, while significant improvements are capitalized.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
3.
Property, Plant & Equipment
Property
and equipment consisted of the following:
|
|
March 31, 2019
|
|
|
September 30, 2018
|
|
Automobile
|
|
$
|
18,275
|
|
|
$
|
18,275
|
|
Signage
|
|
|
19,118
|
|
|
|
19,118
|
|
Furniture and equipment
|
|
|
1,317,785
|
|
|
|
1,199,303
|
|
Leasehold improvements
|
|
|
2,949,706
|
|
|
|
2,718,519
|
|
Buildings and property improvements
|
|
|
5,165,768
|
|
|
|
4,719,742
|
|
Land
|
|
|
300,000
|
|
|
|
300,000
|
|
Software and related
|
|
|
58,518
|
|
|
|
58,518
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
9,829,170
|
|
|
|
9,033,475
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(1,165,404
|
)
|
|
|
(708,676
|
)
|
Property, plant and equipment, net
|
|
$
|
8,663,766
|
|
|
$
|
8,324,799
|
|
On
November 1, 2016, the Company acquired certain real property located at 1027 Willamette Street, Eugene, OR 97401 (the “Property”)
for a total cash purchase price plus closing costs of approximately $918,000.
On
February 6, 2017, the Company acquired certain real property located at 7827 SE Powell Blvd, Portland, OR 97206 (the “Property”)
for a total purchase price plus closing costs of approximately $656,498.
In
January 2018, the Company acquired certain property located at 14336 South Union Hall Road, Mulino, Oregon 97042 for a
total purchase price of approximately $1,555,500 which includes credits issued by the seller for prior rental payments and additional
improvements on the property made by the Company. As part of the consideration for the purchase, the Company issued the seller
a note for $1.2 million with a 2% interest rate and monthly payments beginning in July 2018 of $13,500 for a period of 19 months
with a final balloon payment payable in January 2020 of approximately $957,000. The Company did not record a premium to the market
rate of the note as it was immaterial at issuance.
Depreciation
and amortization expense was $235,446 for the three months ended March 31, 2019 and $456,728 for the six months ended March 31,
2019. Depreciation and amortization expense was $193,339 for the six months ended March 31, 2018.
4.
Deposits and other assets
Other
long-term assets consisted of the following as of:
|
|
March 31, 2019
|
|
|
September 30, 2018
|
|
Project costs
|
|
$
|
1,015,741
|
|
|
$
|
10,000
|
|
Deposits
|
|
|
113,746
|
|
|
|
155,662
|
|
Escrow shares for acquisition
|
|
|
4,442,464
|
|
|
|
-
|
|
|
|
$
|
5,571,951
|
|
|
$
|
165,662
|
|
In
October 2018, the Company entered into an Asset Purchase Agreement (“APA”) to acquire certain assets and assume certain
liabilities of Yerba Oregon, LLC. The purchase price for the assets and assumption of liabilities is the greater of $4.613 million
or multiples of 2018 and 2019 EBITDA of Yerba Oregon LLC, as required under the APA. Payment of the purchase price is as follows
upon successful closing of the APA: $350,000 in cash at closing, a promissory note in the amount of $400,000 and the remainder
in common shares of the Company based on the lesser of 85% of the average closing price of the stock as traded in the over the
counter market 30 days prior to closing or $2.40 per share. The Company deposited into escrow with an attorney, upon signing the
APA, 1,931,506 shares of its common stock, which were valued at $4,442,464. Closing of the APA is subject to certain requirements,
including the issuance of state and local licenses, which is outside the control of the Company and the seller, which as of the
date of these financial statements, had yet to be issued. Yerba Oregon, LLC operates a wholesale cannabis production and sales
operation in the state of Oregon.
In
November and December 2018, the Company determined that Milestone’s 2 and 3 had been reached within the Multi-Party agreement
(see note 10) and therefore had issued 457,191 shares of its common stock, with a valuation of $978,883, in satisfaction of the
requirement to issue common shares covering 20% of the cash expended by the seller to purchase and improve the property and is
currently negotiating with the owner of the property, a director of the Company, in regards to an allocation of cash and mortgage
principal in satisfaction of the purchase price of $4.395 million required, which the Company expects to close on in June 2019.
This is included in Project Costs.
5.
Investment in equity method investees
In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment
to contribute $1.275 million to NVD which included the purchase price of $600,000 and an additional commitment to pay tenant improvement
costs of $675,000. As of March 31, 2019, the Company paid $600,000 in cash for the real estate and not only fully funded its commitment
but invested an additional $350,000 thousand in capital over and above its original obligation. NVD used the funds provided to
date by the Company to construct a cannabis indoor grow building located near Las Vegas, Nevada and to continue the buildout of
the property. The Company has no further commitment to fund the entity beyond its initial equity purchase commitment. NVD will
lease its facilities upon completion to YMY Ventures, LLC (see below).
As
of March 31, 2019, NVD finished its buildout and began operations. In the six months ended March 31, 2019, NVD obtained $300,000
in proceeds from a mortgage on its property. The funds from this mortgage were advanced to the Company. The advance is undocumented,
non-interest bearing and due on demand.
As
of March 31, 2019, no amounts have been recorded as investee income or loss in the financial statements as the operations to date
have been minimal during construction and would be immaterial.
For
the period ending March 31, 2019, the Company has entered into a definitive agreement to acquire South African Ventures, Inc.
(“SAV”). SAV is a joint venture with working capital at closing of $7,550,000 which included $5,750,000 in cash and
$2,500,000 cash in escrow. Additionally, $700,000 is due as a subscription receivable. The JV has received preliminary approval
to become the only licensed growing farm and processing plant for medical cannabis and industrial hemp (the “Facility”)
in The Kingdom of eSwatini f/k/a Swaziland (“eSwatini”) for a minimum of 10 years. The consideration for the acquisition
of SAV is 8,250,000 common shares of Stem, having a value of $14,025,000 based on Stem’s closing trading price on March
22, 2019.
As
of March 31, 2019, no amounts have been recorded as investee income or loss in the financial statements as the entity has not
begun operations and to date operations have been immaterial.
In
September 2018, the Company entered into an agreement to acquire 50% of the membership interest of YMY Ventures LLC (“YMY”).
YMY is a startup operation located near Las Vegas, Nevada and owns a license for the production and sale of cannabis. The purchase
price for the 50% interest is $750,000 with the first $375,000 paid into escrow upon signing, with the final $375,000 due upon
closing, which under the agreement occurs when the license is transferred by the Nevada Department of Taxation and receipt of
approval in transfer of ownership by the Division of Public and Behavioral Health of the City of North Las Vegas. As of March
31, 2019, the Company had funded the $375,000 into escrow and had provided the joint venture with additional funds primarily in
the form of payments for work performed to acquire 4 licenses from the Nevada Department of Taxation in the amount of approximately
$690,238. As of February 28, 2019, the Nevada Department of Taxation approved the change of ownership for four medical and recreational
cultivation and production licenses held by YMY Ventures now owned by Stem Holdings, Inc. Pursuant to the agreement, the escrowed
amount of $375,000 was released, however, the balance of $375,000 is being held and negotiated with the partners due to the additional
funds over and above the original obligation to provide tenant improvements of $650,000. As of the date of the financial statements,
a total $1,055,928 has been allocated to this project.
Prior
to the current quarter, the Company had included this investment under “Due from Affiliates” on the balance sheet
included in those financial statements. In addition, the Company had not recorded any of the investee activity, as under the acquisition
agreement, should the entity fail to obtain the transfer of permits required under the laws of the State of Nevada, the investment
by the Company was required to be unwound. In the quarter ended March 31, 2019, the investee was grated the transfer of all required
licenses and permits by the state and local authorities. The Company now includes its investment under “Investment in equity
method investees” in the balance sheet and has recorded its share of losses in the investee since inception, in the amount
of $158,276 under the line item “Income (loss) from equity method investees” in the statement of operations in these
financial statements.
6.
Due from Affiliates
In
July 2018, the Company entered into an agreement to acquire a 25% interest in East Coast Packers LLC (“ECP”) for the
purchase price of $1.5 million, payable in the amount of $500,000 in cash at closing and a note for $1 million. All amounts are
payable to ECP. At the time of closing, ECP was a dormant Florida LLC, but owned a citrus fruit dealer license active for the
2015-2016 growing season. This qualified ECP under newly enacted legislation in the state of Florida to apply for a license to
produce and sell medical cannabis. Until such time as ECP is granted a medical cannabis license, the $500,000 paid into ECP may
only be expended by ECP in acquiring a medical cannabis license. As of December 31, 2018 and the date of these financial statements,
no license had been granted, however, the Company believes the license will be issued in FY 2019. In the event that ECP is unable
to obtain the medical license, the agreement unwinds in full, the membership interest is returned to the seller and all amounts
paid in not expended on the acquisition of the license are to be refunded to the Company along with cancellation of the $1 million
note. Because the issuance of the license is outside the control of the Company and ECP and because the agreement unwinds in full
in the event the license is not issued, this has not been recorded as an equity method investment as of March 31, 2019, but as
a due from affiliate. In the event of the failure to obtain the license the approximately $500,000 cash investment is at risk.
As
of March 31, 2019, the Company has advanced funds in the amount of approximately $154.000 to entities contained within the multi-party
agreement on an unsecured due on demand basis.
In
the quarter ended March 31, 2019, the Company began negotiations with a group of individuals active in another of the Company’s
joint ventures to enter into a similar agreement to form a joint venture to construct and operate a new grow facility in the state
of Oklahoma. The individuals mentioned above are expected to contribute their ownership of approximately 800,000 square foot nursery
facility including land, while the Company will contribute the funding to construct the necessary cannabis grow facilities, which
at this time is expected to be approximately $3 million. To date, the Company has advanced approximately $785,000 to the individuals
and expects to finalize the negotiations and have a definitive joint venture agreement prior to the end of the quarter ended June
30, 2019.
7.
Notes Payable and Advances
Equipment
financing
In
November 2017, the Company entered into a promissory note in the amount of $21,749 from a vendor of the Company to finance the
acquisition of a security electronics system in one of its properties. The promissory note bears an interest rate of 18% per annum
and also contains a 10% servicing fee. The note matures 24 months after issuance and is secured by certain security electronics
purchased with proceeds of the note. This vendor is currently in a restructuring and is likely to go out of business. As of March
31, 2019, the Company has been notified that the vendor holding the note is in bankruptcy and during the quarter ended March 31,
2019, the Company withheld payment under the note. The obligation remains outstanding at $14,950 as of March 31, 2019. This is
included in current portion of long-term debt and long-term debt line items in the balance sheet.
Effective
April 29, 2018, the Company entered into a 36-month premium finance agreement in consideration for a John Deere Gator Tractor
in the principal amount of $15,710. The note bears no annual interest rate and requires the Company to make thirty-six monthly
payments of $442 over the term of the note. As of March 31, 2019, the obligation outstanding is $11,062. No amount was recorded
for the premium for the non-interest bearing feature of the note as it was immaterial. The note is secured by the equipment financed.
This is included in current portion of long-term debt and long-term debt line items in the balance sheet.
Effective
May 29, 2018, the Company entered into a 24-month premium finance agreement in consideration for a MT85 wide track loader in the
principal amount of $27,844. The note bears no annual interest rate and requires the Company to make 24 monthly payments of $1,160
over the term of the note. As of March 31, 2019, the obligation outstanding is $17,403. No amount was recorded for the premium
for the non-interest bearing feature of the note as it was immaterial. The note is secured by the equipment financed. This is
included in current portion of long-term debt and long-term debt line items in the balance sheet.
Due
to related parties
As
of March 31, 2019, related parties had advanced cash and equipment, on a due on demand, unsecured and undocumented basis, to the
Company in the amount of $33,600.
Insurance
financing
In
February 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $259,916. The note bears an annual interest rate of 5.75% and requires the Company to make ten monthly
payments of $22,205 over the term of the note. As of March 31, 2019, the obligation outstanding is $199,845. This is included
in the short-term notes and advances line item in the balance sheet.
Effective
March 8, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $5,975. The note bears an annual interest rate of 5.75% and requires the Company to make ten monthly
payments of $513 over the term of the note. As of March 31, 2019, the obligation outstanding is $4,617. This is included in the
short-term notes and advances line item in the balance sheet.
Effective
July 31, 2018, the Company entered into a 9-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $54,701.55. The note bears an annual interest rate of 7.99% and requires the Company to make nine monthly
payments of $4,435 over the term of the note. As of March 31, 2019, the obligation outstanding is $4,435. This is included in
the short-term notes and advances line item in the balance sheet.
Short-term
notes and advances
In
September 2018, an investor interested in the then ongoing private placement of convertible notes (see below) advanced the Company
$168,000 on an unsecured basis and then entered discussions with Company regarding the form of the note. As of March 31, 2019,
the Company and the investor had come to terms and the investor agreed to the terms of the notes which has an interest rate of
8% payable quarterly and matures in one year.
As
disclosed in Note 6, the Company entered into a promissory note in the principal amount of $1 million payable to ECP as part of
its investment in the LLC. The promissory is payable in five installments commencing upon the effective date (the date of grant
of license to engage in cannabis operations issuable by the government of the State of Florida), over the course of 1 year, with
an interest rate of 1% per annum for the first six months, then increasing to 5.5% per annum for the remainder of the note period
through maturity. In the event the LLC is denied the licenses necessary to operate, the note is cancelled in full.
Mortgages
payable
On
February 28, 2018, the Company executed a $550,000 mortgage payable on the Willamette property to acquire additional funds. The
mortgage bears interest at 15% per annum. Monthly interest only payments began March 1, 2018 and continue each month thereafter
until paid. The entire unpaid balance is due on March 1, 2020, the maturity date of the mortgage, and is secured by the underlying
property. The Company paid costs of approximately $28,000 to close on the mortgage. The mortgage terms do not allow participation
by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of
the mortgaged real estate project. The note has been cross guaranteed by the CEO and Director of the Company.
On
April 4, 2018, the Company executed a $314,000 mortgage payable on the Powell property to acquire additional funds. At closing
$75,000 of the proceeds was put into escrow. The mortgage bears interest at 15% per annum. Monthly interest only payments began
May 1, 2018 and continue each month thereafter until paid. The entire unpaid balance is due on April 1, 2020, the maturity date
of the mortgage, and is secured by the underlying property. The Company plaid costs of approximately $19,000 to close on the mortgage.
The mortgage terms do not allow participations by the lender in either the appreciation in the fair value of the mortgaged real
estate project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the CEO
and Director of the Company. This is included in the long-term debt line item in the balance sheet.
On
January 16, 2018 the Company consummated a “Contract for Sale” for a Farm Property in Mulino OR (the “Mulino
Property”). The purchase price was $1,700,000 which was reduced by a rental credit of approximately $135,000 which is equivalent
to nine months’ rent at $15,000 a month and an additional credit of $9,500 for additional work done on the property. In
connection with the purchase of the property, the Company made a cash payment as down payment plus payment of closing costs in
the amount of $370,637 and issued a promissory note in the amount of $1,200,000 with a maturity of January 2020. The Company will
pay monthly installments of principal and interest (at a rate of 2% per annum) in the amount of $13,500, commencing in July 2018
through the maturity date (January 2020), at which time the entire unpaid principal balance and any remaining accrued interest
shall be due and payable in full. No amount was recorded for the premium for the below market rate feature of the note as it was
immaterial. The note is secured by a deed of trust on the property. The Company performed an analysis and determined that the
rate obtained was below market, however, no premium was recorded as the Company determined it was immaterial. At March 31, 2019,
the balance of the obligation was $1,096,500.
8.
Convertible debt
On
March 14, 2019, the Company issued 962 special warrants (“CD Special Warrants”) in the second and final closing of
a private offering (the “Offering”) at a price of CDN $1,000 per CD Special Warrant for aggregate gross proceeds of
CDN $962,000. In connection with this offering, the Company issued the agents in such offering 5,600 convertible debenture special
warrants (the “Broker CD Special Warrants”) as partial satisfaction of a selling commission.
On
December 2018 and January 2019, the Company issued 3,121 convertible debenture special warrants (“CD Special Warrants”)
in the first closing of the Offering at a price of CDN $1,000 per CD Special Warrant for aggregate gross proceeds of CDN $3,121,000.
In connection with this offering, the Company issued the agents in such offering 52,430 convertible debenture special warrants
(the “Broker CD Special Warrants”) as partial satisfaction of a selling commission.
Each
CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration)
for one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third
business day after the date on which both (A) a receipt (the “Receipt”) for a (final) prospectus (the “Qualification
Prospectus”) qualifying the distribution of the Convertible Debentures (as defined below) and Warrants (as defined below)
issuable upon exercise of the CD Special Warrants has been issued by the applicable securities regulatory authorities in the Canadian
jurisdictions in which purchasers of the CD Special Warrants are resident (the “Canadian Jurisdictions”), and (B)
a registration statement (the “Registration Statement”) registering the resale of the common shares underlying the
Convertible Debentures and Warrants has been declared effective by the U.S. Securities and Exchange Commission (the “Registration”)
; and (ii) the date that is six months following the closing of the Offering. The Company has also provided certain registration
rights to purchasers of the CD Special Warrants.
Each
Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible
Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant
entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of
CDN $3.90 per Warrant Share for a period of 24 months following the closing of the Offering.
The
Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the
Offering. In the event that the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that
is 120 days following the closing of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof
to receive, upon the exercise thereof and at no additional cost, 1.05 Convertible Debenture Units per CD Special Warrant (instead
of 1.0 Convertible Debenture Unit per CD Special Warrant). Until the Receipt and Registration have been obtained, securities issued
in connection with the Offering (including any underlying securities issued upon conversion or exercise thereof) will be subject
to a 6-month hold period from the date of issue.
The
brokered portion of the Offering (CDN $2,247,000) was completed by a syndicate of agents (collectively, the “Agents”).
The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the the brokered portion of the Offering.
As additional consideration, the Company issued the Agents such number of non-transferable broker convertible debenture special
warrants (the “
Broker CD Special Warrants
“) as is equal to 7.0% of the number of CD Special Warrants sold
under the brokered portion of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD Special
Warrants, into broker warrants of the Company (the “
Broker Warrants
“). Each Broker Warrant entitles the holder
to acquire one Convertible Debenture Unit at an exercise price of CDN $1,000, until the date that is 24 months from the closing
date of the Offering. The distribution of the Broker Warrants issuable upon the exchange of the Broker CD Special Warrants shall
also be qualified under the Qualification Prospectus and the resale of the common shares underlying the Broker Warrants will be
registered under the Registration Statement. The Company also paid the lead agent a corporate finance fee equal to C$100,000,
payable as to CDN $50,000 in cash and as to $50,000 in common shares of the Company at a price per share of CDN $3.00.
As
part of the Offering, as of March 31, 2019, the Company incurred fees of approximately CDN $408,655 The Company valued the warrants
granted as part of the units using the Black Scholes Merton option pricing model and determined that the value at grant was approximately
$797,288. The significant assumptions used in the valuation are as follows:
Fair value of underlying common shares
|
|
$
|
1.78 to 2.10
|
|
Exercise price (converted to USD)
|
|
$
|
2.925
|
|
Dividend yield
|
|
|
-
|
|
Historical volatility
|
|
|
100.8
to 112.0
|
%
|
Risk free interest rate
|
|
|
2.43
to 2.60
|
%
|
The
table below shows the net amount outstanding as of March 31, 2019, after unamortized discount and loan fees under the convertible
notes:
Convertible Notes, Net of Discount
|
|
|
|
Convertible promissory note
|
|
$
|
3,057,125
|
|
Unamortized debt discount and loan fees
|
|
|
(1,701,225
|
)
|
Net amount
|
|
$
|
1,355,900
|
|
9.
Shareholders’ Equity
In
2016, the Company adopted a plan to allow the Company to compensate prospective and current employees, directors and consultants
through the issuance of equity instruments of the Company. The plan has an effective life of 10 years. The plan is administered
by the board of directors of the Company until such time as the board transfers responsibility to a committee of the board. The
plan is limited to issuing common shares of the Company up to 15% of the total shares then outstanding. No limitations exist on
any other instruments issuable under the plan. In the event of a change in control of the Company, all unvested instruments issued
under the plan become immediately vested.
Preferred
shares
The
Company has two series of preferred shares designated with no preferred shares issued and outstanding as of March 31, 2019.
Common
shares
On
July 13, 2018, a meeting of the stockholders of the Company took place, and the stockholders adopted a resolution authorizing
the Board of Directors, in its sole discretion, to amend the Company’s Articles of Incorporation to increase the number
of authorized shares of Company Common Stock from 100,000,000 to 300,000,000.
The
holders of common shares are not entitled to receive dividends at this time, however, are entitled to one vote per share at meetings
of the Company.
Common
Stock issuances for compensation:
In
the six months ended March 31, 2019, as part of the fees associated with the Offering, the Company issued the lead broker 16,666
shares of its common stock and recorded professional fee expense of $34,999 as a result of this issuance.
In
the six months ended March 31, 2019, the Company entered into several consulting agreements, and as part of these agreements agreed
to issue a total of 875,000 shares of common stock in payment for consulting services to be provided to the Company over the following
12 to 18 months. The Company capitalized the amounts to prepaid expense and is amortizing the expense over the period of the respective
agreement as part of stock-based compensation on the statement of operations. Through March 31, 2019, after accounting for the
amortization of prepaids, $1,410,291 was included in stock-based compensation in the statement of operations.
In
the six months ended March 31, 2019, the Company granted 287,562 shares of common stock to certain employees and board members.
The Company capitalized the amounts to prepaid expense and is amortizing the expense over the period of the respective agreement
as part of stock-based compensation on the statement of operations. Through March 31, 2019, after accounting for the amortization
of prepaids, $748,500 was included in stock-based compensation in the statement of operations
In
the six months ended March 31, 2019, the Company converted $1,430,556 of its convertible debt in exchange for 2,575,000 shares
of the company’s common stock.
In
October 2018, the Company entered into an Asset Purchase Agreement (“APA”) to acquire certain assets and assume certain
liabilities of Yerba Oregon, LLC. The purchase price for the assets and assumption of liabilities is the greater of $4.613 million
or multiples of 2018 and 2019 EBITDA of Yerba Oregon LLC, as required under the APA. Payment of the purchase price is as follows
upon successful closing of the APA: $350,000 in cash at closing, a promissory note in the amount of $400,000 and the remainder
in common shares of the Company based on the lesser of 85% of the average closing price of the stock as traded in the over the
counter market 30 days prior to closing or $2.40 per share. The Company deposited into escrow with an attorney, upon signing the
APA, 1,931,506 shares of its common stock, which were valued at $4,442,464. Closing of the APA is subject to certain requirements,
including the issuance of state and local licenses, which is outside the control of the Company and the seller, which as of the
date of these financial statements, had yet to be issued. Yerba Oregon, LLC operates a wholesale cannabis production and sales
operation in the state of Oregon.
In
November and December 2018, the Company determined that Milestone’s 2 and 3 had been reached within the Multi-Party agreement
(see note 10) and therefore had issued 457,191 shares of its common stock, with a valuation of $978,389, in satisfaction of the
requirement to issue common shares covering 20% of the cash expended by the seller to purchase and improve the property and is
currently negotiating with the owner of the property, a director of the Company, in regards to an allocation of cash and mortgage
principal in satisfaction of the purchase price of $4.395 million required, which the Company expects to close on in March 2019.
This is included in Project Costs.
In
November 2018, the Company issued 187,500 shares of its common stock, valued at $450,000, to acquire an option from the investors
in YMY Ventures, LLC and NVD RE 5) to (1) purchase a property comprised of a land and building near Las Vegas, NV and (2) acquire
the remaining 50% of YMY Ventures, LLC held by the option issuers and (3) to acquire 37.5% of NVD RE owned by the option issuers.
The Company allocated the $450,000 for the option as $56,500 to acquire the land and building and has included that amount with
Project Costs, $337,500 to acquire the remaining 50% of YMY Ventures, LLC to Investment in Investee Purchase Agreement above and
$56,500 to acquire the 25% of NVD RE held by the option issuers to Investment in Investee Purchase Agreement above.
On
March 25, 2019, the company acquired a 49 percent stake in a joint venture for 10 years having the only licensed growing farm
and processing plant in the Kingdom of eSwatini. The consideration for the acquisition is 8,250,000 common shares of Stem, having
a value of approximately $14,025,000
Option
Issuances for compensation:
Stock
based compensation for option awards are recognized on a straight-line basis over the service period for the entire contract and
the amounts are capitalized to prepaid expense. All options are revalued at each reporting period until they are fully vested
which may result in an expense or benefit to the company. As of the six months ended March 31,2019, the company recorded $459,764
of stock-based compensation.
During
the six months ended March 31, 2019, the Company amended a previously issued consulting agreement, and as part of that agreement
for professional services, agreed to issue a total of 75,000 options to purchase the common stock of the Company with having an
exercise price of $1.80 per share and a term of 4 years. Pursuant to the agreement, all 75,000 options vested upon issuance. In
addition, the agreement reduced the exercise price of the previously issued options under the original agreement down to $1.80
per share from the original exercise price of $2.40 per share. In total, the Company recorded option-based consulting expense
of $144,750 as a result of these options.
The
significant assumptions used to value the options granted in the three months ended March 31, 2019 are as follows:
Fair value of underlying common shares
|
|
$
|
2.40
|
|
Exercise price
|
|
$
|
1.80
|
|
Dividend yield
|
|
|
0.0
|
%
|
Historical volatility
|
|
|
116.90
|
%
|
Risk free interest rate
|
|
|
2.96
|
%
|
Warrants
issued for compensation
In
the six months ended March 31, 2019, the Company issued a consultant a warrant to acquire 50,000 shares of its common stock as
part of the compensation package within the consulting agreement. The warrant was issued with an exercise price of $2.40 per share
and a term of 3 years.
In
the six months ended March 31, 2019, the Company issued two consultants a warrant to acquire 500,000 shares each of its common
stock as part of the compensation package within the consulting agreement. The warrant was issued with an exercise price of $3.00
per share and a term of 2 years.
In
addition, the Company recorded compensation expense over the term of previously issued warrants to consultants with vesting periods
in and after the current period end of March 31, 2019. Total expense recorded to stock-based compensation for these and the above
warrant grants was $424,966 in the six months ended March 31, 2019.
10.
Commitments and contingencies
As
noted earlier in Note 1, the Company, through entities it invests in and is negotiating to acquire (see below) will be in the
near future engaging in a business that constitutes an illegal act under the laws of the United States Federal Government.
This
raises several possible issues which may impact the Company’s overall operations, not the least of which are related to
traditional banking and other key operational risks.
Since cannabis remains illegal on the federal level, and most traditional
banks are federally insured, those financial institutions will not service cannabis businesses. In states where medical or recreational
marijuana is legal, dispensary owners, manufacturers, and anybody who “touches the plant,” continue to face a host
of operational hurdles. While local, state-chartered banks and credit unions now accept cannabis commerce, there remains a reluctance
by traditional banks to do business with them. Aside from a huge inconvenience and the need to find creative ways to manage financial
flow, payroll logistics, and payment of taxes, this also poses tremendous risks to controls as a result of operating a lucrative
business in cash. This lack of access to traditional banking may inhibit industry growth.
Despite
the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these
risks will have a substantive impact on its planned operations in the near term.
In
July 2016, the Company entered into a 10-year lease for a commercial building from an unrelated third party in Springfield, Oregon.
At the time the original lease was entered into, the Company had expected to close on significant subscriptions from its private
placement. However, when those did not immediately materialize, the Company entered into an agreement with the landlord to cancel
the lease and in addition, paid the landlord $15,000 not to rent out the property until such time the Company could enter into
a new lease. In September 2016, the Company entered into a new 10-year lease with the landlord that commenced in November 2016.
The lease requires the Company to pay a base rental fee of $7,033 plus an additional estimated $315 per month in real estate taxes
in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance
and utilities are included at the end of each year as a one-time payment. In addition, the Company also remitted $14,000 for a
security deposit to the landlord. No amounts have been recorded for deferred rent in these financial statements as the amount
was deemed immaterial by the Company. The Company has subleased this space pursuant to a 10-year lease. On February 22, 2018,
both parties executed a lease addendum that adds contiguous property for 12,322 square feet. The term commences November 1, 2017
and continues through November 31, 2026 at a rate of $3,525 a month that escalates after the first year. The Company subleases
this property to a related party (see disclosures below under “Springfield Suites”). As of March 31, 2019, the total
subrental income to be received by the Company over the life of the sublease is approximately $8.9 million.
In
March 2018, the Company entered into a 3-year lease for the occupancy of the Company’s corporate office located in Boca
Raton, Florida. The lease requires the Company to pay a base rental fee of $3,024 per month with yearly increases thereafter.
All taxes, maintenance and utilities are billed separately.
During
the six months ended March 31, 2019, the Company incurred total rent expense of $145,074. As of March 31, 2019, the Company has
recorded a long-term asset for the straight lining of rent under the rental leases to the cannabis operators of approximately
$2,090,638. As of the date of these financial statements, the Company is in negotiations to acquire the entities that lease its
properties (see below).
In
August 2016, the Company and certain shareholders of the Company entered into a “Multi Party” Agreement, in which
the Company became obligated to lease or acquire three separate real estate assets, and separately, if certain events occur, additional
real estate assets held by entities related to those shareholders. The Agreement also gives the Company the right of first refusal
in regard to certain properties owned by the persons and entities affiliated with the parties of the Agreement so long as certain
targets are met.
Certain
shareholders of the Company have organized entities that operate directly in the cannabis industry, and the Company leases its
properties to these entities. In addition, the Multi Party Agreement has requirements for the purchase of certain properties from
the related parties to the agreement upon certain milestones being reached. The Multi Party Agreement also requires that in the
event that the US Government amends Title 21 of the United States Code, otherwise known as the Controlled Substances Act, to remove
cannabis as a Schedule I drug, and the Company raises more than $10 million in equity and merger funding, the Company is required
to enter into agreements to acquire those related entities and issue such equity that the shareholders of the related entities
obtain 75% of the then issued and outstanding equity of the Company, regardless of the profitability or financial condition of
the related entities at the time of their acquisition. At the time of these financial statements, the Company was in negotiations
with these entities to amend the multiparty agreement in order to acquire the Company’s prior to removal of cannabis from
Schedule 1 of the Act. The Company believes the acquisition of these entities will become probable in the near future in FY 2019.
(see Note 12).
On
July 16, 2018, the Company began trading its common stock under the ticker symbol “STEM” on the Canadian Securities
Exchange (the “
CSE
”).
Property
Rental Agreements
All
of the income leases below are to entities that are related to the Company through common ownership.
1027
Willamette
, Eugene, OR
In
July 2017, the Company entered into an operating lease agreement with a marijuana dispensary (the “Lessee”) to move
into the Company’s acquired property located at 1027 Willamette Street in Eugene, Oregon. The lease agreement is for a base
term of ten years (see note below) and a monthly rent obligation of $13,800, subject to annual increases of 3% per year, plus
an amount for additional rent based on final buildout costs incurred by the Company. The lease is a double net lease with maintenance
and real property taxes to be paid by the Tenant and insurance costs paid by the Company. The Company provided the tenant with
one month of free rent.
Upon
the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for one five-year term, on the
same terms as provided in the lease agreement.
Springfield,
OR
In
July 2017, the Company entered into a lease agreement for its property and warehouse building located at 800 N 42
nd
street in Springfield, Oregon. The lease agreement is for a term of ten years (see note below) and a monthly rent obligation of
$64,640, subject to annual increases of 3% per year plus an amount for additional rent based on final buildout costs incurred
by the Company. The lease is a double net lease with maintenance and real property taxes to be paid by the Tenant and insurance
costs paid by the Company. Rent payments commence on the date the growing season ends, which the Company currently estimates will
occur in September 2019, and thus expects payments to begin in January 2020. The Company has treated this period as a free rental
period for accounting purposes.
Upon
the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same
terms as provided in the lease agreement.
14336
S. Union Hall Road, Mulino, OR
In
July 2017, the Company entered into a lease agreement for its property located at 14336 South Union Hall Road in Mulino, Oregon.
The lease agreement is for a term of ten years (see note below) and a monthly rent obligation of $18,750, subject to annual increases
of 3% per year plus an amount for additional rent based on final buildout costs incurred by the Company. The lease is a double
net lease with maintenance and real property taxes to be paid by the Tenant and insurance costs paid by the Company. Rent payments
will begin at the of the first growing season, which the Company currently estimates will occur in September 2019, and thus payments
will commence in January 2020. The Company expects to treat such period as a free rental period for accounting purposes. At the
time rental payments begin, the total of base rent and additional rent will not be less than $1.00 per foot for light assisted
greenhouse and $.25 per usable square foot for un-light assisted greenhouse or outdoor grow space.
Upon
the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same
terms as provided in the lease agreement.
7827
SE Powell, Portland, OR
In
July 2017, the Company entered into a lease agreement for its acquired property located at 7827 SE Powell Blvd. in Portland, Oregon.
The lease agreement is for a term of ten years and a monthly rent obligation of $6,523, subject to annual increases of 3% per
year. Maintenance and real property taxes to be paid by the Tenant and insurance paid by the Company. Additional rents will be
added to pay landlord back for tenant improvements by the end of the first term of the lease, payments will include annual interest
at 12% compounded monthly. Rent payments commence on the date the growing season ends, which the Company currently estimates will
occur in May 2019, and thus expects payments to begin in September 2019. The Company has treated this period as a free rental
period for accounting purposes.
Upon
the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for five-year term, on the same
terms as provided in the lease agreement.
12.
Subsequent events
From
April 1, 2019 through the date of these financial statements, the Company issued shares of its common stock in satisfaction of
compensation provisions within certain consulting agreements.
On
March 29, 2019 the company entered into a definitive agreement to acquire Western Coast Ventures, Inc. (“WCV). WCV
has a working capital surplus of approximately $2,000,000 and has negotiated a joint venture (the “JV”) with ILCA
Holdings, Inc. (“ILCA”). ILCA has been issued a limited Conditional Use Permit for a Marijuana Production Facility
(a “MPF”) by the City of San Diego, California, which will only be granting a total of 40 MPFs. The consideration
for the acquisition is expected to be 2,000,000 shares of Stem’s common stock, having a value of approximately $3,500,000
based on Stem’s closing trading price on March 29, 2019. After giving effect to the closing of the acquisition of WCV and
the previously announced acquisition of South African Ventures, Inc., the former shareholders of WCV will own approximately 7.3%
of the issued and outstanding shares of Stem. The acquisition of WCV is expected to be completed on or around April 12, 2019.The
JV will consist of its own management team and with the personnel, expertise, and other resources necessary to construct the MPF.
It is agreed that WCV will have a 51% interest in the JV, for an aggregate purchase price of $1,500,000. ILCA will hold the remaining
49% interest in the JV. ILCA previously invested $500,000 in the build-out and initial MPF permitting process. Stem anticipates
the JV will finance the cost of construction of the MPF, estimated at $3.5 million, with its cash on hand and other non-dilutive
sources of financing. The construction of the facility has begun and is estimated to be completed during the fourth quarter of
2019.Upon issuance of the final MPF permit and the completed construction, the JV will: (1) operate an advanced cannabis facility
to grow and cultivate cannabis; (2) manufacture cannabis-derived products; and (3) distribute cannabis and cannabis-derived products
state-wide throughout California.
April
2019, the company entered into a definitive term sheet indicating the principle terms of an acquisitive reorganization of Consolidated
Ventures of Oregon, Inc., and Opco Holdings, Inc. Pursuant to the conditions of the merger consideration, the company issued an
aggregate of 12,500,000 to the selling equity owners of which will stay in escrow until the definitive agreement is executed.
In
April 2019, the Company was notified by its primary bank that the banking institution would no longer allow the Company to retain
its accounts and was given 30 days to move all of its cash to another financial institution. As of the date of these financial
statements, the Company has transferred part of its cash holdings to a local credit union in the state of Oregon and has transferred
part of its cash holdings to a related entity owned by its CEO and Chairman of the Board that is essentially a dormant corporation
that does not engage in cannabis activities.