RISK
FACTORS
Before
you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors,
together with all of the other information included in this annual report before you decide to purchase our securities. If any
of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations
could be materially adversely affected.
An
investment in our securities involves a high degree of risk. In addition to the other information contained in this prospectus,
prospective investors should carefully consider the following risks before investing in our securities. If any of the following
risks actually occur, as well as other risks not currently known to us or that we currently consider immaterial, our business,
operating results and financial condition could be materially adversely affected. As a result, the trading price of our common
stock could decline, and you may lose all or part of your investment in our common stock. The risks discussed below also include
forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
See “Cautionary Note Regarding Forward-Looking Statements” in this prospectus. In assessing the risks below, you should
also refer to the other information contained in this prospectus, including the financial statements and the related notes, before
deciding to purchase any of our securities.
Risks
Related to the Marijuana Industry
Cannabis
continues to be a Controlled Substance under the United States Federal Controlled Substances Act and our business may result in
federal civil or criminal prosecution.
We
are directly engaged in the medical and recreational cannabis industry in the U.S. where local state law permits such activities
however all such activities remain illegal under federal law in the U.S. Investors are cautioned that in the U.S., cannabis is
highly regulated at the state level. To our knowledge, there are to date a total of 33 states, and the District of Columbia, Puerto
Rico and Guam that have legalized medical cannabis in some form, including California, although not all states have fully implemented
their legalization programs. Eleven states and the District of Columbia have legalized cannabis for recreational use. Fourteen
additional states have legalized high-cannabidiol (“CBD”), low Delta-9-tetrahydrocannabinol (“THC”) oils
for a limited class of patients. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis
continues to be categorized as a Schedule I controlled substance under the U.S. Controlled Substance Act of 1970 (codified in
21 U.S.C.A. Section 812) (the “Controlled Substances Act”). Under United States federal law, a Schedule I drug is
considered to have a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for
the use of the substance under medical supervision. Federal law prohibits commercial production and sale of all Schedule I controlled
substances, and as such, cannabis-related activities, including without limitation, the importation, cultivation, manufacture,
distribution, sale and possession of cannabis remain illegal under U.S. federal law. It is also illegal to aid or abet such activities
or to conspire or attempt to engage in such activities. Strict compliance with state and local laws with respect to cannabis may
neither absolve us of liability under U.S. federal law, nor provide a defense to any federal proceeding brought against us. An
investor’s contribution to and involvement in such activities may result in federal civil and/or criminal prosecution, including,
but not limited to, forfeiture of his, her or its entire investment, fines and/or imprisonment.
Violations
of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements
arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges and penalties,
including, but not limited to, disgorgement of profits, cessation of business activities, divestiture, or prison time. This could
have a material adverse effect on us, including our reputation and ability to conduct business, the potential listing of our securities
on the Canadian Securities Exchange (the “CSE”), our financial position, operating results, profitability or liquidity
or the market price of our publicly traded shares. In addition, it is difficult for us to estimate the time or resources that
would be needed for the investigation or defense of any such matters or our final resolution because, in part, the time and resources
that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved,
and such time or resources could be substantial.
The
approach to the enforcement of cannabis laws may be subject to change, which creates uncertainty for our business.
As
a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in, and
the operations of, cannabis businesses in the U.S. are subject to inconsistent laws and regulations. The so-called “Cole
Memorandum” issued by former Deputy Attorney General James Cole on August 29, 2013 and other Obama-era cannabis policy guidance,
discussed below, provided the framework for managing the tension between federal and state cannabis laws. Subsequently, as discussed
below, former Attorney General Jeff Sessions rescinded the Cole Memo and related policy guidance. Although no longer in effect,
these policies, and the enforcement priorities established within, appear to continue to be followed during the Trump administration
and remain critical factors that inform the past and future trend of state-based legalization.
The
Cole Memo directed U.S. Attorneys not to prioritize the enforcement of federal cannabis laws against individuals and businesses
that comply with state medical or adult-use cannabis regulatory programs, provided certain enumerated enforcement priorities (such
as diversion or sale of cannabis to minors) were not implicated. In addition to general prosecutorial guidance issued by the DOJ,
FinCEN issued a the FinCEN Memorandum on February 14, 2014 outlining Bank Secrecy Act-compliant pathways for financial institutions
to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memorandum. On the
same day the FinCEN Memorandum was published, the DOJ issued complimentary policy guidance directing prosecutors to apply the
enforcement priorities of the Cole Memo when determining whether to prosecute individuals or institutions with crimes related
to financial transactions involving the proceeds of cannabis-related activities.
On
January 4, 2018, the then Attorney General Jeff Sessions rescinded the Cole Memo, the Cole Banking Memorandum, and all other related
Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance
documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses
in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’
rescission of the Cole Memo and the Cole Banking Memorandum has not affected the status of the FinCEN Memorandum issued by the
Department of Treasury, which remains in effect. In addition to his rescission of the Cole Memo, former Attorney General Sessions
issued a one-page memorandum known as the “Sessions Memorandum.” The Sessions Memorandum explains the DOJ’s
rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary”
due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.S. Attorney’s Manual (the
“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s
limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness”
of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular
crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled
substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority,
and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific
direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities and the
lack of additional guidance since the resignation of former Attorney General Sessions, there can be no assurance that the federal
government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
Such
potential proceedings could involve significant restrictions being imposed upon us or third parties, while diverting the attention
of key executives. Such proceedings could have a material adverse effect on our business, revenues, operating results and financial
condition as well as our reputation and prospects, even if such proceedings were concluded successfully in our favor. In the extreme
case, such proceedings could ultimately involve the criminal prosecution of our key executives, the seizure of corporate assets,
and consequently, the inability of us to continue its business operations. Strict compliance with state and local laws with respect
to cannabis does not absolve us of potential liability under U.S. federal law, nor provide a defense to any federal proceeding
which may be brought against us. Any such proceedings brought against us may adversely affect our operations and financial performance.
We
may be in violation of anti-money laundering laws and regulations which could impact our ability to obtain banking services, result
in the forfeiture or seizure of our assets and could require us to suspend or cease operations.
We
are subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping
and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering)
and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any
related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S.
and Canada. Since the cultivation, manufacture, distribution and sale of cannabis remains illegal under the Controlled Substances
Act, banks and other financial institutions providing services to cannabis-related businesses risk violation of federal anti-money
laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and
the Bank Secrecy Act, among other applicable federal statutes. Banks or other financial institutions that provide cannabis businesses
with financial services such as a checking account or credit card in violation of the Bank Secrecy Act could be criminally prosecuted
for willful violations of money laundering statutes, in addition to being subject to other criminal, civil, and regulatory enforcement
actions. Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state
of the laws and regulations governing financial institutions in the U.S. The lack of banking and financial services presents unique
and significant challenges to businesses in the cannabis industry. The potential lack of a secure place in which to deposit and
store cash, the inability to pay creditors through the issuance of checks and the inability to secure traditional forms of operational
financing, such as lines of credit, are some of the many challenges presented by the unavailability of traditional banking and
financial services. These statutes can impose criminal liability for engaging in certain financial and monetary transactions with
the proceeds of a “specified unlawful activity” such as distributing controlled substances which are illegal under
federal law, including cannabis, and for failing to identify or report financial transactions that involve the proceeds of cannabis-related
violations of the Controlled Substances Act. We may also be exposed to the foregoing risks.
As
previously introduced, in February 2014, FinCEN issued the FinCEN Memo providing instructions to banks seeking to provide services
to cannabis-related businesses. The FinCEN Memo states that in some circumstances, it is permissible for banks to provide services
to cannabis-related businesses without risking prosecution for violation of the Bank Secrecy Act. It refers to supplementary guidance
that former Deputy Attorney General James M. Cole issued to federal prosecutors relating to the prosecution of money laundering
offenses predicated on cannabis-related violations of the Controlled Substances Act. Although the FinCEN Memo remains in effect
today, it is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memo. Overall, the
DOJ continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money laundering
and violations of the Bank Secrecy Act, that occur in any state, including in states that have legalized the applicable conduct
and the DOJ’s current enforcement priorities could change for any number of reasons. A change in the DOJ’s enforcement
priorities could result in the DOJ prosecuting banks and financial institutions for crimes that previously were not prosecuted.
If we do not have access to a U.S. banking system, its business and operations could be adversely affected.
Other
potential violations of federal law resulting from cannabis-related activities include the Racketeer Influenced Corrupt Organizations
Act (“RICO”). RICO is a federal statute providing criminal penalties in addition to a civil cause of action for acts
performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received income derived
from a pattern of racketeering activity (which includes most felonious violations of the Canadian Securities Administrators),
to use or invest any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise which
is engaged in interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns
of racketeering activity to initiate a civil action against the individuals involved. Although RICO suits against the cannabis
industry are rare, a few cannabis businesses have been subject to a civil RICO action. Defending such a case has proven extremely
costly, and potentially fatal to a business’ operations.
In
the event that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues
accruing from such operations in the United States were found to be in violation of money laundering legislation or otherwise,
such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation.
This could restrict or otherwise jeopardize our ability to declare or pay dividends, effect other distributions, and subject us
to civil and/or criminal penalties. Furthermore, while there are no current intentions to declare or pay dividends on our Common
Stock in the foreseeable future, in the event that a determination was made that our proceeds from operations (or any future operations
or investments in the United States) could reasonably be shown to constitute proceeds of crime, we may decide or be required to
suspend declaring or paying dividends without advance notice and for an indefinite period of time. We could likewise be required
to suspend or cease operations entirely.
We
may become subject to federal and state forfeiture laws which could negatively impact our business operations.
Violations
of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements
arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including,
but not limited to, seizure of assets, disgorgement of profits, cessation of business activities or divestiture. As an entity
that conducts business in the cannabis industry, we are potentially subject to federal and state forfeiture laws (criminal and
civil) that permit the government to seize the proceeds of criminal activity. Civil forfeiture laws could provide an alternative
for the federal government or any state (or local police force) that wants to discourage residents from conducting transactions
with cannabis related businesses but believes criminal liability is too difficult to prove beyond a reasonable doubt. Also, an
individual can be required to forfeit property considered to be the proceeds of a crime even if the individual is not convicted
of the crime, and the standard of proof in a civil forfeiture matter is lower than the standard in a criminal matter. Depending
on the applicable law, whether federal or state, rather than having to establish liability beyond a reasonable doubt, the federal
government or the state, as applicable, may be required to prove that the money or property at issue is proceeds of a crime only
by either clear and convincing evidence or a mere preponderance of the evidence.
Investors
located in states where cannabis remains illegal may be at risk of prosecution under federal and/or state conspiracy, aiding and
abetting, and money laundering statutes, and be at further risk of losing their investments or proceeds under forfeiture statutes.
Many states remain fully able to take action to prevent the proceeds of cannabis businesses from entering their state. Because
state legalization is relatively new, it remains to be seen whether these states would take such action and whether a court would
approve it. Our investors and prospective investors should be aware of these potentially relevant federal and state laws in considering
whether to invest in us.
We
are subject to certain tax risks and treatments that could negatively impact our results of operations.
Section
280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking
controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section
280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the
IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and
the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several
pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these
courts will issue an interpretation of Section 280E favorable to cannabis businesses.
The
heightened regulatory scrutiny could have a negative impact on our ability to raise capital.
Our
business activities rely on newly established and/or developing laws and regulations in multiple jurisdictions, including in Nevada.
These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect
our profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny
by the U.S. Food and Drug Administration, SEC, the DOJ, the Financial Industry Regulatory Authority or other federal, Nevada or
other applicable state or non-governmental regulatory authorities or self-regulatory organizations that supervise or regulate
the production, distribution, sale or use of cannabis for medical or non-medical purposes in the U.S. It is impossible to determine
the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become
law. The regulatory uncertainty surrounding our industry may adversely affect our business and operations, including without limitation,
the costs to remain compliant with applicable laws and the impairment of its ability to raise additional capital, create a public
trading market in the U.S. for our securities or to find a suitable acquirer, which could reduce, delay or eliminate any return
on investment in the company.
The
potential re-classification of cannabis in the United States could create additional regulatory burdens on our operations and
negatively affect our results of operations.
If
cannabis and/or CBD is re-categorized as a Schedule II or lower controlled substance, the ability to conduct research on the medical
benefits of cannabis would most likely be improved; however, rescheduling cannabis may materially alter enforcement policies across
many federal agencies, primarily the U.S. Food and Drug Administration (the “FDA”). FDA is responsible for ensuring
public health and safety through regulation of food, drugs, supplements, and cosmetics, among other products, through its enforcement
authority pursuant to the Federal Food Drug and Cosmetic Act (the “FFDCA”). FDA’s responsibilities include regulating
the ingredients as well as the marketing and labeling of drugs sold in interstate commerce. Because cannabis is federally illegal
to produce and sell, and because it has no federally recognized medical uses, the FDA has historically deferred enforcement related
to cannabis to the U.S. Drug Enforcement Agency (the “DEA”); however, the FDA has enforced the FFDCA with regard to
hemp-derived products, especially CBD, sold outside of state-regulated cannabis businesses. If cannabis were to be rescheduled
to a federally controlled, yet legal, substance, FDA would likely play a more active regulatory role. Further, in the event that
the pharmaceutical industry directly competes with state-regulated cannabis businesses for market share, as could potentially
occur with rescheduling, the pharmaceutical industry may urge the DEA, FDA, and others to enforce the FFDCA against businesses
that comply with state but not federal law. The potential for multi-agency enforcement post-rescheduling could threaten or have
a materially adverse effect on the operations of existing state-legal cannabis businesses, including the company.
There
is uncertainty regarding the availability of U.S. federal patent and trademark protection.
As
long as cannabis remains illegal under U.S. federal law, the benefit of certain federal laws and protections which may be available
to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not
be available to us. As a result, our intellectual property may never be adequately or sufficiently protected against the use or
misappropriation by third-parties. In addition, since the regulatory framework of the cannabis industry is in a constant state
of flux, we can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal,
state or local level.
We
could experience difficulty enforcing our contracts.
Due
to the nature of our business and the fact that our contracts involve cannabis and other activities that are not legal under U.S.
federal law and in some jurisdictions, we may face difficulties in enforcing our contracts in federal and certain state courts.
The inability to enforce any of our contracts could have a material adverse effect on our business, operating results, financial
condition or prospects.
Risks
Related to the Business
We
will require additional financing to support our on-going operations.
We
will require equity and/or debt financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions
or other business combination transactions. A number of factors could cause us to incur higher borrowing costs and experience
greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global
capital markets and/or a decline in our financial performance, outlook, or credit ratings. There can be no assurance that additional
financing will be available to us when needed or on terms which are acceptable. Our inability to raise financing to fund on-going
operations, capital expenditures or acquisitions may adversely affect our ability to fund our operations, meet contractual commitments,
make future investments or desirable acquisitions, or respond to competitive challenges and may have a material adverse effect
upon our business, results of operations, financial condition or prospects.
If
additional funds are raised through further issuances of equity or convertible debt securities, existing shareholders could suffer
significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of
holders of Common Stock. Any debt financing secured in the future could involve restrictive covenants relating to capital raising
activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and
to pursue business opportunities, including potential acquisitions.
We
may not be able to continue to operate as a going concern.
Since
our inception, we have incurred significant operating losses and negative cash flows from operations. For the fiscal year ended
September 30, 2019, the Company incurred a net loss of approximately $28,985,000 and used cash in operating activities of approximately
$6,549,000. For the six months ended March 31, 2020, the Company incurred a net loss of $8,087,000 and used cash in operating
activities of $3,795,000. In addition, the Company’s independent registered public accounting firm, in their report on the
Company’s September 30, 2019 audited financial statements, raised substantial doubt about the Company’s ability to
continue as a going concern. These factors raise substantial doubt about the Company’s ability to continue as a going concern
within one year of the date that the financial statements are issued. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.
The
Company’s ability to continue as a going concern is dependent upon improving its profitability and raising additional debt
or equity capital. No assurance can be given that any future financing, if needed, will be available or, if available, that it
will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed,
it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its shareholders,
in the case of equity financing.
We
have identified material weaknesses in our internal control over financial reporting that, if not properly remediated, could result
in material misstatements in our financial statements in future periods.
Management
identified material weaknesses in our internal control over financial reporting as of September 30, 2019. See “Item 9A –
Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 filed with the Securities
and Exchange Commission on March 8, 2020 (and amended on March 19, 2020.
Although
we are undertaking steps to address these material weaknesses, the existence of a material weakness is an indication that there
is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in
the current or any future period. Remediation efforts are still in process and have not yet been completed. We cannot assure you
that the steps taken will remediate such weakness, nor can we be certain of whether additional actions will be required or the
costs of any such actions.
In
addition, we may in the future identify further material weaknesses in our internal control over financial reporting that we have
not discovered to date. Although we are engaged in remediation efforts with respect to the material weaknesses, the existence
of one or more material weaknesses could result in errors in our financial statements, and substantial costs and resources may
be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors
could lose confidence in our reported financial information, the market price of our common stock could decline significantly,
we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could
be harmed. We cannot assure you that we will be able to remediate these material weaknesses in a timely manner.
We
may experience difficulties in generating profits.
We
may experience difficulties in our development process, such as capacity constraints, quality control problems or other disruptions,
which would make it more difficult to generate profits. Our failure to achieve a low-cost structure through economies of scale
or improvements in manufacturing processes and design could have a material adverse effect on our business, prospects, results
of operations and financial condition.
We
will likely incur significant costs and obligations in relation to our on-going and anticipated business operations.
We
expect to incur significant on-going costs and obligations related to our investment in infrastructure and growth and for regulatory
compliance, which could have a material adverse impact on our results of operations, financial condition and cash flows. In addition,
future changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes
to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect
on the business, results of operations and financial condition of the company.
Acquisitions
may be cash flow negative.
We
may acquire companies which operate at a negative cash flow, which could place a strain on our cash resources and otherwise have
a negative impact on our overall cash flow and need to access additional capital.
We
are reliant on key employees in the management of our business and loss of their services could materially adversely affect our
business.
Our
success is dependent upon the ability, expertise, judgment, discretion and good faith of our senior management. While employment
agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these
agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material
adverse effect on our business, operating results, financial condition or prospects. We do not carry any key man life insurance.
Public
company compliance may make it more difficult to attract and retain officers and directors.
The
Sarbanes-Oxley Act and rules implemented by the SEC required changes in corporate governance practices of public companies. As
a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and
costly. As a public company, these rules and regulations also may make it more difficult and expensive for us to obtain director
and officer liability insurance and we may at times be required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. Thus, it may be more difficult for us to attract and retain qualified persons
to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our
business is heavily regulated which could have a material adverse effect on our results of operations and financial condition.
The
business and activities of the company are heavily regulated in all jurisdictions (particularly with respect to state and local
governments) where it carries on business. Our operations are subject to various laws, regulations and guidelines by governmental
authorities, relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of marijuana
and cannabis oil, and also including laws and regulations relating to health and safety, insurance coverage, the conduct of operations
and the protection of the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory
bodies broad administrative discretion over the activities of the company, including the power to limit or restrict business activities
as well as impose additional disclosure requirements on our products and services. Achievement of our business objectives is contingent,
in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all regulatory approvals,
where necessary, for the sale of our products. Similarly, we cannot predict the time required to secure all appropriate regulatory
approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. Any delays
in obtaining, or failure to obtain regulatory approvals would significantly delay the development of markets and products and
could have a material adverse effect on the business, results of operations and financial condition of the company.
We
will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may lead to possible
sanctions including the revocation or imposition of additional conditions on licenses to operate our business, the suspension
or expulsion from a particular market or jurisdiction or of our key personnel, and the imposition of fines and censures. In addition,
changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our
operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the
business, results of operations and financial condition of the company.
Our
industry is subject to intense competition.
There
is potential that we will face intense competition from other companies, some of which can be expected to have longer operating
histories and more financial resources and experience than the company. Increased competition by larger and better-financed competitors
could materially and adversely affect the business, financial condition, results of operations or prospects of the company. If
we are unable to compete effectively, it could decrease our customer traffic, sales and profit margins, which could adversely
affect our business, financial condition, and results of operations.
Because
of the early stage of the industry in which we operate, we expect to face additional competition from new entrants. To become
and remain competitive, we will require research and development, marketing, sales and support. We may not have sufficient resources
to maintain research and development, marketing, sales and support efforts on a competitive basis which could materially and adversely
affect the business, financial condition, results of operations or prospects of the company.
We
have a limited operating history.
The
Company and its subsidiaries have varying and limited operating histories, which can make it difficult for investors to evaluate
our operations and prospects and may increase the risks associated with investment into the company.
The
results of future clinical research may negatively impact our business.
Research
in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance
of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few clinical trials
on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although we believe that the articles, reports and
studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis,
future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions
relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of our Common Stock should not
place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to
those stated in this Prospectus or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing,
social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand
for our products with the potential to lead to a material adverse effect on our business, financial condition, results of operations
or prospects.
We
are reliant on key inputs and changes in their costs could negatively impact our profitability.
The
manufacturing business is dependent on a number of key inputs and their related costs including raw materials and supplies related
to product development and manufacturing operations. Any significant interruption or negative change in the availability or economics
of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects
of the company. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source
supplier was to go out of business, the company might be unable to find a replacement for such source in a timely manner or at
all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the company in the
future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse
impact on the business, financial condition, results of operations or prospects of the company.
We
are subject to environmental regulations.
Our
operations are subject to environmental regulation in the various jurisdictions in which we operate. These regulations mandate,
among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on
the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a
manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors
and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect our operations.
Failure
to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions thereunder,
including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective
measures requiring capital expenditures, installation of additional equipment, or remedial actions. We may be required to compensate
those suffering loss or damage due to our operations and may have civil or criminal fines or penalties imposed for violations
of applicable laws or regulations.
The
market for our products is difficult to forecast and our forecasts may not be accurate which could negatively impact our results
of operations.
We
must rely largely on our own market research to forecast sales as detailed forecasts are not generally obtainable from other sources
at this early stage of the industry. A failure in the demand for our products to materialize as a result of competition, technological
change or other factors could have a material adverse effect on the business, results of operations, financial condition or prospects
of the company.
We
are subject to certain risks regarding the management of our growth.
We
may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. The ability
of the company to manage growth effectively will require it to continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. The inability of the company to deal with this growth may have a material
adverse effect on our business, financial condition, results of operations or prospects.
We
may experience difficulties in maintaining adequate internal controls.
Certain
of our officers and directors lack experience in and with the reporting and disclosure obligations of publicly-traded companies.
Such lack of experience may impair our ability to maintain effective internal controls over financial reporting and disclosure
controls and procedures, which may result in material misstatements to our financial statements and an inability to provide accurate
financial information to our stockholders. Effective internal controls are necessary for the company to provide reliable financial
reports and to help prevent fraud. Failure to implement required new or improved controls, or difficulties encountered in their
implementation, could harm our results of operations or cause it to fail to meet its reporting obligations. If the company or
its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s
confidence in our Consolidated Financial Statements and materially adversely affect the trading price of our Common Stock. In
addition, our operations, future earnings and ultimate financial success could suffer irreparable harm due to our officers’
and directors’ lack of experience with publicly-traded companies and their reporting requirements in general.
We
are subject to product liability regarding our products, which could result in costly litigation and settlements.
As
a distributor of products designed to be ingested by humans, the company faces an inherent risk of exposure to product liability
claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the
sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination.
Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications
or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused
injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or
interactions with other substances.
A
product liability claim or regulatory action against the company could result in increased costs, could adversely affect our reputation
with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial
condition of the company. Although we have secured product liability insurance, and strictly enforce a quality standard within
the operations, there can be no assurances that we will be able to maintain our product liability insurance on acceptable terms
or with adequate coverage against potential liabilities. This scenario could prevent or inhibit the commercialization of our potential
products. To date, there have been no product related issues.
We
may have uninsured or uninsurable risks.
We
may be subject to liability for risks against which we cannot insure or against which we may elect not to insure due to the high
cost of insurance premiums or other factors. The payment of any such liabilities would reduce the funds available for our normal
business activities. Payment of liabilities for which the company does not carry insurance may have a material adverse effect
on our financial position and operations.
Certain
remedies shareholders may seek against our officers and directors may be limited and such officers and directors may be entitled
to indemnification by the company.
Our
governing documents provide that the liability of our board of directors and officers is eliminated to the fullest extent allowed
under the laws of the State of Nevada. Thus, the company and the shareholders of the company may be prevented from recovering
damages for alleged errors or omissions made by the members of our board of directors and officers. Our governing documents also
provide that the company will, to the fullest extent permitted by law, indemnify members of our board of directors and officers
for certain liabilities incurred by them by virtue of their acts on behalf of the company.
Breaches
in our security, cyber-attacks or other cyber-risks could expose us to significant liability and cause our business and reputation
to suffer.
Our
operations involve transmission and processing of our customers’ confidential, proprietary and sensitive information. We
have legal and contractual obligations to protect the confidentiality and appropriate use of customer data. Despite our security
measures, our information technology and infrastructure may be vulnerable to attacks as a result of third-party action, employee
error or misconduct. Security risks, including, but not limited to, unauthorized use or disclosure of customer data, theft of
proprietary information, loss or corruption of customer data and computer hacking attacks or other cyber-attacks, could expose
us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties,
mitigation expenses and other liabilities. We are continuously working to improve our information technology systems, together
with creating security boundaries around our critical and sensitive assets. We provide advance security awareness training to
our employees and contractors that focuses on various aspects of the cyber security world. Because techniques used to obtain unauthorized
access or to sabotage systems change frequently and generally are not recognized until successfully launched against a target,
we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach
of our security occurs, the market perception of the effectiveness of our security measures and our products could be harmed,
we could lose potential sales and existing customers, our ability to operate our business could be impaired, and we may incur
significant liabilities.
Our
business, results of operations and financial condition may be adversely impacted by the COVID-19 pandemic.
The
COVID-19 pandemic has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant
travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant
disruption of the financial markets. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business,
including how it will impact our customers, employees and supply chain. Given the critical nature of the services and products
that we provide, our calibration labs, distribution centers and support offices have remained open during the pandemic. While
the COVID-19 pandemic did not have a material adverse effect on our reported results for the second quarter of fiscal year 2020,
we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position
or cash flows. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments,
which are highly uncertain and cannot be accurately predicted. We may experience additional operating costs due to increased challenges
with our workforce (including as a result of illness, absenteeism or government orders), access to supplies, capital, and fundamental
support services (such as shipping and transportation). Even after the COVID-19 pandemic has subsided, we may experience materially
adverse impacts to our business due to any resulting economic recession or depression. Furthermore, the impacts of a potential
worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown.
The
impact of the COVID-19 pandemic may also exacerbate other risks discussed in this section, any of which could have a material
adverse effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.
The
COVID-19 pandemic may significantly disrupt our workforce and internal operations.
The
COVID-19 pandemic may significantly disrupt our workforce if a significant percentage of our employees are unable to work due
to illness, quarantines, government actions, facility closures in response to the pandemic, fear of acquiring COVID-19 while performing
essential business functions, or as a result of recent changes to unemployment insurance where unemployed workers can receive,
in the short-term, benefits in excess of what would be offered for working for us. As part of our response to the pandemic, we
instituted hazard pay for certain employees that perform essential work at customer sites. While we remain fully operational as
an essential business, we cannot guarantee that we will be able to adequately staff our operations when needed, particularly as
the COVID-19 pandemic progresses, which may strain our existing personnel, increase costs, and negatively impact our operations.
As a result, our internal operations may experience disruptions. The pandemic may create additional challenges in attracting and
retaining quality employees in the future. In addition, COVID-19 related-illness could impact members of our board of directors
resulting in absenteeism from meetings of the directors or committees of directors, making it more difficult to convene the quorums
of the full board of directors or its committees needed to conduct meetings for the management of our affairs. We cannot predict
the extent to which the COVID-19 pandemic may disrupt our workforce and internal operations.
We
have taken certain precautions due to the COVID-19 pandemic that could negatively impact our business.
In
response to the COVID-19 pandemic, we have taken measures intended to protect the health and well-being of our employees, customers,
and communities, which could negatively impact our business. These measures include temporarily requiring all non-essential employees
(personnel whose roles allow) to work remotely, restricting work-related travel except for direct onsite service to our customers,
restricting non-essential visitors from entering our sites, increasing the frequency and extent of cleaning and disinfecting facilities,
workstations, and equipment, developing social distancing plans, and instituting specialized training to ensure the safe handling
of our customers’ critical equipment. The health of our workforce, customers and communities is of primary concern and we
may take further actions as may be required by government authorities or as we determine are in the best interests of our employees,
customers and others. In addition, our management team has, and will likely continue to, spend significant time, attention and
resources monitoring the COVID-19 pandemic and seeking to manage its effects on our business and workforce. The extent to which
the pandemic and our precautionary measures may impact our business will depend on future developments, which are highly uncertain
and cannot be predicted at this time.
Risks
related to this Offering and the Ownership of our Common Stock
Our
directors and officers control a significant percentage of our Common Stock.
The
officers and directors of the company currently own a significant portion of the issued and outstanding shares of Common Stock.
Our shareholders nominate and elect our board of directors, which generally has the ability to control the acquisition or disposition
of our assets, and the future issuance of our Common Stock or other securities. Accordingly, for any matters with respect to which
a majority vote of our Common Stock may be required by law, our directors and officers may have the ability to control such matters.
Because the directors and officers control a substantial portion of such Common Stock, investors may find it difficult or impossible
to replace our directors if they disagree with the way our business is being operated.
Because
our common stock is deemed a low-priced “Penny” stock, an investment in our common stock should be considered high
risk and subject to marketability restrictions.
Since
our common stock is a penny stock, as defined in Rule 3a51-1 under the Exchange Act, it will be more difficult for investors to
liquidate their investment. The SEC defines “penny stock” to be any equity security that has a market price (as defined)
less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The shares of Common
Stock are covered by the penny stock rules pursuant to Rule 15g-9 under the Exchange Act, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The
term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with
a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer
and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special
written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the
secondary market for the securities of the company that are captured by the penny stock rules. Consequently, the penny stock rules
may affect the ability of broker-dealers to trade our securities. Management believes that the penny stock rules could discourage
investor interest in and limit the marketability of our Common Stock.
Financial
Industry Regulatory Authority sales practice requirements may also limit a stockholder’s ability to buy and sell our common
stock, which could depress the price of our common stock.
In
addition to the “penny stock” rules described above, the U.S. Financial Industry Regulatory Authority (“FINRA”)
has adopted rules that require a broker-dealer to have reasonable grounds for believing that an investment is suitable for a customer
before recommending an investment to a customer. Prior to recommending speculative, low priced securities to non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax
status, investment objectives, and other information. Pursuant to the interpretation of these rules, FINRA believes that there
is a high probability that speculative, low priced securities will not be suitable for at least some customers. Thus, the FINRA
requirements make it more difficult for broker-dealers to recommend our Common Stock to customers which may limit an investor’s
ability to buy and sell our Common Stock, have an adverse effect on the market for our Common Stock, and thereby negatively impact
the price of our Common Stock.
Our
Common Stock is subject to liquidity risks.
Our
Common Stock trades on the OTCQX in the United States and the CSE in Canada. The OTCQX is an inter-dealer, over-the-counter market
that provides significantly less liquidity than other national or regional exchanges. Securities traded on the OTCQX tend to be
thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The SEC’s order handling rules,
which apply to NASDAQ-listed securities, do not apply to securities quoted on the OTCQX. Quotes for stocks listed on the OTCQX
are not listed in newspapers. Therefore, prices for securities traded solely on the OTCQX may be difficult to obtain and holders
of our securities may be unable to resell their securities at or near their original acquisition price, or at any price.
We
cannot predict at what prices our Common Stock will trade in the future and there can be no assurance that an efficient and liquid
trading market will develop or be sustained. Commencing in July 2018, our Common Stock began trading on the CSE. Because our Common
Stock may be thinly traded on the CSE, we have limited liquidity on this exchange and we cannot guaranty that we will do so in
the future. There is a significant liquidity risk associated with an investment in the company.
The
shares of our Common Stock we may issue in the future and the options we may issue in the future may have an adverse effect on
the market price of our Common Stock and cause dilution to investors.
We
may issue shares of Common Stock and warrants to purchase Common Stock pursuant to private offerings and we may issue options
to purchase Common Stock to our executive officers pursuant to their employment agreements. The sale, or even the possibility
of sale, of shares pursuant to a separate offering or to executive officers could have an adverse effect on the market price of
our Common Stock or on our ability to obtain future financing.
Our
stock price may be volatile and you may not be able to sell your shares for more than what you paid.
Our
stock price may be subject to significant volatility, and you may not be able to sell shares of Common Stock at or above the price
you paid for them. The trading price of our Common Stock has been subject to fluctuations in the past and the market price of
our Common Stock could continue to fluctuate in the future in response to various factors, including, but not limited to: quarterly
variations in operating results; our ability to control costs and improve cash flow; announcements of innovations or new products
by us or by our competitors; changes in investor perceptions; and new products or product enhancements by us or our competitors.
An investment in our common stock is speculative and there is no assurance that investors will obtain any return on their investment.
Investors will be subject to substantial risks involved in an investment in us, including the risk of losing their entire investment.
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 consolidated balance sheet.
Equity
Method Investments
Investments
in unconsolidated affiliates are accounted for under the equity method of accounting, as appropriate. The Company accounts for
investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5.0% of the investee’s
outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s
investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.
During
the year ended September 30, 2019, the Company recognized losses of approximately $6.5 million. The losses related to its investment
in Stempro International, Inc. (acquired in its acquisition of South African Ventures, LLC (“SAV”) of approximately
$5.775 million, East Coast Packers LLC (“ECP”) of approximately $0.03 million, SOK Management LLC (“SOK”)
of approximately $0.5 million and Tilstar Medical, LLC (“TIL”) of approximately $0.25 million.
Asset
Acquisitions
The
Company has adopted ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as businesses acquisitions. As a result of adopting ASU
2017-01, acquisitions of real estate and cannabis licenses do not meet the definition of a business combination and were deemed
asset acquisitions, and the Company therefore capitalized these acquisitions, including its costs associated with these acquisitions.
Goodwill
and Intangible Assets
Goodwill.
Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill
is not amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance
occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill
impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances
lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required.
If the Company concludes otherwise, the Company is required to perform the two-step impairment test. The goodwill impairment test
is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying
value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated
fair value is less than the carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing
the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill.
Intangible
Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives,
where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash
flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable
intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually,
the remaining useful life is evaluated.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent
reversal of impairment losses is not permitted.
During
the year ended September 30, 2019, the Company determined that certain intangible assets were impaired and recorded impairment
charges totaling approximately $0.5 million. The impairment charges included its intangible asset acquired with its investment
in YMY Ventures, Inc. of approximately $0.5 million.
Business
Combinations
The
Company applies the provisions of ASC 805 in the accounting for acquisitions. ASC 805 requires the Company to recognize separately
from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition
date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired
and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to
assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates
are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from
the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the
conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever
comes first, any subsequent adjustments are recorded in the consolidated statements of operations. Accounting for business combinations
requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for
intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration,
where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they
are based in part on historical experience and information obtained from management of the acquired companies and are inherently
uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates,
or actual results.
Contingent
Consideration
The
Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations” (“FASB
ASC 805”). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or
equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires
that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the
transaction. FASB ASC 805 uses the fair value definition in Fair Value Measurements, which defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. As defined in FASB ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree, if specified
future events occur or conditions are met or (ii) the right of the acquirer to the return of previously transferred consideration,
if specified conditions are met.
Warrant
Liability
The
Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair
value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any
change in fair value is recognized in the Company’s consolidated statements of operations. The fair value of the warrants
issued by the Company has been estimated using Monte Carlo simulation model and the Black-Scholes pricing model.
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s)
should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded
in the statement of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible
debt instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition.
When the Company records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective
debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.
Income
Taxes
The
provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated
United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates
at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense
are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in
deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and tax-reporting purposes. At September 30, 2019 and 2018, such net
operating losses were offset entirely by a valuation allowance.
The
Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more
likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely
of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being
sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative
expense, respectively, on the consolidated statements of operations.
In
December 2017, the Tax Cuts and Jobs Act (TJCA or the Act) was enacted, which significantly changes U.S. tax law. In accordance
with ASC 740, “Income Taxes”, the Company is required to account for the new requirements in the period that includes
the date of enactment. The Act reduced the overall corporate income tax rate to 21.0%, created a territorial tax system (with
a one-time mandatory transition tax on previously deferred foreign earnings), broadened the tax base and allowed for the immediate
capital expensing of certain qualified property.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 605, “Revenue Recognition.” Revenue is realized or realizable
and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the sales price is
fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shipped and the customer has taken
ownership and assumed risk of loss.
Cannabis
Dispensary, Cultivation and Production
The
Company recognizes revenue as earned when the following four criteria have been met: (i) when persuasive evidence of an arrangement
exists, (ii) the product has been delivered to a customer, (iii) the sales price is fixed or determinable, and (iv) collection
is reasonably assured. Revenue is recognized net of sales incentives and returns, after discounts for the assurance program, veterans
coverage program and compassionate programs.
Leasing
Operations
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.
Geographical
Concentrations
As
of September 30, 2019, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational
use in 11 states and DC, with lesser legalization, such as for medical use in an additional 22 states and DC, as of the time of
these consolidated financial statements. In addition, the United States Congress has passed legislation, specifically the Agriculture
Improvement Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of hemp and associated
products from Schedule 1 of the Controlled Substances Act.
Cost
of Goods Sold
Cost
of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include
raw materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production
facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and
property taxes. The Company recognizes the cost of sales as the associated revenues are recognized.
Fair
value of Financial Instruments
As
defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
To
estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can
be readily observable, market corroborated or generally unobservable.
The
authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1”
measurements) and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair
value hierarchy are as follows:
Level
1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 — Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs
which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level
3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about
how market participants would price the assets and liabilities.
In
instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level
input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of
a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset
or liability.
Stock-based
compensation
The
Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock
options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the
market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These
options generally vest on the grant date or over a one- year period.
The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used
in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties
and the application of management’s judgment.
Expected
Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding
based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected
Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading
prices.
Risk-Free
Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon
issues with an equivalent remaining term.
Expected
Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends
in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
Effective
January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update
(“ASU”) 2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that
vested. Prior to making this election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have a
significant history of forfeitures.
Loss
per Share
ASC
260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Basic
net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares
of common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution
that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since
the Company has only incurred losses, basic and diluted net loss per share is the same. Securities that could potentially
dilute loss per share in the future that were not included in the computation of diluted loss per share at September 30, 2019
and 2018 are as follows:
Net
loss per share
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
Convertible
notes
|
|
|
1,429,050
|
|
|
|
1,031,667
|
|
Options
to purchase common stock
|
|
|
1,105,416
|
|
|
|
2,925,416
|
|
Unvested
restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
Warrants
to purchase common stock
|
|
|
2,241,920
|
|
|
|
175,966
|
|
|
|
|
4,776,386
|
|
|
|
4,133,049
|
|
Advertising
Costs
The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was $61,161 and $49,948
for the year ended September 30, 2019 and 2018, respectively.
Related
parties
Parties
are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled
by, or are under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company
may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent
that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Segment
reporting:
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision–maker is its chief executive officer. The Company currently operate
in one segment.
Recent
Accounting Guidance
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU
2018-07”). ASU 2018-07 expands the guidance in Topic 718 to include share-based payments for goods and services to non-employees
and generally aligns it with the guidance for share-based payments to employees. The amendments are effective for fiscal years
beginning after December 15, 2018, including interim periods within that fiscal year. The new standard will be effective for the
Company on the adoption date of ASU 2014-09. Adoption of this guidance will not have a material impact on the Company’s
consolidated financial condition or results of operations.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides companies
with a single model for use in accounting for revenue arising from contracts with customers and will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective, including industry-specific revenue guidance. The standard specifically
excludes lease contracts. The ASU allows for the use of either the full or modified retrospective transition method and will be
effective for the Company on October 1, 2019, at which time the Company expects to adopt the updated standard using the modified
retrospective approach. The financial information included in the Company’s 2020 Form 10-K will be updated for
the October 1, 2019 adoption date; this new guidance will be reflected for the first time in the Company’s 2020 Form 10-K but
effective as of October 1, 2019 in that filing. However, the Company will continue to account for revenue recognition under
ASC Topic 605 for interim periods in 2020 and will not be required to amend its Form 10-Q filings filed throughout 2020
to reflect the October 1, 2019 adoption date. The guidance allows for the use of one of two retrospective application methods:
the full retrospective method or the modified retrospective method. The Company plans to adopt the standard in fiscal year 2020
using the modified retrospective method. The Company does not expect the new standard to have a material impact on the recognition
of revenue.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting
guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases
that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a
manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in
prior periods but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities
are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparable period presented, with an option to elect certain transition relief. Full retrospective application is prohibited.
The standard will be effective for the Company on October 1, 2020; however, early adoption of the ASU is permitted. The Company
is still finalizing its analysis but expects to recognize additional operating liabilities of approximately $1.3 million, with
corresponding ROU assets of approximately the same amount as of October 1, 2019 based on the present value of the remaining lease
payments.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”). ASU 2016-13 provides guidance for recognizing credit losses on financial
instruments based on an estimate of current expected credit losses model. The amendments are effective for fiscal years beginning
after December 15, 2019. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar
year 2023. The Company is currently assessing the impact of the adoption of this ASU on its financial statements.
3.
Property, Plant & Equipment
Property
and equipment consists of the following (in thousands):
|
|
As
of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,451
|
|
|
$
|
300
|
|
Automobiles
|
|
|
61
|
|
|
|
18
|
|
Signage
|
|
|
19
|
|
|
|
19
|
|
Furniture
and equipment
|
|
|
2,125
|
|
|
|
1,199
|
|
Leasehold
improvements
|
|
|
3,197
|
|
|
|
2,719
|
|
Buildings
and property improvements
|
|
|
9,719
|
|
|
|
4,720
|
|
Computer
software
|
|
|
59
|
|
|
|
59
|
|
|
|
|
16,631
|
|
|
|
9,034
|
|
Accumulated
depreciation
|
|
|
(1,925
|
)
|
|
|
(709
|
)
|
Property
and equipment, net
|
|
$
|
14,706
|
|
|
$
|
8,325
|
|
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 $1.6 million 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 note is currently being extended through mutual negotiations
with its management with the same terms and conditions as previously adhered to. The Company did not record a premium to the market
rate of the note as it was immaterial at issuance.
Purchase
of Building with Common Stock
On
July 10, 2019, the Company entered into an asset purchase agreement with an Oregon limited liability company which owns title
to Real property (buildings and improvements) located at 399 and 451 Wallis Street, Eugene, Or 97402 for a total purchase price
tendered in kind for approximately 6,322,058 shares of the Company’s common stock, which included the grant of 457,191 shares
as the Company determined certain milestones were met within the Mutli-Party Agreement. The building and improvement acquired
was recorded at its carrying value of approximately $2.99 million as the seller was a related party. The Company has expensed
the value of the shares issued as part of the Multi-Party Agreement which were valued at approximately $1 million in the year
ended September 30, 2019 and is included in the impairment of property and equipment on the statement of operations.
Purchase
of Land with Common Stock
On
July 10, 2019, the Company entered into an asset purchase agreement with a Oregon limited liability company which owns title to
Real property (land) located at 12590 Highway 238, Jacksonville, Or 97503 for a total purchase price tendered in kind for 1,233,665
shares of the Company’s common stock. The land acquired was recorded at its carrying value of approximately $1.2 million
as the seller was a related party.
Depreciation
expense was approximately $1.2 million and $1.4 million for the years ended September 30, 2019 and 2018, respectively. Depreciation
expense is included in general and administrative expense. Included in the depreciation amount above for the year ended September
30, 2018 is approximately $0.8 million in impairments to property, plant and equipment. In the year ended September 30, 2019 there
was an impairment recorded of approximately $0.7 million recorded in the statement of operations under the line item impairment
of property and equipment.
4.
Inventory
Inventory
consists of the following (in thousands):
|
|
September
30, 2019
|
|
|
|
|
|
Raw
materials
|
|
$
|
169
|
|
Work-in-progress
|
|
|
42
|
|
Finished
goods
|
|
|
400
|
|
Total
Inventory
|
|
$
|
611
|
|
The
Company’s inventory is related to five subsidiaries which are 100% owned by the Company and one subsidiary that is 50% owned
by the Company. Raw materials and work-in-progress include the costs incurred for cultivation materials and live plants. Finished
goods consists of cannabis products ready to be sold. No inventory reserve was recorded during the year ended September 30, 2019
due to management’s assessment of the inventory on hand. There was no inventory recorded as of September 30, 2018.
5.
Equity method investments
2018
Transactions
East
Coast Packers LLC
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 September 30, 2019, and the date of these consolidated
financial statements, no license had been granted, however, the Company believes the license will be issued in calendar year 2020.
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. As of September 30, 2019, the Company accounted for the investment under the equity method
and the $500,000 paid at closing has been recorded in investments in equity method investees on the accompanying consolidated
balance sheet. The interest in ECP will continue to be accounted for under the equity method until such time that the contingency
(which is outside of the Company’s control) is met such that the Company would have a currently exercisable redemption right.
Once the contingency is met, the Company may reclassify the equity investment upon exercise of the redemption feature.
The
issuance of the license is outside the control of the Company and ECP. The agreement unwinds in full in the event the license
is not issued, this has been recorded as an equity method investment as of September 30, 2019. In the event that the license is
not issued the $500,000 cash investment is at risk. As of September 30, 2019, the difference between the investment and the percentage
of net assets attributable to the Company’s investment was approximately $0.4 million excluding the $1 mm note investment,
however, as of September 30, 2019, ECP had cash of approx. $0.25 million all of which would be returnable in the event of the
Company withdrawal because of the no license being granted.
2019
Transactions
SOK
Management, LLC
During
the year ended September 30, 2019, the Company advanced approximately $830,000 to a group of companies attempting to start up
cannabis operations in Oklahoma. In May 2019, the Company and the group of entities entered into a formal agreement in which $500,000
of the advanced funds would become a 7% ownership interest in SOK Management, LLC. The remaining $330,000 of advanced funds were
returned to the Company, and the Company is no longer required to advance further amounts. The Company accounted for its $500,000
investment in SOK Management LLC using the equity method of accounting. As of September 30, 2019, the Company recorded a loss
on investment of $500,000, bringing its total investment to zero.
Tilstar
Medical, LLC
In
April 2019, the Company entered into an agreement to acquire 48% of the membership interest of Tilstar Medical, LLC (“TIL”).
TIL is a startup operation located in Laurel, Maryland and owns a project management company which assists in procuring licenses
for the production and sale of cannabis. The purchase price for the 48% interest was $550,000 to capitalize TIL which under the
operating agreement occurs upon the execution of the agreement. As of September 30, 2019, the Company had funded the $550,000
and accounted for its investment using the equity method of accounting. During the year ended September 30, 2019, the Company
recorded a loss on investment of approximately $279,000. The Company was not made aware at time of its investment in the type
and magnitude of expenses that would be funded with its investment capital and is currently in the process of renegotiating the
terms of the operating agreement. During the year ended September 30, 2019, Tilstar Medical along with its partner, Stem Holdings,
Inc, received a letter from the Maryland Medical Cannabis commission with notification that we received stage one pre-approval
for a processor license. The Companies application ranked amongst the top nine highest scoring applications for a medical cannabis
processor license. Final awards will be issued during calendar year 2020. As of September 30, 2019, the difference between the
investment and the percentage of net assets attributable to the Company’s investment was approximately $0.28 million
6.
Consolidated Asset Acquisitions
2018
Transactions
YMY
Ventures LLC
In
September 2018, the Company entered into an agreement to acquire 50% of the membership interest of YMY Ventures LLC (“YMY”).
YMY is a startup operation located near Las Vegas, Nevada and owns licenses for the production and sale of cannabis. The purchase
price for the 50% interest was $750,000, with the first $375,000 paid into escrow upon signing, with the final $375,000 due upon
closing, which under the agreement occurs when the license is transferred by the Nevada Department of Taxation and receipt of
approval in transfer of ownership by the Division of Public and Behavioral Health of the City of North Las Vegas. As of June 30,
2019, the Company had funded the $375,000 into escrow and had provided the joint venture with additional funds primarily in the
form of payments for work performed to acquire four licenses from the Nevada Department of Taxation in the amount of approximately
$690,238. As of February 28, 2019, the Nevada Department of Taxation approved the change of ownership for four medical and recreational
cultivation and production licenses held by YMY Ventures now owned by Stem Holdings, Inc. Pursuant to the agreement, the escrowed
amount of $375,000 was released and an additional payment of $67,500 was issued in August 2019. The balance of $307,500 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. $0.7 million non-controlling interest in connection with this asset acquisition is included in investment in affiliates
During
the year ended September 30, 2019, the Company acquired an option for the acquisition of fifty percent (50%) membership interests
of affiliated companies membership interest position in YMY and as consideration for the grant of the option, the Company issued
four hundred and fifty thousand (450,000) dollars’ of its common stock at fair value of $2.40 per share. During the year
ended September 30, 2019 the Company recorded an impairment related to this option in the amount of $450,000.
NVD
RE Corp.
In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment
to contribute $1.275 million to NVD, which included the purchase price of $600,000 and an additional commitment to pay tenant
improvement costs of $675,000. As of September 30, 2019, the Company paid $600,000 in cash for the real estate and not only fully
funded its commitment but invested an additional $377,000 in capital over and above its original obligation. NVD used the funds
provided to date by the Company to construct a cannabis indoor grow building and processing plant located near Las Vegas, Nevada
and to continue the buildout of the property. The Company has no further commitment to fund the entity beyond its initial equity
purchase commitment. NVD leases its facilities to YMY Ventures, LLC. $1.0 million non-controlling interest in connection with
this asset acquisition is included in investment in affiliates.
In
the fiscal year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this
mortgage were advanced to the Company.
South
African Ventures, Inc.
On
March 22, 2019, the Company entered into a definitive agreement to acquire South African Ventures, Inc. (“SAV”). The
Company issued 8,250,000 shares of its common stock, with a fair value of $14.025 million or $1.70 per share, the closing price
of the Company’s common stock on March 22, 2019. At the time of the acquisition, SAV was a shell with no operations with
$7.55 million in cash, a subscription receivable of $0.7 million and a 49% ownership interest in a newly formed entity (see below).
The Company has recorded a $5.775 million investment in equity method investees in connection with this acquisition (see below).
As of September 30, 2019, the Company determined the investment was impaired and recorded a loss from equity method investees
of $5.8 million on the accompanying consolidated statement of operations. In addition, the Company impaired the subscription receivable
in full.
SAV
holds a 49% interest in Stempro International, Inc., a Nevada Corporation. Profile Solutions, Inc (“PISQ”) owns the
remaining 51%. Stempro International, Inc. 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.
Western
Coast Ventures, Inc.
On
March 29, 2019 the company entered into a definitive agreement to acquire Western Coast Ventures, Inc. (“WCV”). At
the time of acquisition, WCV was a shell with cash of $2,000,000 and a 51% ownership with ILCA Holdings, Inc. (“ILCA”).
At the time of acquisition of WCV, ILCA was also a shell with no operations, which has been issued a limited Conditional Use Permit
for a Marijuana Production Facility (a “MPF”) by the City of San Diego, California, which will only be granting a
total of 40 MPFs. As consideration for the acquisition, the Company issued 2,500,000 shares of its common stock, with a fair value
of approximately $4.4 million or $1.47 per share, the Company’s closing stock price on March 29, 2019. The Company recorded
$2.0 million of cash acquired and a $2.4 million investment in ILCA. The Company has recorded $3.8 million intangible assets (cannabis
licenses) in connection with the acquisition of WCV and a $1.35 million non-controlling interest in connection with this acquisition.
7.
Non-Controlling Interests
Non-controlling
interests in consolidated entities are as follows (in thousands):
|
|
As
of September 30, 2018
|
|
|
|
NCI
Equity
Share
|
|
|
Net
Loss
Attributable
to NCI
|
|
|
NCI
in
Consolidated
Entities
|
|
|
Non-Controlling
Ownership %
|
|
NVD
RE Corp.
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
62.5
|
%
|
YMY
Ventures, Inc.
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50.0
|
%
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
As
of September 30, 2019 (As Amended)
|
|
|
|
NCI
Equity
Share
|
|
|
Net
Loss
Attributable
to NCI
|
|
|
NCI
in
Consolidated
Entities
|
|
|
Non-Controlling
Ownership %
|
|
NVD
RE Corp.
|
|
$
|
1,042
|
|
|
$
|
(53
|
)
|
|
$
|
989
|
|
|
|
62.5
|
%
|
Western
Coast Ventures, Inc.
|
|
|
1,352
|
|
|
|
(64
|
)
|
|
|
1,288
|
|
|
|
49.0
|
%
|
YMY
Ventures, Inc.
|
|
|
721
|
|
|
|
(274
|
)
|
|
|
447
|
|
|
|
50.0
|
%
|
|
|
$
|
3,115
|
|
|
$
|
(391
|
)
|
|
$
|
2,724
|
|
|
|
|
|
8.
Business Combination - Yerba Buena, Oregon LLC
On
June 24, 2019, the Company completed the Asset Purchase Agreement (the “APA) with Yerba Buena, Oregon LLC (“Yerba
Buena”) and Preston Clarence Greene, Glenn R. McClish, Michael McClish, and Larry Heitman (collectively, the “Seller’s
Members”) to purchase certain assets and assume certain liabilities of Yerba Buena (“the Net Assets”). Yerba
Buena operates a wholesale cannabis production and sales operation in the state of Oregon.
Purchase
Price Allocation
The
Company allocated the purchase consideration to the fair value of the assets acquired and liabilities assumed as summarized in
the table below (in thousands):
Intangible
assets
|
|
$
|
1,775
|
|
Goodwill
|
|
|
1,070
|
|
Accounts
receivable
|
|
|
170
|
|
Inventory
|
|
|
372
|
|
Prepaid
expenses and other current assets
|
|
|
25
|
|
Property
and equipment
|
|
|
827
|
|
Accounts
payable and accrued expenses
|
|
|
-
|
|
Purchase
price
|
|
$
|
4,239
|
|
Upfront
Consideration
The
upfront purchase price is paid as follows:
●
|
Cash
of $350,000;
|
●
|
A
promissory note in the principal amount of $400,000;
|
●
|
Shares
of Stem whereby the number of shares issued is equal to $1,580,581 divided by the lesser of: (a) 85% of the average closing
price of Stem’s shares for the 30 trading days before the Closing Date; and (b) $2.40. Stem issued 1,019,370 shares
of its common stock to settle this purchase price consideration.
|
●
|
Shares
of Stem whereby the number of shares issued is equal to $2,282,431.25 divided by the average closing price of Stem’s
shares for the 30 trading days before June 30, 2019. On June 30, 2019, Stem issued 1,472,536 shares to settle the “June
30, 2019” purchase price consideration.
|
Contingent
Consideration
Contingent
consideration in the form of additional shares are issuable if the actual earnings before income taxes, depreciation and amortization
(“EBITDA”) for calendar year 2018 and 2019 exceeds $1,930,581 and $2,682,431, respectively.
The
Company assigned a zero probability to contingent consideration and as of September 30, 2019 and September 30, 2018, no contingent
consideration was earned.
Consideration
Transferred
Consideration
transferred in a business combination is measured at fair value and is calculated as the sum of the acquisition-date fair values
of the assets transferred by the acquirer, the liabilities incurred by the acquirer to the former owners of the acquire, and the
equity interests issued by the acquirer.
The
following represents the consideration transferred in the acquisition of Yerba Buena (in thousands):
Cash
|
|
$
|
350
|
|
Notes
payable
|
|
|
400
|
|
Common
stock
|
|
|
3,489
|
|
Total
Purchase Price
|
|
$
|
4,239
|
|
Notes
Payable – The note payable was issued on April 8, 2019 and is due on April 8, 2021. The note payable has a coupon interest
rate of 8%. The Company determined that the principal balance approximates fair value on the acquisition date. The note payable
requires twelve monthly interest only payments, followed by eleven monthly payments of $17,000 and a final payment for the entire
unpaid principal balance together with accrued interest due on April 8, 2021. From April 8, 2019 to September 30, 2019, the Company
has not made any principal payments and interest payments.
Common
Stock - The fair value of the common stock was based on Stem’s closing stock price on the acquisition date (i.e., June
24, 2019) of $1.40, and includes both the shares issued in the interim closing on April 8 and the shares issued on June 30, 2019,
as follows (in thousands, except for share and per share amounts):
|
|
Shares
Issued
|
|
|
Closing
Stock
Price - June 24
|
|
|
Fair
Value
|
|
Interim
Closing Date
|
|
|
1,019,730
|
|
|
$
|
1.40
|
|
|
$
|
1,428
|
|
June
30, 2019
|
|
|
1,472,536
|
|
|
$
|
1.40
|
|
|
$
|
2,061
|
|
Total
|
|
|
2,492,266
|
|
|
|
|
|
|
$
|
3,489
|
|
The
supplemental unaudited pro forma information, as if the Yerba acquisition had occurred on October 1, 2018, is as follows (in thousands):
|
|
2019
|
|
Revenues
|
|
$
|
4,066
|
|
Net
Loss Attributable to Stem
|
|
$
|
(26,243
|
)
|
Net
Loss per Common Share Attributable to Stem Common Stockholders - Basic and Diluted
|
|
$
|
(0.93
|
)
|
The
supplemental unaudited pro forma information above is based on estimates and assumptions that we believe are reasonable. The pro
forma information presented is not necessarily indicative of the consolidated results of operations in future periods or the results
that would have been realized had the acquisition occurred on October 1, 2018. The supplemental pro forma results above exclude
any benefits that may result from the acquisition due to synergies that are expected to be derived from the elimination of any
duplicative costs.
9.
Intangible Assets, net
Intangible
assets as of September 30, 2019 and 2018 (in thousands):
|
|
Estimated
Useful Life
|
|
|
Cannabis
Licenses
|
|
|
Tradename
|
|
|
Customer
Relationship
|
|
|
Non-compete
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Balance
as September 30, 2017
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Balance
as September 30, 2018
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
YMY
Ventures (1)
|
|
|
15
|
|
|
|
758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
758
|
|
Western
Coast Ventures, Inc. (1)
|
|
|
15
|
|
|
|
3,786
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,786
|
|
Yerba
Buena
|
|
|
3-15
years
|
|
|
|
1,270
|
|
|
|
150
|
|
|
|
135
|
|
|
|
220
|
|
|
|
-
|
|
|
|
1,775
|
|
Other
|
|
|
5
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
Balance
as September 30, 2019
|
|
|
|
|
|
$
|
5,814
|
|
|
$
|
147
|
|
|
$
|
135
|
|
|
$
|
220
|
|
|
$
|
-
|
|
|
$
|
6,316
|
|
(1)
These represent provisional licenses that the Company acquired during the fiscal years ended September 30, 2019 and 2018. Once
these licenses are approved by their respective regulatory bodies, the Company will amortize these cannabis licenses over a 15-year
estimated useful life.
Actual
amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions,
changes in useful lives or other relevant factors or changes. No amortization was recorded for the period ended September 30,
2019 as it was deemed immaterial.
10.
Accounts payable and accrued expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
Accounts
payable
|
|
$
|
707
|
|
|
$
|
412
|
|
Accrued
credit cards
|
|
|
31
|
|
|
|
28
|
|
Accrued
interest
|
|
|
106
|
|
|
|
52
|
|
Other
|
|
|
238
|
|
|
|
19
|
|
Total
Accounts Payable and Accrued Expenses
|
|
$
|
1,082
|
|
|
$
|
511
|
|
11.
Notes Payable and Advances
The
following table summarizes the Company’s short-term notes and advances as of September 30, 2019 and 2018:
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
Equipment
financing
|
|
$
|
33
|
|
|
$
|
53
|
|
Due
to related parties
|
|
|
-
|
|
|
|
34
|
|
Insurance
financing
|
|
|
160
|
|
|
|
100
|
|
Mortgages
payable
|
|
|
2,191
|
|
|
|
1,081
|
|
Promissory
note (cancellable)
|
|
|
1,000
|
|
|
|
-
|
|
|
|
$
|
3,384
|
|
|
$
|
1,268
|
|
Acquisition
notes payable
|
|
|
708
|
|
|
|
-
|
|
Total
notes payable and advances
|
|
$
|
4,092
|
|
|
$
|
1,268
|
|
Equipment
financing
Effective
May 29, 2018, the Company entered into a 24-month premium finance agreement in consideration for a MT85 wide track loader in the
principal amount of $27,844. The note bears no annual interest rate and requires the Company to make 24 monthly payments of $1,160
over the term of the note. As of September 30, 2019, the obligation outstanding is $9,281. 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.
In
Effective April 29, 2018, the Company entered into a 36-month premium finance agreement in consideration for a John Deere Gator
Tractor in the principal amount of $15,710. The note bears no annual interest rate and requires the Company to make thirty-six
monthly payments of $442 over the term of the note. As of September 30, 2019, the obligation outstanding is $8,407. No amount
was recorded for the premium for the non-interest bearing feature of the note as it was immaterial. The note is secured by the
equipment financed.
November
2017, the Company entered into a promissory note in the amount of $21,749 from a vendor of the Company to finance the acquisition
of a security electronics system in one of its properties. The promissory note bears an interest rate of 18% per annum and also
contains a 10% servicing fee. The note matures 24 months after issuance and is secured by certain security electronics purchased
with proceeds of the note. This vendor is currently in a restructuring and is likely to go out of business. As of September 30,
2019, the Company has been notified that the vendor holding the note is in bankruptcy and during the year ended September 30,
2019, the Company withheld payment under the note. The obligation remains outstanding at $14,950 as of September 30, 2019.
Due
to related parties
As
of September 30, 2019, there were no amounts due to related parties. As of September 30, 2018, related parties had advanced cash
and equipment, on a due on demand, unsecured and undocumented basis, to the Company in the amount of approximately $34,000.
Insurance
financing
Effective
July 31, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $63,101. The note bears an annual interest rate of 7.63% and requires the Company to make ten monthly
payments of $4,582 over the term of the note. As of September 30, 2019, the obligation outstanding is $36,658.
Effective
July 31, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $78,900. The note bears an annual interest rate of 7.25% and requires the Company to make ten monthly
payments of $5,756 over the term of the note. As of September 30, 2019, the obligation outstanding is $46,047.
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 September 30, 2019, the obligation outstanding is $2,540.
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 September 30, 2019, the obligation outstanding is $66,615.
Effective
May 24, 2019, the Company entered into a 9-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $11,440. The note bears an annual interest rate of 8.7% and requires the Company to make 9 monthly payments
of $1,322 over the term of the note. As of September 30, 2019, the obligation outstanding is $6,611.
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 $54,702. 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 September 30, 2019, the obligation outstanding is $1,539.
Notes
payable
As
disclosed in Note 5, in July 2018 the Company entered into a promissory note in the principal amount of $1.0 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
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 September 30,
2019, the balance due is $1,027,500.
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. As of September
30, 2019 $550,000 was outstanding under this mortgage.
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 paid 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. As of September 30, 2019 $314,000 was outstanding under this mortgage.
In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment
to contribute $1.275 million to NVD which included the purchase price of $600,000 and an additional commitment to pay tenant improvement
costs of $675,000. In the year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The
funds from this mortgage were advanced to the Company. The advance is undocumented, non-interest bearing and due on demand. At
September 30, 2019, the balance due totals $300,000.
Acquisition
Notes Payable
As
disclosed in Note 8, in April 2019, the Company entered into a promissory note with a principal balance of $400,000 related to
its acquisition of Yerba Buena, Oregon LLC. The note was issued on April 8, 2019 and is due on April 8, 2021. The note has a coupon
interest rate of 8%. As of September 30, 2019, the Company has not made any principal and interest payments.
As
disclosed in Note 6, in September 2018, the Company entered into an agreement to acquire 50% of the membership interest of YMY.
The purchase price for the 50% interest was approximately $0.8 million. In connection with this agreement, as of September 30,
2019, the Company has paid approximately $0.5 million and recorded a note payable of $0.3 million.
12.
Convertible debt
8%
Convertible notes
Twelve-month
term
In
May and June 2018, the Company issued senior unsecured convertible notes with a principal balance of $1.5 million to accredited
investors (the “Note Holders”). The notes matured in May 2019 and had an annual rate of interest at 8%. Accrued interest
was payable quarterly in arrears on the fifth day of each calendar quarter. The notes ranked senior to all obligations not designated
as a primary obligation by the Company. The Note Holders were entitled to convert all or any amount of the principal balance then
outstanding into shares of the Company’s common stock at a conversion price of $2.50 per share. In October 2018, the Company
offered the convertible note holders the opportunity to receive a reduced conversion price from $2.50 per share to $1.80 per share
as an inducement for the Note Holders to convert the notes. As of October 31, 2018, all of the convertible note holders agreed
to convert at the reduced price offered by the Company. The Company issued 833,334 shares of common stock in conversion of the
notes. The Company recognized an inducement cost associated with the conversion of the convertible
promissory notes of approximately $0.567 million with a corresponding credit to additional
paid-in capital.
Six-month
term
On
September 1, 2018, the Company entered into a Securities Purchase Agreement (the “Agreement” or “SPA”)
with accredited investors. The securities offered by the Agreement were offered in a private offering with an aggregate amount
of up to $2.0 million, comprising of up to $2.0 million of convertible promissory notes and a number of warrants to purchase a
number of shares of Company’s common stock at a conversion price of $2.50 per share equal to 25% of the face amount of the
notes purchased by the accredited investors.
During
the year ended September 30, 2018, the Company issued convertible promissory notes with a principal balance of $975,000 to accredited
investors (the “Note Holders”). The notes matured in March 2019 and had an annual rate of interest of 8%. Unless the
notes are prepaid, the notes will automatically convert at the maturity date into shares of the Company’s common stock at
a conversion price of $2.50 per share. In October 2018, the Company offered the convertible note holders the opportunity to receive
a reduced conversion price from $2.50 per share to $1.80 per share as an inducement for the Note Holders to convert the notes.
As of October 31, 2018, all of the convertible note holders agreed to convert at the reduced price offered by the Company. The
Company issued 541,668 shares of common stock in conversion of the notes. The Company recognized
an inducement cost associated with the conversion of the convertible promissory notes of
approximately $0.368 million with a corresponding credit to additional paid-in capital.
In
connection with the issuance of the convertible promissory notes, the Company issued the Note Holders common stock purchase warrants
with a three year term from the issuance date, providing the Note Holders the right to purchase 97,500 shares of the Company’s
common stock at $2.50 per share, with standard anti-dilution protection. After allocating
issuance proceeds to the warrant liability, the effective conversion price of the convertible promissory notes was
below the quoted market price of the Company’s common stock. As such, the Company recognized beneficial conversion feature
equal to the intrinsic value of the conversion feature on the issuance date, resulting in an additional discount to the initial
carrying value of the convertible promissory notes of approximately $0.5 million
with a corresponding credit to additional paid-in capital.
Other
Notes
The
Company issued a $100,000 promissory note dated December 1, 2017 to an accredited investor which matured on March 1, 2018 and
has an annual rate of interest at 24%. Both principal and interest were due at maturity. The promissory note ranks senior to all
obligations not designated as a primary obligation by the Company. As an inducement to issue the promissory note, the Company
granted the holder warrants to acquire 20,833 shares of the Company’s common stock. The warrants have an exercise price
of $2.40 per underlying common share and are exercisable for 2 years from the anniversary date of issuance and were valued at
approximately $46,000 and amortized to interest expense over the life of the initial note. On March 1, 2018, pursuant to the First
Amendment to Loan Agreement and Promissory note, the parties agreed to extend the maturity date on the note for one more year
which includes the following terms; (1) interest payment of $6,000 due from the original note is to be paid (2) interest rate
decreases from an annual rate of 24% to 8% (3) the Company has the right to prepay the note combined with accrued interest at
any time prior to maturity (4) the lender has the right to call the note together with accrued interest not less than 30 days
written notice to the Company (5) at any time prior to maturity of the note, lender has the option to convert the indebtedness
with accrued interest into the Company’s common stock at the rate of $2.40 a share). At issuance, the Company determined
that there was no beneficial conversion feature. The Company considered the amendment an extinguishment, however, its determination
was that the reduction in interest was offset by the inclusion of the conversion feature and therefore no gain or loss on extinguishment
was required.
In
October 2018, the Company offered the convertible note holder the opportunity to receive a reduced conversion price from $2.50
per share to $1.80 per share as an inducement for the Note Holder to convert the notes. As of October 31, 2018, the convertible
note holder agreed to convert at the reduced price offered by the Company. The Company issued 55,556 shares of common stock in
conversion of the notes. The Company recognized an inducement cost associated with the conversion
of the convertible promissory notes of approximately $0.032 million with a corresponding
credit to additional paid-in capital.
In
September 2018, an investor interested in the then ongoing private placement of convertible notes advanced the Company $168,000
on an unsecured basis. The note had an interest rate of 8%, was payable quarterly and matured one year from the issuance date.
The Company repaid the note in full during the fourth quarter of 2019.
Canaccord
On
December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of
up to 10,000 convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross
proceeds of up to CDN$10,000,000 (the “Offering”). The net proceeds of the Offering were used for expansion initiatives
and general corporate purposes. The Company’s functional currency is U.S. dollars.
In
December 2018 and January 2019, the Company issued 3,121 CD Special Warrants in the first closing of the Offering, at a price
of CDN $1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $3.1 million or $2.3 million USD. In connection
with this offering, the Company issued the agents in such offering 52,430 convertible debenture special warrants (the “Broker
CD Special Warrants”) as partial satisfaction of a selling commission.
On
March 14, 2019, the Company issued 962 CD Special Warrants in the second and final closing of the Offering, at a price of CDN
$1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $1.0 million or $0.7 million USD. In connection with
this offering, the Company issued the agents in such offering 5,600 convertible debenture special warrants (the “Broker
CD Special Warrants”) as partial satisfaction of a selling commission.
The
total aggregate proceeds of the Offering totaled $4.1 million CDN or $3.1 million USD.
Each
CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration)
for one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third
business day after the date on which both (A) a receipt (the “Receipt”) for a (final) 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. The CD Special Warrants were exchanged for Convertible Debenture Units after
six months as U.S. and Canadian registrations were not effective at that time.
Each
Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible
Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant
entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of
CDN $3.90 per Warrant Share for a period of 24 months following the closing of the Offering.
The
Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the
Offering. In the event that the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that
is 120 days following the closing of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof
to receive, upon the exercise thereof and at no additional cost, 1.05 Convertible Debenture Units per CD Special Warrant (instead
of 1.0 Convertible Debenture Unit per CD Special Warrant). Until the Receipt and Registration have been obtained, securities issued
in connection with the Offering (including any underlying securities issued upon conversion or exercise thereof) will be subject
to a 6-month hold period from the date of issue. Since the CD Special Warrants were exchanged for Convertible Debenture Units
after 6 months as U.S. and Canadian registrations were not effective at that time, the holders received 1.05 Convertible Debenture
Units per CD Special Warrant.
The
brokered portion of the Offering (CDN $2.5 million, $1.9 million USD) was completed by a syndicate of agents (collectively, the
“Agents”). The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the brokered
portion of the Offering. As additional consideration, the Company issued the Agents such number of non-transferable broker convertible
debenture special warrants (the “Broker CD Special Warrants”) as is equal to 7.0% of the number of CD Special Warrants
sold under the brokered portion of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD
Special Warrants, into broker warrants of the Company (the “Broker Warrants”). Each Broker Warrant entitles the holder
to acquire one Convertible Debenture Unit at an exercise price of CDN $1,000, until the date that is 24 months from the closing
date of the Offering. The distribution of the Broker Warrants issuable upon the exchange of the Broker CD Special Warrants shall
also be qualified under the Qualification Prospectus and the resale of the common shares underlying the Broker Warrants will be
registered under the Registration Statement. The Company also paid the lead agent a commission noted above of CDN$157,290, corporate
finance fee equal to CDN $50,000 in cash and as to $50,000 in common shares of the Company at a price per share of CDN $3.00 plus
additional expenses of CDN$20,000. In addition, the Company paid the trustees legal fees of CDN$181,365. In total the Company
approx. USD $0.32 million in fees and expenses associated with the offering.
The
issuance of the securities was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as
amended (the “Securities Act”), for the offer and sale of securities not involving a public offering, Regulation D
promulgated under the Securities Act, Regulation S, in Canada to “accredited investors” within the meaning of National
Instrument 45106 and other exempt purchasers in each province of Canada, except Quebec, and/or outside Canada and the United States
on a basis which does not require the qualification or registration. The securities being offered have not been registered under
the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent
registration or an applicable exemption from the registration requirements.
The
Convertible Debenture features contain the following embedded derivatives:
|
●
|
Conversion
Option - The Convertible Debentures provide the holder the right to convert all or any portion of the outstanding principal
into common shares of the Company at a conversion price of C$3.00 such that 333.33 common shares are issued for each C$1,000
of principal of Convertible Debentures converted.
|
|
●
|
Contingent
Put - Upon an Event of Default, the Convertible Debentures settle for cash at the outstanding principal and interest amount
(at discretion of the Indenture Trustee or upon request of Holders of 25% or more of principal of the Convertible Debentures).
|
|
●
|
Contingent
Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding amount and principal and interest
* 105% (where Holder accepts a Change of Control Offer).
|
The
conversion option, the contingent put feature upon an Event of Default, and the contingent put feature upon a Change in Control
should be bifurcated and recognized collectively as a compound embedded derivative at fair value at inception and at each quarterly
reporting period.
A
five percent penalty assessed for failure to timely file a registration statement to register the stock underlying the CD special
warrants.
The
Company valued the warrants granted using the Black-Scholes pricing model and determined that the value at grant date was approximately
$424,000 USD (this includes the warrants issued as part of the penalty for failure to timely file the required registration statement
under the indenture agreement). The significant assumptions used in the valuation are as follows:
Fair value
of underlying common shares
|
|
$
|
1.78
to 2.10
|
|
Exercise
price (converted to USD)
|
|
$
|
2.925
|
|
Dividend
yield
|
|
|
-
|
|
Historical
volatility
|
|
|
85
|
%
|
Risk
free interest rate
|
|
|
1.40
to 1.90
|
%
|
The
warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not
meet the scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance
with the guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in
fair value recognized in earnings each reporting period.
The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Canaccord convertible
notes and the subsequent fair value measurement during the year ended September 30, 2019 in USD, (in thousands):
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
Balance
at September 30, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance
of warrants in connection with convertible notes
|
|
|
424
|
|
|
|
-
|
|
Embedded
derivative in connection with convertible notes
|
|
|
-
|
|
|
|
1,169
|
|
Change
in fair value
|
|
|
(382
|
)
|
|
|
(1,011
|
)
|
Balance
at September 30, 2019
|
|
$
|
42
|
|
|
$
|
158
|
|
The
table below shows the net amount of convertible notes as of September 30, 2019 in USD (in thousands):
|
|
September
30, 2019
|
|
Principal
value of 8%, convertible at $2.27 at September 30, 2019, due December 27, 2020
|
|
|
|
including
penalty provision of $0.155 million
|
|
$
|
3,205
|
|
Fair
value of bifurcated contingent put option of convertible debenture
|
|
|
158
|
|
Debt
discount
|
|
|
(1,350
|
)
|
Cumulative
foreign currency impact
|
|
|
33
|
|
Carrying
value of convertible notes
|
|
$
|
2,046
|
|
Total
long-term carrying value of convertible notes and associated derivative liability
|
|
$
|
2,046
|
|
13.
Fair Value Measurements
In
accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding
warrants and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value
of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair
value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable
inputs. An explanation of each level in the hierarchy is described below:
Level
1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement
date
Level
2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level
3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
The
following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy
as of September 30, 2019 (in thousands):
|
|
Fair
value measured at September 30, 2019
|
|
|
|
|
|
|
Quoted
prices in active
|
|
|
Significant
other
|
|
|
Significant unobservable
|
|
|
|
Fair
value at
|
|
|
markets
|
|
|
observable
inputs
|
|
|
inputs
|
|
|
|
September
30, 2019
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Warrant
liability
|
|
$
|
283
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
283
|
|
Embedded
derivative liability
|
|
|
158
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158
|
|
Total
fair value
|
|
$
|
441
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
441
|
|
There
were no transfers between Level 1, 2 or 3 during the years ended September 30, 2019.
The
following table presents changes in Level 3 liabilities measured at fair value for the year ended September 30, 2019. Both observable
and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3
category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that
were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long- dated volatilities) inputs (in thousands).
|
|
|
|
|
Embedded
|
|
|
|
|
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
|
Total
|
|
Balance
– October 1, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrants
granted for stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change
in fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
– September 30, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrants
granted for stock-based compensation
|
|
|
893
|
|
|
|
-
|
|
|
|
893
|
|
Warrants
granted associated with convertible notes
|
|
|
599
|
|
|
|
-
|
|
|
|
599
|
|
Issuance
of convertible notes
|
|
|
-
|
|
|
|
1,169
|
|
|
|
1,169
|
|
Change
in fair value
|
|
|
(1,209
|
)
|
|
|
(1,011
|
)
|
|
|
(2,220
|
)
|
Balance
– September 30, 2019
|
|
$
|
283
|
|
|
$
|
158
|
|
|
$
|
441
|
|
A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of September
30, 2019 is as follows:
|
|
Warrant
Liability
|
|
|
|
As
of
September 30, 2019
|
|
|
As
of
September 30, 2018
|
|
Strike
price
|
|
$
|
2.97
|
|
|
$
|
2.40
|
|
Contractual
term (years)
|
|
|
1.6
|
|
|
|
1.7
|
|
Volatility
(annual)
|
|
|
104
|
%
|
|
|
111
|
%
|
Risk-free
rate
|
|
|
2
|
%
|
|
|
3
|
%
|
Dividend yield
(per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
Embedded
|
|
|
|
Derivative
Liability
|
|
|
|
As
of
September 30, 2019
|
|
Strike
price
|
|
$
|
0.80
|
|
Contractual
term (years)
|
|
|
1.2
|
|
Volatility
(annual)
|
|
|
85
|
%
|
Risk-free
rate
|
|
|
2
|
%
|
Dividend yield
(per share)
|
|
|
0
|
%
|
Credit
spread
|
|
|
11.12
|
%
|
The
Company used a lattice based trinomial model developed by Tsiveriotis, K. and Fernades in which the three lattices incorporate
(1) the Company’s underlying common stock price; (2) the value of the debt components of the convertible notes; and (3)
the value of the equity component of the convertible notes. The main drivers of sensitivity for the model are volatility and the
credit spread. The model used will vary by approximately 1.5% for a 4% change in volatility and will vary by less than 1% for
each 1% change in credit spread.
14.
Income Taxes
The
income tax expense (benefit) consisted of the following for the fiscal year ended September 30, 2019 and 2018:
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Total
current
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The
following is a reconciliation of the expected statutory federal income tax provision to the actual income tax benefit for the
fiscal year ended September 30, 2019 and 2018:
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
Federal
statutory rate
|
|
$
|
(7,246
|
)
|
|
$
|
(2,115
|
)
|
Permanent
timing differences
|
|
|
(427
|
)
|
|
|
-
|
|
Effect
of change in US Tax rates for deferral items
|
|
|
-
|
|
|
|
989
|
|
Other
|
|
|
-
|
|
|
|
44
|
|
Change
in valuation allowance
|
|
|
7,673
|
|
|
|
1,082
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the year ended September 2018, the expected tax benefit is calculated at the 2018 statutory rate of 34%. The effect for temporary
timing differences are also calculated at the 21% statutory rate effective for fiscal year ended September 30, 2019. Long-term
temporary differences are calculated at the 25% statutory rate effective for years ending on or after December 31, 2019.
For
the year ended September 30, 2019, the expected tax benefit, temporary timing differences and long-term timing differences are
calculated at the 25% statutory rate.
Significant
components of the Company’s deferred tax assets and liabilities were as follows for the fiscal year ended September 30,
2019 and 2018:
|
|
September
30,
2019
|
|
|
September
30,
2018
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
4,483
|
|
|
$
|
2,212
|
|
Equity
based compensation
|
|
|
3,154
|
|
|
|
408
|
|
Impairment
of loan receivable
|
|
|
75
|
|
|
|
75
|
|
Impairment
of investments and other property
|
|
|
2,468
|
|
|
|
-
|
|
Total
deferred tax assets
|
|
|
10,180
|
|
|
|
2,695
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
669
|
|
|
|
857
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
-
|
|
Total
deferred tax liabilities
|
|
|
669
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
9,511
|
|
|
|
1,838
|
|
Less
valuation allowance
|
|
|
(9,511
|
)
|
|
|
(1,838
|
)
|
Net
deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
At
September 30, 2019, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$17.9 million. The federal and state net operating loss carryforwards will expire beginning in 2036.
During
the fiscal year ended September 30, 2019 and 2018, the Company recognized no amounts related to tax interest or penalties related
to uncertain tax positions. The Company is subject to taxation in the United States and various state jurisdictions. The Company
currently has no years under examination by any jurisdiction.
15.
Shareholders’ Equity
In
2016, the Company adopted a plan to allow the Company to compensate prospective and current employees, directors and consultants
through the issuance of equity instruments of the Company. The plan has an effective life of 10 years. The plan is administered
by the board of directors of the Company until such time as the board transfers responsibility to a committee of the board. The
plan is limited to issuing common shares of the Company up to 15% of the total shares then outstanding. No limitations exist on
any other instruments issuable under the plan. In the event of a change in control of the Company, all unvested instruments issued
under the plan become immediately vested.
Preferred
shares
The
Company has two series of preferred shares designated with no preferred shares issued and outstanding as of September 30, 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.
During
the year ended September 30, 2019, the Company issued 51,418 shares of its common stock related to a stock purchase agreement
for cash of approximately $35,000.
During
the year ended September 30, 2019, the Company converted $2,575,000 of its convertible debt in exchange for 1,430,556 shares of
the company’s common stock. The Company recorded an inducement cost of approximately $0.973 million.
During
the year ended September 30, 2019, as part of the fees associated with the Canaccord offering, the Company issued the lead broker
16,666 shares of its common stock with a fair value of approximately $35,000 or $2.10 per share.
During
the year ended September 30, 2019, the Company issued 18,900 shares of its common stock related to an employee separation agreement
with a fair value of approximately $18,000 or $0.97 per share.
Common
stock issuances to acquire entities, interests in investees and joint ventures:
Yerba
Buena
On
June 24, 2019, the Company closed its acquisition of Yerba. During the fiscal year ended September 30, 2019, the Company issued
the following shares (see Note 8) (in thousands except share and per share amounts):
|
|
Shares
Issued
|
|
|
Closing
Stock
Price - June 24
|
|
|
Fair
Value
|
|
Interim
Closing Date
|
|
|
1,019,730
|
|
|
$
|
1.40
|
|
|
$
|
1,428
|
|
June
30, 2019
|
|
|
1,472,536
|
|
|
$
|
1.40
|
|
|
$
|
2,061
|
|
Total
|
|
|
2,492,266
|
|
|
|
|
|
|
$
|
3,489
|
|
YMY
In
November 2018, the Company issued 187,500 shares of its common stock, with a fair value of $487,500, to acquire an option from
the investors in YMY Ventures, LLC and NVD RE 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 for a combined purchase price of $12 million. The Company impaired the option ($0.45 million was included as intangible
and is included in the line item impairment of intangible assets on the statement of operations) as it determined that the option
was worthless as of September 30, 2019.
South
African Ventures, Inc.
On
March 22, 2019, the Company entered into a definitive agreement to acquire South African Ventures, Inc. The Company issued 8,250,000
shares of its common stock with a fair value of $14.0 million or $1.70 per share, the closing price of the Company’s common
stock on March 22, 2019.
Western
Coast Ventures, Inc.
On
March 29, 2019 the company entered into a definitive agreement to acquire Western Coast Ventures, Inc. The Company issued 2,500,000
shares of its common stock, with a fair value of approximately $4.4 million or $1.47 per share, the Company’s closing stock
price on March 29, 2019.
Consolidated
Ventures of Oregon, LLC (“CVO”) and Opco Holdings, LLC (“Opco”)
In
August 2016, the Company and certain shareholders of the Company entered into a “Multi Party” Agreement, in which
the Company became obligated to lease or acquire three separate real estate assets, and separately, if certain events occur, additional
real estate assets held by entities related to those shareholders. The Agreement also gives the Company the right of first refusal
in regard to certain properties owned by the persons and entities affiliated with the parties of the Agreement so long as certain
targets are met. In the quarter ended June 30, 2019, the Company issued 12,500,000 shares of its common stock (shares are held
in escrow) as it is currently attempting to acquire the set of entities that include Consolidated Ventures of Oregon, LLC (“CVO”)
and Opco Holdings, LLC (“Opco”) which comprise the entities within the Multi Party Agreement. In addition, the Company
is also currently negotiation with the owners of certain properties contained within the Multi Party Agreement. The Company and
owners of CVO and Opco have finalized their agreements, and are waiting for regulatory approval to transfer certain licenses,
which has not yet occurred as of the date of this filing, or the date of these consolidated financial statements, however, the
Company does believe it will complete the acquisition in the current calendar year. Should the acquisition be completed, the Company
will no longer be engaged primarily in property rental operations, but will take over the operations of its primary renters, which
is the cultivation, production and sale of cannabis and related productions. Because CVO and Opco are related to the Company,
should the acquisition occur, it will not be accounted for as a business combination at fair value under the codification sections
of ASC 805. The assets and liabilities will transfer at their historical cost and the company will include the operations of CVO
and Opco for all periods presented and the rental revenue recorded by the Company will eliminate in full with the rental expense
recorded by CVO and Opco. The Company has therefore recorded the par value of the shares issued of $12,500 as of September 30,
2019.
Purchase
of Buildings with Common Stock
On
July 10, 2019, the Company entered into an asset purchase agreement with an Oregon limited liability company which owns title
to Real property (buildings) located at 399 and 451 Wallis Street, Eugene, Or 97402 for a total purchase price tendered in kind
for approximately 6,322,058 shares of the Company’s common stock. The Company acquired the property from a related party,
and recorded the building and improvements at their carrying value of approximately $2.99 million. Included in the shares above
were 457,191 shares which were issued because the Company determined that certain milestones were met contained within the Multi-Party
Agreement. Those shares were valued at approximately $0.973 million and were recorded to impairment of property and equipment
within the statement of operations.
Purchase
of Land with Common Stock
On
July 10, 2019, the Company entered into an asset purchase agreement with a Oregon limited liability company which owns title to
Real property (land) located at 12590 Highway 238, Jacksonville, Or 97503 for a total purchase price tendered in kind for 1,233,665
shares of the Company’s common stock. The Company acquired the property from a related party, and recorded the land at its
carrying value of approximately $1.2 million.
2018
Private placements
The
Company received subscriptions in private placement offerings completed for the following shares for the year ended September
30, 2018:
●
|
For
the year ended September 30, 2018, 2,688,834 common shares were issued at $2.40 per share to unaffiliated investors raising
gross cash proceeds (including collection of $100,000 subscription receivable from September 30, 2017) of approximately $6.6
million.
|
|
|
●
|
During
the year ended September 30, 2018, the Company began the process of registering shares of common stock for trading under the
securities laws of Canada. As part of that process, certain founders were notified that they had to contribute additional
amounts for their shares. In the twelve months ended September 30, 2018, two founders contributed an additional $9,933 towards
their founders’ shares as part of the requirements of the securities regulators of Canada.
|
On
September 20, 2018, the Company issued 12,500 shares of its common stock in connection with a legal settlement for a fair value
of $25,000 or $2.00 per share.
16.
Stock Based Compensation
Stock
Options
The
fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of
the awards was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend
yield is 0%. The expected term for stock options granted with service conditions represents the average period the stock options
are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities
and Exchange Commission’s Staff Accounting Bulletin for “plain vanilla” options for options granted in 2019.
The expected term for stock options granted with performance and/or market conditions represents the period estimated by management
by which the performance conditions will be met. The Company obtained the risk-free interest rate from publicly available data
published by the Federal Reserve. The Company uses a methodology in estimating its volatility percentage from a computation that
was based on a comparison of average volatility rates of similar companies to a computation based on the standard deviation of
the Company’s own underlying stock price’s daily logarithmic returns. The fair value of options granted during the
years ended September 30, 2019 and 2018 were estimated using the following weighted-average assumptions:
Employee
Options:
|
|
For
the Years Ended
|
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
Exercise
price (Average)
|
|
$
|
1.28
|
|
|
$
|
2.40
|
|
Expected
term (years)
|
|
|
1.4
|
|
|
|
1.6
|
|
Expected
stock price volatility
|
|
|
104
|
%
|
|
|
119
|
%
|
Risk-free
rate of interest
|
|
|
2
|
%
|
|
|
2
|
%
|
Expected
dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Non-employee
Options:
|
|
For
the Years Ended
|
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
Exercise
price (Average)
|
|
$
|
1.95
|
|
|
$
|
2.91
|
|
Contractual
term (years)
|
|
|
3.7
|
|
|
|
4.3
|
|
Expected
stock price volatility
|
|
|
118
|
%
|
|
|
127
|
%
|
Risk-free
rate of interest
|
|
|
3
|
%
|
|
|
3
|
%
|
Expected
dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
In
August 2019, the board of directors of the Company agreed to compensate executives and consultants who’s previously issued
2018 options had become significantly underwater. The board authorized that 2,757,002 shares be issued to the holders of 2,105,000
options previously granted with an exercise price of $2.40 per share. The Company has treated this as essentially an exercise
of these options with a zero exercise price and recorded additional compensation as a result of $2.481 million which is included
in stock based compensation.
A
summary of option activity under the Company’s employee stock option plan for years ended September 30, 2019 and 2018 are
presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Total
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Outstanding
as of October 1, 2017
|
|
|
250,000
|
|
|
$
|
2.40
|
|
|
$
|
-
|
|
|
|
8.9
|
|
Granted
|
|
|
1,660,416
|
|
|
|
2.40
|
|
|
|
-
|
|
|
|
9.4
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
2.40
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(10,000
|
)
|
|
|
2.40
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
as of September 30, 2018
|
|
|
1,890,416
|
|
|
|
2.40
|
|
|
|
-
|
|
|
|
2.7
|
|
Granted
|
|
|
185,000
|
|
|
|
1.28
|
|
|
|
-
|
|
|
|
2.6
|
|
Exercised
|
|
|
(1,805,000
|
)
|
|
|
2.40
|
|
|
|
-
|
|
|
|
2.3
|
|
Outstanding
as of September 30, 2019
|
|
|
270,416
|
|
|
$
|
2.30
|
|
|
$
|
-
|
|
|
|
1.8
|
|
Options
vested and exercisable
|
|
|
260,416
|
|
|
$
|
2.30
|
|
|
$
|
-
|
|
|
|
1.8
|
|
A
summary of the activity of options that the Company granted to non-employees for the year ended September 30, 2019 and 2018 are
presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Total
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Outstanding
as of October 1, 2017
|
|
|
400,000
|
|
|
$
|
2.40
|
|
|
$
|
-
|
|
|
|
3.3
|
|
Granted
|
|
|
785,000
|
|
|
|
2.91
|
|
|
|
-
|
|
|
|
3.9
|
|
Exercised
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
as of September 30, 2018
|
|
|
1,035,000
|
|
|
|
2.79
|
|
|
$
|
-
|
|
|
|
3.6
|
|
Granted
|
|
|
100,000
|
|
|
|
1.95
|
|
|
|
-
|
|
|
|
2.9
|
|
Exercised
|
|
|
(300,000
|
)
|
|
|
2.40
|
|
|
$
|
-
|
|
|
|
|
|
Outstanding
as of September 30, 2019
|
|
|
835,000
|
|
|
$
|
2.71
|
|
|
$
|
-
|
|
|
|
2.6
|
|
Options
vested and exercisable
|
|
|
835,000
|
|
|
$
|
2.71
|
|
|
$
|
-
|
|
|
|
2.6
|
|
Estimated
future stock-based compensation expense relating to unvested stock options was nominal as of September 30, 2019 and approximately
$0.6 million as of September 30, 2018. Weighted average remaining contractual life of the options is 2.1 years.
Restricted
Stock
A
summary of employee restricted stock activity for years ended September 30, 2019 and 2018 are presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
as of October 1, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Granted
(1)
|
|
|
2,217,490
|
|
|
|
1.65
|
|
Outstanding
as of September 30, 2019
|
|
|
2,217,490
|
|
|
|
1.65
|
|
A
summary of non-employee restricted stock activity under the Company’s for years ended September 30, 2019 and 2018 are presented
below:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
as of October 1, 2017
|
|
|
50,000
|
|
|
$
|
2.40
|
|
Granted
|
|
|
460,000
|
|
|
|
2.33
|
|
Forfeited/expired
|
|
|
(150,000
|
)
|
|
|
2.40
|
|
Outstanding
as of September 30, 2018
|
|
|
360,000
|
|
|
|
2.32
|
|
Granted
(1)
|
|
|
2,086,262
|
|
|
|
1.62
|
|
Outstanding
as of September 30, 2019
|
|
|
2,446,262
|
|
|
$
|
1.73
|
|
|
(1)
|
Tables
above do not include the share grant as a result of the option repricing above.
|
Warrants
A
summary of the status of the Company’s outstanding warrants as of September 30, 2019 and 2018 and changes during the year
then ended are presented below:
|
|
Number
of
|
|
|
Weighted
Average
Exercise
|
|
|
Remaining
Contractual
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Term
|
|
Outstanding
as of October 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Warrants
granted – equity
|
|
|
155,966
|
|
|
|
2.47
|
|
|
|
2.5
|
|
Warrants
granted – liability
|
|
|
20,000
|
|
|
|
2.40
|
|
|
|
1.8
|
|
Outstanding
as of September 30, 2018
|
|
|
175,966
|
|
|
|
2.46
|
|
|
|
2.4
|
|
Warrants
granted – consultants (liability)
|
|
|
1,350,000
|
|
|
|
2.98
|
|
|
|
1.7
|
|
Warrants
granted – Canaccord (liability)
|
|
|
715,954
|
|
|
|
2.95
|
|
|
|
1.3
|
|
Outstanding
as of September 30, 2019
|
|
|
2,241,920
|
|
|
$
|
2.92
|
|
|
|
1.6
|
|
Stock-based
Compensation Expense
Stock-based
compensation expense for the years ended September 30, 2019 and 2018 was comprised of the following (in thousands):
|
|
Years
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Restricted
stock awards
|
|
$
|
7,102
|
|
|
$
|
2,664
|
|
Stock
options
|
|
|
3,080
|
|
|
|
3,013
|
|
Warrants
(liability)
|
|
|
893
|
|
|
|
-
|
|
Total
stock-based compensation
|
|
$
|
11,075
|
|
|
$
|
5,677
|
|
Change
of Accounting Principle - Prepaid Stock-based Compensation
In
the fourth quarter of 2019, the Company changed its policy for recognizing prepaid fully vested non-employee stock-based compensation.
Historically, the Company would initially record a prepaid asset based upon the fair value of the award on the grant date and
subsequently amortize the associated cost of this award over an implicit service period. Effective with the change in accounting
principle, the Company will expense all fully vested employee and non-employee stock-based compensation on the grant date as there
is no substantive future service period on the grant date. This change in resulted in a decrease in prepaid stock-based compensation
of approximately $1.3 million and an increase in stock-based compensation expense of $1.3 million in the year ended September
30, 2019 at the time of the change. This change in accounting method was applied retrospectively, and this change resulted in
an adjustment to increase stock-based compensation of approximately $0.84 million for the year ended September 30, 2018. This
change increased the loss per share by $0.10 from $0.95 loss per share as originally reported to $1.05 per share for the year
ended September 30, 2018 in these financial statements.
17.
Commitments and contingencies
As
noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States
Federal Government. This raises several possible issues which may impact the Company’s overall operations, not the least
of which are related to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level,
and most traditional banks are federally insured, those financial institutions will not service cannabis businesses. In states
where medical or recreational marijuana is legal, dispensary owners, manufacturers, and anybody who “touches the plant,”
continue to face a host of operational hurdles. While local, state-chartered banks and credit unions now accept cannabis commerce,
there remains a reluctance by traditional banks to do business with them. Aside from a huge inconvenience and the need to find
creative ways to manage financial flow, payroll logistics, and payment of taxes, this also poses tremendous risks to controls
as a result of operating a lucrative business in cash. This lack of access to traditional banking may inhibit industry growth.
In the period ended September 30, 2019, the Company’s accounts with a major money center bank were closed as the bank would
not allow the Company to continue to use its banking network.
Despite
the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these
risks will have a substantive impact on its planned operations in the near term.
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 starting base rental fee of $7,033 plus an additional estimated $315 per month in real
estate taxes in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate
taxes), maintenance and utilities are included at the end of each year as a one-time payment. In addition, the Company also remitted
$14,000 for a security deposit to the landlord. No amounts have been recorded for deferred rent in these financial statements
as the amount was deemed immaterial by the Company. The Company has subleased this space pursuant to a 10-year lease. On February
22, 2018, both parties executed a lease addendum that adds contiguous property for 12,322 square feet. The term commences November
1, 2017 and continues through November 31, 2026 at a starting rate of $3,525 a month that escalates after the first year. The
Company subleases this property to a related party (see disclosures below under “Springfield Suites”). As of September
30, 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. This space is currently being sub-leased for the reminder of its term.
The Company expects to receive approximately $0.165 million over the term of the lease in subrentals.
In
September 2019, the Company entered into a 4-year lease for the occupancy of the Company’s new corporate office located
in Boca Raton, Florida. The lease requires the Company to pay a starting base rental fee of $4,285 per month with yearly increases
thereafter.
In
January 2019, the Company entered into a 5-year lease for the occupancy of real estate and a building located in Hillsboro, Oregon.
The lease requires the Company to pay a starting base rental fee of $9,696 per month with yearly increases thereafter.
The
following table shows the expected net rental payments for the following five years under the leases noted above as of September
30:
Year
Ended September 30, 2020
|
|
$
|
293,550
|
|
Year Ended
September 30, 2021
|
|
|
274,237
|
|
Year Ended
September 30, 2022
|
|
|
260,977
|
|
Year Ended
September 30, 2023
|
|
|
258,607
|
|
Thereafter
|
|
|
334,629
|
|
Total
|
|
$
|
1,422,000
|
|
As
of September 30, 2019, the Company has acquired interests in several entities more fully described in Note 5 and Note 6. As part
of those interests, the Company has commitments to fund the acquisition of licenses and permits to allow for the cultivation and
sale of cannabis and related products in the United States and Eswatini. As of September 30, 2019, Company estimates that its
investees will need up to approximately $2.5 million to complete the acquisition of licenses and permits, to fund the buildout
or expansion of facilities to fully operate in their respective cannabis markets, which will encompass several years of development.
The Company believes that on a short-term basis, it will need to fund the acquisition of licenses and farming permits in Eswatini
and that will require an estimated $2.0 million, should the Kingdom grant SAV’s licenses in the coming year.
Property
Rental Agreements
All
of the income leases below are to entities that are related to the Company through common ownership.
1027
Willamette
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 starting 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
In
July 2017, the Company entered into a lease agreement for its property and warehouse building located at 800 N 42nd street in
Springfield, Oregon. The lease agreement is for a term of ten years (see note below) and a starting 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
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 starting 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.
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
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 starting 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.
30300
SW Laurel Road
In
June 2019, the Company entered into a lease agreement for its acquired property located at 30300 SW Laurel Road Hillsboro, Oregon.
The lease agreement is for a term of five years and a starting monthly rent obligation of $10,036, subject to annual increases
of 12% per year. Maintenance, real property taxes and insurance is to be paid by the Tenant.
18.
Subsequent events
As
of October 3, 2019, the Company upgraded to OTCQX from the OTCQB® Venture Market.
As
of October 3, 2019 the Company appointed Ellen B. Deutsch as Executive Vice President and Chief Operating Officer. Ms. Deutsch
will oversee all the operations for driving revenue and efficiency across all of its various business segments including cultivation,
production, distribution and retail.
November
1, 2019, the Company received 100.0% interest in Empire Holdings, LLC (“EH”). EH leases its facilities to Kind Care,
LLC. The Company purchased the property for $500,000 less the lien amount of $105,732 paid in kind.
As
of November 12, 2019, the Company entered into a promissory note in the principal amount of $500,000 payable to Strategic Education
Loan Fund, LLC. The promissory is payable on the earlier to occur (i) the ninth month anniversary of the first advance under the
note; or (ii) the completion of an initial public offering by Payee (the maturity date). This note bears an interest rate of 1
percent per month.
In
January 2020, the Company entered into two promissory notes totaling $500,000 payable in full on the ninth month anniversary.
This note bears an interest rate of 1 percent per month.
As
of December 23, 2019 has entered into a stock purchase agreement with Attollo Capital Holdings A, LLC (the “Purchaser”)
pursuant to which Stem will issue 11,764,706 shares of preferred stock of the Company (the “Preferred Stock”) at a
purchase price of US$0.85 per share of Preferred Stock (the “Original Issue Price”) for gross proceeds to the Company
of approximately US$10,000,000 (the “Investment”). As of the date of this filing, the Company has not yet closed on
this transaction.
Pursuant
to the Definitive Agreement dated December 24, 2019, Stem will acquire all of the outstanding common shares of 7LV (the “7LV
Shares”) by way of a three-cornered amalgamation (the “Acquisition”). Upon the completion of the Acquisition,
7LV will become a wholly-owned subsidiary of Stem. As consideration for the 7LV Shares, the Company will pay the holders an aggregate
of 13,000,000 shares of common stock of Stem (“Stem Shares”). The acquisition is subject to a number of conditions,
including the receipt of all required shareholder, regulatory approvals and approval of the debenture holders of 7LV (“Debenture
holders”).
January
7, 2020, the Company, completed a joint venture with Community Growth Partners, Inc. (“CGP”), a vertically-integrated
cannabis company with provisional licensed operations in Massachusetts. The Massachusetts Cannabis Control Commission recently
awarded CGP three provisional cannabis licenses for cultivation, manufacturing and retail – making CGP one of the Commonwealth’s
first women- and minority-founded and owned businesses to become approved as a vertically-integrated cannabis operation. Stem
will acquire 49% of CGP’s common stock and will then provide a $2 million revolving line of credit for future expansion
into Massachusetts. The agreements are subject to approval of the Massachusetts Cannabis Control Commission and other local state
authorities.
19.
Correction of an Error
The
Company incorrectly included the losses of South African Ventures, Inc. within the losses of its non-controlling interests. The
Company wholly owns South African Ventures, Inc. and the losses associated with the other than temporary investment in Stempro
International, Inc. were correctly included as part of equity method losses. The tables below show the corrected amounts on the
balance sheet and statement of operations:
|
|
As Originally Filed
|
|
|
Correction
|
|
|
As Amended
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Common stock
|
|
|
52
|
|
|
|
-
|
|
|
|
52
|
|
Additional paid-in capital
|
|
|
61,202
|
|
|
|
-
|
|
|
|
61,202
|
|
Accumulated deficit
|
|
|
(37,082
|
)
|
|
|
(3,302
|
)
|
|
|
(40,384
|
)
|
Total Stem Holdings stockholder equity
|
|
|
24.172
|
|
|
|
(3,302
|
)
|
|
|
20,870
|
|
Non-controlling interest
|
|
|
(578
|
)
|
|
|
3,302
|
|
|
|
2,724
|
|
Total stockholders’ equity
|
|
$
|
23,594
|
|
|
$
|
-
|
|
|
$
|
23,594
|
|
|
|
As Originally Filed
|
|
|
Correction
|
|
|
As Amended
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(28,985
|
)
|
|
$
|
-
|
|
|
$
|
(28,985
|
)
|
Net loss attributable to non-controlling interest
|
|
|
3,693
|
|
|
|
(3,302
|
)
|
|
|
391
|
|
Net loss attributable to Stem Holdings, Inc.
|
|
|
(25,292
|
)
|
|
|
(3,302
|
)
|
|
|
(28,594
|
)
|
Net loss per share, basic and diluted
|
|
|
(0.90
|
)
|
|
|
-
|
|
|
|
(1.01
|
)
|
Quarters ended March 31, 2020 and March
31, 2019 (unaudited)
STEM
HOLDINGS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands except for share and per share amounts)
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019*
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,848
|
|
|
$
|
3,339
|
|
Accounts receivable
|
|
|
548
|
|
|
|
427
|
|
Note receivable
|
|
|
750
|
|
|
|
|
|
Inventory
|
|
|
955
|
|
|
|
611
|
|
Prepaid expenses and other current assets
|
|
|
456
|
|
|
|
491
|
|
Total current assets
|
|
|
4,557
|
|
|
|
4,868
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
14,697
|
|
|
|
14,706
|
|
Investment in equity method investees
|
|
|
287
|
|
|
|
1,771
|
|
Investments in affiliates
|
|
|
1,828
|
|
|
|
1,827
|
|
Deposits and other assets
|
|
|
50
|
|
|
|
47
|
|
Intangible assets
|
|
|
10,533
|
|
|
|
6,316
|
|
Goodwill
|
|
|
11,613
|
|
|
|
1,070
|
|
Due from related party
|
|
|
891
|
|
|
|
492
|
|
Total assets
|
|
|
44,456
|
|
|
$
|
31,097
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
2,693
|
|
|
$
|
1,082
|
|
Convertible notes, net
|
|
|
5,629
|
|
|
|
1,888
|
|
Short term notes and advances
|
|
|
2,545
|
|
|
|
3,384
|
|
Acquisition notes payable
|
|
|
708
|
|
|
|
708
|
|
Due to related party
|
|
|
490
|
|
|
|
-
|
|
Derivative liability
|
|
|
16
|
|
|
|
158
|
|
Warrant liability
|
|
|
1,417
|
|
|
|
283
|
|
Total current liabilities
|
|
|
13,498
|
|
|
|
7,503
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, mortgages
|
|
|
3,085
|
|
|
|
-
|
|
Total liabilities
|
|
|
16,583
|
|
|
|
7,503
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, Series A; $0.001 par value; 50,000,000 shares authorized, none outstanding as of December 31, 2019 and September 30, 2019
|
|
|
-
|
|
|
|
-
|
|
Preferred stock, Series B; $0.001 par value; 50,000,000 shares authorized, none outstanding as of December 31, 2019 and September 30, 2019
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value;
300,000,000 shares authorized; 66,211,741 and 52,254,941 shares issued, issuable
and outstanding as of December 31, 2019 and September 30, 2019, respectively
|
|
|
66
|
|
|
|
52
|
|
Additional paid-in capital
|
|
|
73,554
|
|
|
|
61,202
|
|
Accumulated deficit
|
|
|
(48,126
|
)
|
|
|
(40,384
|
)
|
Total Stem Holdings stockholder’s equity
|
|
|
25,494
|
|
|
|
20,870
|
|
Noncontrolling interest
|
|
|
2,379
|
|
|
|
2,724
|
|
Total shareholders’ equity
|
|
|
27,873
|
|
|
|
23,594
|
|
Total liabilities and shareholders’ equity
|
|
$
|
44,456
|
|
|
$
|
31,097
|
|
*
Derived from audited information
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
STEM
HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands except for share and per share amounts)
|
|
For the Three Ended March
31,
|
|
|
For the Six Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Total Revenue
|
|
$
|
2,298
|
|
|
$
|
354
|
|
|
$
|
3,619
|
|
|
$
|
692
|
|
COGS
|
|
$
|
1,573
|
|
|
|
-
|
|
|
|
2,642
|
|
|
|
-
|
|
Gross Profit
|
|
|
725
|
|
|
|
354
|
|
|
|
977
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
|
1,398
|
|
|
|
1,137
|
|
|
|
1,907
|
|
|
|
2,240
|
|
Professional fees
|
|
|
884
|
|
|
|
409
|
|
|
|
1,523
|
|
|
|
851
|
|
General and administration
|
|
|
2,068
|
|
|
|
1,202
|
|
|
|
4,058
|
|
|
|
2,780
|
|
Total operating expenses
|
|
|
4,350
|
|
|
|
2,748
|
|
|
|
7,488
|
|
|
|
5,871
|
|
Loss from operations
|
|
|
(3,625
|
)
|
|
|
(2,394
|
)
|
|
|
(6,511
|
)
|
|
|
(5,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(863
|
)
|
|
|
(241
|
)
|
|
|
(1,271
|
)
|
|
|
(799
|
)
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Inducement cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(824
|
)
|
Change in fair value of derivative liability
|
|
|
121
|
|
|
|
-
|
|
|
|
142
|
|
|
|
-
|
|
Change in fair value of warrant liability
|
|
|
(254
|
)
|
|
|
-
|
|
|
|
(215
|
)
|
|
|
-
|
|
Foreign currency exchange gain
|
|
|
89
|
|
|
|
-
|
|
|
|
20
|
|
|
|
|
|
Total other income (expense)
|
|
|
(907
|
)
|
|
|
(241
|
)
|
|
|
(1,324
|
)
|
|
|
(1,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from equity method investees
|
|
|
(243
|
)
|
|
|
(158
|
)
|
|
|
(252
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,775
|
)
|
|
|
(2,793
|
)
|
|
$
|
(8,087
|
)
|
|
$
|
(6,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
(110
|
)
|
|
|
-
|
|
|
$
|
(345
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Stem Holdings
|
|
$
|
(4,665
|
)
|
|
$
|
(2,793
|
)
|
|
$
|
(7,742
|
)
|
|
$
|
(6,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.47
|
)
|
Weighted-average shares outstanding, basic and diluted
|
|
|
57,224,658
|
|
|
|
15,398,732
|
|
|
|
54,920,125
|
|
|
|
14,656,989
|
|
The accompanying
notes are an integral part of these unaudited condensed consolidated financial statements
STEM
HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT
OF
CHANGES IN STOCKHOLDERS’ EQUITY
(in
thousands, except for share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stem
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Holdings
Shareholders’
|
|
|
Non-Controlling
|
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
Balance as of September 30, 2019
|
|
|
52,254,941
|
|
|
$
|
52
|
|
|
$
|
61,202
|
|
|
$
|
(40,384
|
)
|
|
$
|
20,870
|
|
|
$
|
2,724
|
|
|
$
|
23,594
|
|
Issuance of common stock in connection with consulting agreement
|
|
|
5,000
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Issuance of common stock in connection with asset acquisitions
|
|
|
394,270
|
|
|
|
-
|
|
|
|
394
|
|
|
|
-
|
|
|
|
394
|
|
|
|
-
|
|
|
|
394
|
|
Stock based compensation
|
|
|
100,000
|
|
|
|
1
|
|
|
|
497
|
|
|
|
-
|
|
|
|
498
|
|
|
|
-
|
|
|
|
498
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,077
|
)
|
|
|
(3,077
|
)
|
|
|
(235
|
)
|
|
|
(3,312
|
)
|
Balance as of December 31, 2019
|
|
|
52,754,211
|
|
|
$
|
53
|
|
|
$
|
62,097
|
|
|
$
|
(43,461
|
)
|
|
$
|
18,689
|
|
|
$
|
2,489
|
|
|
$
|
21,178
|
|
Issuance of common stock in connection with consulting agreement
|
|
|
970,416
|
|
|
|
1
|
|
|
|
1,548
|
|
|
|
|
|
|
|
1,549
|
|
|
|
-
|
|
|
|
1,549
|
|
Cancellation of common stock in connection with consulting agreement
|
|
|
(700,000
|
)
|
|
|
(1
|
)
|
|
|
(699
|
)
|
|
|
-
|
|
|
|
(700
|
)
|
|
|
-
|
|
|
|
(700
|
)
|
Issuance of common stock in connection with asset acquisitions
|
|
|
12,681,008
|
|
|
|
13
|
|
|
|
10,009
|
|
|
|
-
|
|
|
|
10,022
|
|
|
|
-
|
|
|
|
10,022
|
|
Stock based compensation
|
|
|
303,756
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
Issuance of common stock related to interest on convertible
notes
|
|
|
202,350
|
|
|
|
-
|
|
|
|
121
|
|
|
|
-
|
|
|
|
121
|
|
|
|
-
|
|
|
|
121
|
|
Derivatives
|
|
|
|
|
|
|
-
|
|
|
|
431
|
|
|
|
-
|
|
|
|
431
|
|
|
|
-
|
|
|
|
431
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,665
|
)
|
|
|
(4,665
|
)
|
|
$
|
(110
|
)
|
|
|
(4,775
|
)
|
Balance as of March 31, 2020
|
|
|
66,211,741
|
|
|
$
|
66
|
|
|
$
|
73,554
|
|
|
$
|
(48,126
|
)
|
|
$
|
25,494
|
|
|
$
|
2,379
|
|
|
$
|
27,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stem
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Holdings
Shareholders’
|
|
|
Non-Controlling
|
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
Balance
as of September 30, 2018
|
|
|
10,177,496
|
|
|
$
|
10
|
|
|
$
|
19,810
|
|
|
$
|
(11,533
|
)
|
|
$
|
8,287
|
|
|
$
|
-
|
|
|
$
|
8,287
|
|
Common stock issued
in connection with conversion of notes payable
|
|
|
1,430,556
|
|
|
|
1
|
|
|
|
2,574
|
|
|
|
-
|
|
|
|
2,575
|
|
|
|
-
|
|
|
|
2,575
|
|
Exercise of stock options
|
|
|
(15,662
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Yerba Buena acquisition
|
|
|
1,931,506
|
|
|
|
2
|
|
|
|
4,440
|
|
|
|
-
|
|
|
|
4,442
|
|
|
|
-
|
|
|
|
4,442
|
|
Asset Purchase Agreement
- 399 & 451 Wallis St and Applegate
|
|
|
457,191
|
|
|
|
1
|
|
|
|
978
|
|
|
|
-
|
|
|
|
979
|
|
|
|
-
|
|
|
|
979
|
|
Investment in YMY
|
|
|
187,500
|
|
|
|
-
|
|
|
|
450
|
|
|
|
-
|
|
|
|
450
|
|
|
|
-
|
|
|
|
450
|
|
Canaccord fee
|
|
|
16,666
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
35
|
|
Inducement cost to
convert convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
824
|
|
|
|
-
|
|
|
|
824
|
|
|
|
-
|
|
|
|
824
|
|
Debt discount for
warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
-
|
|
|
|
84
|
|
|
|
-
|
|
|
|
84
|
|
Issuance of Canaccord
warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
483
|
|
|
|
-
|
|
|
|
483
|
|
|
|
-
|
|
|
|
483
|
|
Stock based compensation
|
|
|
669,233
|
|
|
|
1
|
|
|
|
1,746
|
|
|
|
-
|
|
|
|
1,747
|
|
|
|
-
|
|
|
|
1,747
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,167
|
)
|
|
|
(4,167
|
)
|
|
|
-
|
|
|
|
(4,167
|
)
|
Balance as of December
31, 2018
|
|
|
14,854,486
|
|
|
$
|
15
|
|
|
$
|
31,424
|
|
|
$
|
(15,700
|
)
|
|
$
|
15,739
|
|
|
$
|
-
|
|
|
$
|
15,739
|
|
Stock based compensation
|
|
|
493,329
|
|
|
|
1
|
|
|
|
1,289
|
|
|
|
|
|
|
|
1,289
|
|
|
|
|
|
|
|
1,289
|
|
Common stock issued
for investment (South African Ventures)
|
|
|
8,250,000
|
|
|
|
8
|
|
|
|
14,017
|
|
|
|
|
|
|
|
14,025
|
|
|
|
|
|
|
|
14,025
|
|
Debt discount for
warrants
|
|
|
|
|
|
|
|
|
|
|
1,027
|
|
|
|
|
|
|
|
1,027
|
|
|
|
|
|
|
|
1,027
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,793
|
)
|
|
|
(2,793
|
)
|
|
|
|
|
|
|
(2,793
|
)
|
Balance
as of March 31, 2019
|
|
|
23,597,815
|
|
|
$
|
24
|
|
|
$
|
47,757
|
|
|
$
|
(18,493
|
)
|
|
$
|
29,287
|
|
|
|
|
|
|
$
|
29,287
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
STEM
HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
For the Six Months Ended
|
|
|
|
March
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,087
|
)
|
|
$
|
(6,960
|
)
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
1,907
|
|
|
|
3,036
|
|
Depreciation and amortization
|
|
|
1,027
|
|
|
|
457
|
|
Non-cash interest
|
|
|
432
|
|
|
|
591
|
|
Loss from equity method investees
|
|
|
252
|
|
|
|
824
|
|
Change in fair value of derivative
liability
|
|
|
73
|
|
|
|
-
|
|
Foreign currency translation
adjustment
|
|
|
(21
|
)
|
|
|
-
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
(94
|
)
|
|
|
-
|
|
Prepaid expenses and other current
assets
|
|
|
357
|
|
|
|
(106
|
)
|
Inventory
|
|
|
(213
|
)
|
|
|
-
|
|
Other assets
|
|
|
(3
|
)
|
|
|
-
|
|
Accounts payable and accrued
expenses
|
|
|
575
|
|
|
|
100
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
(649
|
)
|
Net cash used in operating activities
|
|
|
(3,795
|
)
|
|
|
(2,707
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(366
|
)
|
|
|
(755
|
)
|
Advances to related entities
|
|
|
(750
|
)
|
|
|
-
|
|
Return of cash for equity method
investees
|
|
|
231
|
|
|
|
(970
|
)
|
Cash acquired in acquisition,
net of cash transferred
|
|
|
81
|
|
|
|
4,757
|
|
Project costs
|
|
|
-
|
|
|
|
(27
|
)
|
Related party advances received
|
|
|
490
|
|
|
|
-
|
|
Related party advances made
|
|
|
(399
|
)
|
|
|
-
|
|
Investment in affiliates
|
|
|
-
|
|
|
|
(362
|
)
|
Net cash used in investing activities
|
|
|
(713
|
)
|
|
|
2,643
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from advance from NVDRE
|
|
|
-
|
|
|
|
300
|
|
Proceeds from Stem Ventures
funds
|
|
|
-
|
|
|
|
3,493
|
|
Proceeds from West Coast Venture
funds
|
|
|
-
|
|
|
|
1,999
|
|
Proceeds from notes payable
and advances
|
|
|
4,085
|
|
|
|
150
|
|
Proceeds from the convertible
notes, net of fees paid
|
|
|
-
|
|
|
|
2,357
|
|
Other
|
|
|
81
|
|
|
|
-
|
|
Cash paid from loan fees
|
|
|
-
|
|
|
|
(103
|
)
|
Repayments
of notes payable
|
|
|
(1,149
|
)
|
|
|
(236
|
)
|
Net cash (used in) provided by financing activities
|
|
|
3,017
|
|
|
|
7,960
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,491
|
)
|
|
|
7,896
|
|
Cash and cash equivalents
at the beginning of the period
|
|
|
3,339
|
|
|
|
761
|
|
Cash and cash equivalents
at the end of the period
|
|
$
|
1,848
|
|
|
$
|
8,657
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
288
|
|
|
$
|
119
|
|
Supplemental disclosure of noncash activities:
|
|
|
|
|
|
|
|
|
Financed insurance
|
|
$
|
310
|
|
|
$
|
266
|
|
Conversion of debt and
accrued interest to equity
|
|
$
|
121
|
|
|
$
|
2,575
|
|
Transfer of deposits to fixed
assets
|
|
$
|
-
|
|
|
$
|
41
|
|
Stock based compensation
posted to prepaid expense
|
|
$
|
-
|
|
|
$
|
1,625
|
|
Deposit YMY stock
|
|
$
|
-
|
|
|
$
|
450
|
|
Deposit Yerba Oregon stock
|
|
$
|
-
|
|
|
$
|
4,442
|
|
Stock acquisition of South
African Ventures
|
|
$
|
-
|
|
|
$
|
14,025
|
|
Debt discount from warrants
and beneficial conversion features
|
|
$
|
-
|
|
|
$
|
1,912
|
|
Projects costs paid in equity
|
|
$
|
-
|
|
|
$
|
978
|
|
Stock acquisition of Seven
LV
|
|
$
|
14,025
|
|
|
$
|
-
|
|
Building acquired from related
party with equity, net of lien acquired
|
|
$
|
394
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
STEM
HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Incorporation and Operations and Going Concern
Stem
Holdings, Inc. (“Stem” or the “Company”) is a Nevada corporation incorporated on June 7, 2016. The Company
is a multi-state, vertically integrated, cannabis company that purchases, improves, leases, operates and invests in properties
for use in the production, distribution and sales of cannabis and cannabis-infused products licensed under the laws of the states
of Oregon, Nevada, California and Oklahoma. As of March 31, 2020, Stem 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
partner consumer brands are award-winning and nationally known, and include: cultivators, TJ’s Gardens, Travis X James,
and Yerba Buena; retail brands, Stem and TJ’s; infused product manufacturers, Cannavore and Supernatural Honey; and a CBD
company, Dose-ology. As of March 31, 2020, the Company has acquired six commercial properties and leased a seventh property, located
in Oregon and Nevada, and has entered into leases to related entities for these properties (see Note 15). As of March 31, 2020,
the buildout of these properties to support cannabis related operations was either complete or near completion.
The
Company has incorporated six wholly-owned subsidiaries –Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem
Agri, LLC., Stem Group Oklahoma, Inc. and Stem Holdings Florida, Inc. Stem, through its subsidiaries, is currently in the process
of finalizing the investment in and acquisition of entities that engage directly in the production and sale of cannabis, thereby
transitioning from a real estate company, with a focus on cannabis industry tenants, to a vertically integrated, multi-state cannabis
operating company.
The
Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the symbol “STEM”
and the OTCQX under the symbol “STMH”.
Going
Concern
At
March 31, 2020, the Company had approximate balances of cash and cash equivalents of $1.8 million, negative working capital of
$8.9 million, total stockholders’ equity of $28 million and an accumulated deficit of $48 million.
These
unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that the Company
will be able to realize its assets and discharge its liabilities in the normal course of business.
While
the recreational use of cannabis is legal under the laws of certain States, where the Company has and is working towards further
finalizing the acquisition of entities or investment in entities that directly produce or sell cannabis, the use and possession
of cannabis is illegal under United States Federal law for any purpose, by way of Title II of the Comprehensive Drug Abuse Prevention
and Control Act of 1970, otherwise known as the Controlled Substances Act of 1970 (the “ACT”). Cannabis is currently
included under Schedule 1 of the Act, making it illegal to cultivate, sell or otherwise possess in the United States.
On
January 4, 2018, the office of the Attorney General published a memo regarding cannabis enforcement that rescinds directives promulgated
under former President Obama that eased federal enforcement. In a January 8, 2018 memo, Jefferson B. Sessions, then Attorney General
of the United States, indicated enforcement decisions will be left up to the U.S. Attorney’s in their respective states
clearly indicating that the burden is with “federal prosecutors deciding which cases to prosecute by weighing all relevant
considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent
effect of federal prosecution, and the cumulative impact of particular crimes on the community.” Subsequently, in April
2018, President Trump promised to support congressional efforts to protect states that have legalized the cultivation, sale
and possession of cannabis, however, a bill has not yet been finalized in order to implement legislation that would, in effect,
make clear the federal government cannot interfere with states that have voted to legalize cannabis. Further in December 2018,
the US Congress passed legislation, which the President signed on December 20, 2018, removing hemp from being included with Cannabis
in Schedule I of the Act.
In
December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to a number
of other countries, including the United States. On March 11, 2020, the World Health Organization characterized COVID-19 as a
pandemic. In addition, as of the time of the filing of this Annual Report on Form 10-K, several states in the United States have
declared states of emergency, and several countries around the world, including the United States, have taken steps to restrict
travel. The existence of a worldwide pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments
in response to COVID-19, or any, pandemic, to regulate the flow of labor and products and impede the travel of personnel, may
impact our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity.
Disruptions to our supply chain and business operations disruptions to our retail operations and our ability to collect rent
from the properties which we own, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’
products, any of which could have adverse ripple effects throughout our business. If we need to close any of our facilities or
a critical number of our employees become too ill to work, our production ability could be materially adversely affected in a
rapid manner. Similarly, if our customers experience adverse consequences due to COVID-19, or any other, pandemic, demand for
our products could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also
result in social, economic, and labor instability in the markets in which we operate. Any of these uncertainties could have a
material adverse effect on our business, financial condition or results of operations.
These conditions
raise substantial doubt as to the Company’s ability to continue as a going concern. Should the United States Federal Government
choose to begin enforcement of the provisions under the Act, the Company through its wholly owned subsidiaries could be prosecuted
under the Act and the Company may have to immediately cease operations and/or be liquidated upon their closing of the acquisition
or investment in entities that engage directly in the production and or sale of cannabis.
Management
believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities.
However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures
to reduce costs, including reducing its workforce, eliminating outside consultants and reducing legal fees to conserve its cash
in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments
that might become necessary should the Company be unable to continue as a going concern.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The unaudited condensed financial statements included
herein are unaudited. Such financial statements, in the opinion of management, contain all adjustments necessary to present fairly
the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring
nature. These interim results are not necessarily indicative of the results to be expected for the year ending September 30, 2020
or for any other period. Certain information and footnote disclosures normally included in the financial statements prepared in
accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission,
and because of this, for further information, readers should refer to the financial statements and footnotes included in its Form
10-K for the fiscal year ended September 30, 2019 filed on March 2, 2020. The Company believes that the disclosures are adequate
to make the interim information presented not misleading.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The most significant
estimates included in these condensed consolidated financial statements are those associated with the assumptions used to value
equity instruments, valuation of its long live assets for impairment testing and the deferral of rents. These estimates and assumptions
are based on current facts, historical experience and various other factors believed to be reasonable given the circumstances
that exist at the time the financial statements are prepared. Actual results may differ materially and adversely from these estimates.
To the extent there are material differences between the estimates and actual results, the Company’s future results of operations
will be affected.
Principals
of Consolidation
The
Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock.
In addition, the Company consolidates entities that meet the definition of a variable interest entity (“VIE”) for
which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE
that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity
or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities
that are less than wholly owned, the third party’s holding of equity interest is presented as noncontrolling interests in
the Company’s condensed consolidated balance sheets and condensed consolidated statements of changes in stockholders’
equity. The portion of net loss attributable to the noncontrolling interests is presented as net loss attributable to noncontrolling
interests in the Company’s condensed consolidated statements of operations.
The
accompanying unaudited condensed consolidated financial statements include the accounts of Stem Holdings, Inc. and its wholly-owned
subsidiaries, Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri, LLC., Stem Group Oklahoma, Inc. and Stem
Holdings Florida, Inc. All material intercompany accounts, transactions, and profits have been eliminated in consolidation.
Loss
per Share
ASC
260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Basic
net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares
of common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive.
Since the Company has only incurred losses, basic and diluted net loss per share is the same. Securities that could potentially
dilute loss per share in the future that were not included in the computation of diluted loss per share at March 31, 2020 is as
follows:
Convertible notes
|
|
|
4,302,231
|
|
Options to purchase common stock
|
|
|
4,747,916
|
|
Unvested restricted stock awards
|
|
|
1,374,172
|
|
Warrants to purchase common stock
|
|
|
4,564,733
|
|
|
|
|
14,989,052
|
|
Revenue
Recognition
The
Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with
Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it
is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is
determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines
those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes
as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.
Revenue
for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at
contract inception, that the period between when the Company’s transfers control of the product and when the Company receives
payment will be one year or less. Product shipping and handling costs are included in cost of product sales.
Effective
October 1, 2019, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective
method. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues
related to wholesale and retail revenue are recorded upon transfer of merchandise to the customer, which was the effective policy
under ASC 605 previously.
The
following policies reflect specific criteria for the various revenue streams of the Company:
Revenue
is recognized upon transfer of retail merchandise to the customer upon sale transaction.
The
Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale)
there are essentially no returns allowed under the various state laws.
Revenue
related to wholesale products is recognized upon receipt of the customer.
Disaggregation
of Revenue
In
the three and six months ended March 31, 2019, the Company’s revenue was primarily rental of land, buildings and improvements
in nature, and governed primarily under ASC 840. In the three and six months ended March 31, 2020, all of the Company’s
rental revenue is eliminated upon consolidation, and the revenue reported is primarily from the sale of cannabis and related products
accounted for under ASC 606.
The
following table illustrates our revenue by type related to the three months ended March 31, 2020 and 2019:
Three Months Ended March 31,
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
827
|
|
|
$
|
-
|
|
Retail
|
|
|
1,462
|
|
|
|
30
|
|
Rental
|
|
|
7
|
|
|
|
324
|
|
Other
|
|
|
2
|
|
|
|
-
|
|
Total Revenue
|
|
$
|
2,298
|
|
|
$
|
354
|
|
The
following table illustrates our revenue by type related to the six months ended March 31, 2020 and 2019:
Six Months Ended March 31,
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,307
|
|
|
$
|
-
|
|
Retail
|
|
|
2,294
|
|
|
|
30
|
|
Rental
|
|
|
15
|
|
|
|
662
|
|
Other
|
|
|
3
|
|
|
|
-
|
|
Total Revenue
|
|
$
|
3,619
|
|
|
$
|
692
|
|
Recent
Accounting Guidance
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU
2018-07”). ASU 2018-07 expands the guidance in Topic 718 to include share-based payments for goods and services to non-employees
and generally aligns it with the guidance for share-based payments to employees. The amendments are effective for fiscal years
beginning after December 15, 2018, including interim periods within that fiscal year. The Company’s adoption of this standard
on October 1, 2019 did not have a material impact on the Company’s condensed consolidated financial condition or results
of operations.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides companies with
a single model for use in accounting for revenue arising from contracts with customers and will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective, including industry-specific revenue guidance. The standard specifically
excludes lease contracts. The ASU allows for the use of either the full or modified retrospective transition method and will be
effective for the Company on October 1, 2019, at which time the Company expects to adopt the updated standard using the modified
retrospective approach. The financial information included in the Company’s 2020 Form 10-K will be updated for the October
1, 2019 adoption date; this new guidance will be reflected for the first time in the Company’s 2020 Form 10-K but effective
as of October 1, 2019 in that filing. However, the Company will continue to account for revenue recognition under ASC Topic 605
for interim periods in 2020 and will not be required to amend its Form 10-Q filings filed throughout 2020 to reflect the October
1, 2019 adoption date. The guidance allows for the use of one of two retrospective application methods: the full retrospective
method or the modified retrospective method. The Company plans to adopt the standard in fiscal year 2020 using the modified retrospective
method. The Company does not expect the new standard to have a material impact on the recognition of revenue.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and
requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have
a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar
to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods
but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required
to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable
period presented, with an option to elect certain transition relief. Full retrospective application is prohibited. The standard
will be effective for the Company on October 1, 2020; however, early adoption of the ASU is permitted. The Company is still finalizing
its analysis but expects to recognize additional operating liabilities of approximately $1.3 million, with corresponding ROU assets
of approximately the same amount as of October 1, 2020 based on the present value of the remaining lease payments.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”). ASU 2016-13 provides guidance for recognizing credit losses on financial
instruments based on an estimate of current expected credit losses model. The amendments are effective for fiscal years beginning
after December 15, 2019. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar
year 2023. The Company is currently assessing the impact of the adoption of this ASU on its financial statements.
3.
Property, Plant & Equipment
Property
and equipment consist of the following (in thousands):
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,451
|
|
|
$
|
1,451
|
|
Automobiles
|
|
|
61
|
|
|
|
61
|
|
Signage
|
|
|
19
|
|
|
|
19
|
|
Furniture and equipment
|
|
|
2,170
|
|
|
|
2,125
|
|
Leasehold improvements
|
|
|
3,306
|
|
|
|
3,197
|
|
Buildings and property improvements
|
|
|
10,323
|
|
|
|
9,719
|
|
Computer software
|
|
|
59
|
|
|
|
59
|
|
|
|
|
17,389
|
|
|
|
16,631
|
|
Accumulated depreciation
|
|
|
(2,692
|
)
|
|
|
(1,925
|
)
|
Property and equipment, net
|
|
$
|
14,697
|
|
|
$
|
14,706
|
|
Depreciation
and amortization expense was approximately $0.4 million and $0.8 million for the three and six months ended March 31, 2020.
Depreciation
and amortization expense was approximately $0.2 million and $0.5 million for the three and six months ended March 31, 2019.
4.
Inventory
Inventory
consists of the following (in thousands):
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
Raw materials
|
|
$
|
179
|
|
|
$
|
169
|
|
Work-in-progress
|
|
|
|
|
|
|
42
|
|
Finished goods
|
|
|
776
|
|
|
|
400
|
|
Total Inventory
|
|
$
|
955
|
|
|
$
|
611
|
|
The
Company’s inventory is related to seven subsidiaries of which four are consolidated because of their VIE status, two are
wholly owned by the Company and one subsidiary that is 50% owned by the Company. Raw materials and work-in-progress include the
costs incurred for cultivation materials and live plants. Finished goods consists of cannabis products ready to be sold. There
was no inventory reserve as of March 31, 2020 and September 30, 2019.
5.
Asset Acquisitions
November
1, 2019, the Company received 100.0% interest in Empire Holdings, LLC (“EH”). EH leases its facilities to Kind Care,
LLC. The Company purchased the property for $500,000 less the lien amount of $105,732 paid in kind and issued 394,270 shares of
its common stock in satisfaction of the purchase price.
In
March 2020, the Company acquired Seven Leaf Ventures Corp. (“7LV”), a private Alberta corporation, and its
subsidiaries, pursuant to the terms of a share purchase agreement dated March 6, 2020. 7LV owns Foothills Health and
Wellness, a medical dispensary, in the greater Sacramento, California area. In connection with the acquisition, the Company
issued 11,999,008 shares of common stock to former shareholders of 7LV (“7LV Shares”). The Company issued an
aggregate 682,000 shares and replacement 10% unsecured convertible debentures in the aggregate principal amount of C4,571,170 ($3,410,000 USD)
(the “Replacement Debentures”), convertible into shares at a conversion price of C$1.67 per share at any time
prior to May 3, 2021, to former holders of unsecured convertible debentures of 7LV. As part of the Acquisition, the Company
assumed the obligations of 7LV with respect to the common share purchase warrants of 7LV outstanding on the closing of the
acquisition, subject to appropriate adjustments to reflect the exchange ratio. Accordingly, the Company has assumed 1,022,915
common share purchase warrants (the “Warrants”), exercisable into shares at an exercise price of C$2.08 per share
at any time prior to May 3, 2021, 299,975 Warrants, exercisable into shares at an exercise price of C$4.17 per share at any
time prior to December 31, 2020 and 999,923 Warrants, exercisable into shares at an exercise price of C$0.50 at any time
prior to October 10, 2020. Following the completion of the acquisition, 7LV is now a wholly-owned subsidiary of the Company.
Certain shareholders of 7LV, who collectively held approximately 74.5% of the 7LV Shares outstanding at the closing of the
acquisition, have agreed to a contractual lock-up pursuant to which such shareholders will not transfer 25% of the
Company’s shares received as part of the acquisition until approximately 90 days following the acquisition by 7LV of
the Sacramento California Dispensary.
With respect to the $3,410 of convertible debt acquired in
the acquisition noted above, the Company agreed to issue to the Seven Leaf debenture holders a First Supplemental Indenture dated
March 6, 2020. This instrument is entered into for the purpose of providing for the issue of additional debentures in an initial
aggregate principal amount of $3,410 designated as 10 percent unsecured convertible debentures under the indenture and establishing
the terms, provisions, and conditions of the 10 percent debentures.
The table below represents unaudited
pro forma revenue and operating loss as if the acquisition of 7LV had occurred on September 30, 2019.
|
|
Six months ended March
31, 2020
|
|
|
|
|
|
Revenues
|
|
$
|
5,672
|
|
Operating loss
|
|
$
|
(25,292
|
)
|
Seven
Leaf Ventures Corp
Purchase Price Allocation
March 6, 2020
Consideration Paid (in thousands)
|
|
|
|
Estimated fair value of common stock issued
|
|
$
|
10,022
|
|
Estimated fair value of warrants issued
|
|
|
653
|
|
Estimated fair value of debt issued
|
|
|
3,410
|
|
Total consideration paid
|
|
$
|
14,085
|
|
|
|
|
|
|
Assets acquired: (in thousands)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
81
|
|
Accounts Receivable, net
|
|
|
-
|
|
Inventory
|
|
|
131
|
|
Prepaid expenses and other current assets
|
|
|
12
|
|
Goodwill
|
|
|
10,543
|
|
Intangible assets
|
|
|
4,474
|
|
Total assets acquired
|
|
$
|
15,241
|
|
|
|
|
|
|
Liabilities assumed: (in thousands)
|
|
|
|
|
Accounts payable
|
|
$
|
1,084
|
|
Accrued expenses and other current liabilities
|
|
|
72
|
|
Total liabilities assumed
|
|
$
|
1,156
|
|
|
|
|
|
|
Net assets acquired (in thousands)
|
|
$
|
14,085
|
|
6.
Notes Receivable
On
January 4, 2020, the Company issued a $355,000 promissory note to Community Growth Partners Holdings, Inc., (“CGS”).
CGS is a cannabis license holder in Massachusetts. Subject to the terms and conditions of the note, CGS promises to pay the Company
all of the outstanding balance together with interest upon the first to occur of (i) the closing of the initial capital equity
contribution made by the Company in GCS or (ii) the date that is six months after the opening of the Great Barrington Dispensary
which is planned to open sometime this summer.
On January 6, 2020, the Company issued a convertible
promissory note to Community Growth Partners Holdings, Inc., (“CGS”) which will act as a line of credit. Subject
to the terms and conditions of the note, CGS promises to pay the Company all of the outstanding principal together with
interest on the unpaid principal balance upon the date that is twelve months after the effective date and shall be payable as
follows: (a)The Company agrees to make several loans to CGS from time to time upon request of CGS in amounts not
to exceed the principal sum of $2,000,000, (b) Payment of principal and interest shall be immediately available funds, (c) This
note may be prepaid in whole or in part at any time without premium or penalty. Any partial prepayment shall be applied against
the principal amount outstanding, (d) The unpaid principal amount outstanding under this note shall bear interest commencing upon
the first advance at the rate of 10% per annum through the maturity date, calculated on the basis of a 365-day, until the entire
indebtedness is fully paid, (e) Upon the closing of a $2,000,000 financing by the Company, all of the principal and interest shall
automatically convert into equity shares of CGS at the price obtained by the qualified financing. Balance outstanding as
of March 31, 2020 is approximately $395,000.
On January 6, 2020, the Company issued a revolving
credit promissory note to Community Growth Partners Holdings, Inc., (“CGS”) which will act as a second line
of credit once the convertible prom note is fulfilled. Subject to the terms and conditions of the note, CGS promises to
pay the Company, on the fourth anniversary of the effective date, the lesser of $2,500,000 or the aggregate unpaid principal balance
amount of the loans made by the Company to CGS from time to time in accordance with the terms together with interest on
the unpaid balance.
7.
Non-Controlling Interests
Non-controlling
interests in consolidated entities are as follows (in thousands):
|
|
As of March 31, 2020
|
|
|
|
NCI Equity Share
|
|
|
Net Loss Attributable to NCI
|
|
|
NCI in Consolidated Entities
|
|
|
Non- Controlling Ownership
%
|
|
NVD RE Corp.
|
|
$
|
989
|
|
|
$
|
(28
|
)
|
|
$
|
961
|
|
|
|
62.5
|
%
|
Western Coast Ventures, Inc.
|
|
|
1,287
|
|
|
|
(142
|
)
|
|
|
1,145
|
|
|
|
49.0
|
%
|
YMY Ventures, Inc.
|
|
|
447
|
|
|
|
(174
|
)
|
|
|
273
|
|
|
|
50.0
|
%
|
|
|
$
|
2,723
|
|
|
$
|
(344
|
)
|
|
$
|
2,379
|
|
|
|
|
|
8.
Intangible Assets, net
Intangible
assets as of March 31, 2020 (in thousands):
|
|
Estimated Useful Life
|
|
|
Cannabis Licenses
|
|
|
Tradename
|
|
|
Customer Relationship
|
|
|
Non-compete
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Balance as September 30, 2019
|
|
|
|
|
|
$
|
5,814
|
|
|
$
|
147
|
|
|
$
|
135
|
|
|
$
|
220
|
|
|
|
-
|
|
|
$
|
6,316
|
|
YMY Ventures (1)
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Western Coast Ventures, Inc. (1)
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(81
|
)
|
|
|
(81
|
)
|
Yerba Buena
|
|
|
3-15 years
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(127
|
)
|
|
|
(127
|
)
|
Foot Hills
|
|
|
15
|
|
|
|
4,474
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
4,449
|
|
Other
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Balance as March 31, 2020
|
|
|
|
|
|
$
|
10,288
|
|
|
$
|
147
|
|
|
$
|
135
|
|
|
$
|
220
|
|
|
$
|
(258
|
)
|
|
$
|
10,533
|
|
(1)
These represent provisional licenses that the Company acquired during the fiscal years ended September 30, 2019 and 2018. Once
these licenses are approved by their respective regulatory bodies, the Company will amortize these cannabis licenses over a 15-year
estimated useful life. Amortization expense for the three and six months ended March 31, 2020 was $137 and $258, respectively.
9.
Related party
In the period ended March 31, 2020, the Company
advanced funds of approximately $399 that was advanced to Consolidated Ventures of Oregon for operating expenses.
In the period ended March 31, 2020, the
Company was advanced $490 by the parent company of 7LV.
10.
Accounts payable and accrued expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
March 31, 2020
|
|
|
September 30, 2019
|
|
Accounts payable
|
|
$
|
2,266
|
|
|
$
|
707
|
|
Accrued credit cards
|
|
|
52
|
|
|
|
31
|
|
Accrued interest
|
|
|
49
|
|
|
|
106
|
|
Other
|
|
|
326
|
|
|
|
238
|
|
Total Accounts Payable and Accrued Expenses
|
|
$
|
2,693
|
|
|
$
|
1,082
|
|
11.
Notes Payable and Advances
The
following table summarizes the Company’s short-term notes, mortgages, and advances as of March 31, 2020 and September 30,
2019 (in thousands):
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Equipment financing
|
|
$
|
35
|
|
|
$
|
33
|
|
Insurance financing
|
|
|
251
|
|
|
|
160
|
|
Mortgages payable
|
|
|
1,259
|
|
|
|
2,191
|
|
Promissory note
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
$
|
2,545
|
|
|
$
|
3,384
|
|
Acquisition notes payable
|
|
|
708
|
|
|
|
708
|
|
Total notes payable and advances
|
|
$
|
3,253
|
|
|
$
|
4,092
|
|
Long-term mortgages
|
|
|
3,085
|
|
|
|
|
|
Current portion
|
|
$
|
168
|
|
|
|
|
|
Equipment
financing
Effective
May 29, 2018, the Company entered into a 24-month premium finance agreement in consideration for a MT85 wide track loader in the
principal amount of $27,844. The note bears no annual interest rate and requires the Company to make 24 monthly payments of $1,160
over the term of the note. As of March 31, 2020, the obligation outstanding is $2,320. 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.
Effective
April 29, 2018, the Company entered into a 36-month premium finance agreement in consideration for a John Deere Gator Tractor
in the principal amount of $15,710. The note bears no annual interest rate and requires the Company to make thirty-six monthly
payments of $442 over the term of the note. As of December 31, 2019, the obligation outstanding is $5,752. No amount was recorded
for the premium for the non-interest-bearing feature of the note as it was immaterial. The note is secured by the equipment
financed.
November
2017, the Company entered into a promissory note in the amount of $21,749 from a vendor of the Company to finance the acquisition
of a security electronics system in one of its properties. The promissory note bears an interest rate of 18% per annum and also
contains a 10% servicing fee. The note matures 24 months after issuance and is secured by certain security electronics purchased
with proceeds of the note. This vendor is currently in a restructuring and is likely to go out of business. As of September 30,
2019, the Company has been notified that the vendor holding the note is in bankruptcy and during the year ended September 30,
2019, the Company withheld payment under the note. The obligation remains outstanding at $14,950 as of March 31, 2020.
Upon
acquisition of Yerba Buena on June 24, 2019, the Company assumed the liability of a 2017 tractor with a balance of approximately
$18,000. The note bears no annual interest rate and requires the Company to make monthly payments of $482 over the term of the
note. As of March 31, 2020, the obligation outstanding is $12,502. No amount was recorded for the premium for the non-interest-bearing
feature of the note as it was immaterial. The note is secured by the equipment financed.
Insurance
financing
Effective
July 31, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $63,101. The note bears an annual interest rate of 7.63% and requires the Company to make ten monthly
payments of $4,582 over the term of the note. As of March 31, 2020, the obligation outstanding is $9,164.
Effective
July 31, 2019, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $78,900. The note bears an annual interest rate of 7.25% and requires the Company to make ten monthly
payments of $5,756 over the term of the note. As of March 31, 2020, the obligation outstanding is $11,512.
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, 2020, the obligation was paid in full.
Effective
May 24, 2019, the Company entered into a 9-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $11,440. The note bears an annual interest rate of 8.7% and requires the Company to make 9 monthly payments
of $1,322 over the term of the note. As of March 31, 2020, the obligation was paid in full.
Effective
December 5, 2019, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $9,490. The note bears an annual interest rate of 8.7% and requires the Company to make 9 monthly payments
of $685 over the term of the note. As of March 31, 2020, the obligation outstanding is $3,423.
Effective
February 7, 2020, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy
in the principal amount of $310,150. The note bears an annual interest rate of 7.46%. The Company paid $60,255 as a down payment
on February 7, 2020, the note requires the Company to make 9 monthly payments of $22,718 over the remaining term of the note.
As of March 31, 2020, the obligation outstanding is $227,177.
Notes
payable
In July 2018, the Company entered into
an agreement to acquire a 25% interest in East Coast Packers LLC (“ECP”) for the purchase price of $1.5 million, payable
in the amount of $500,000 in cash at closing and a note for $1 million. All amounts are payable to ECP. At the time of closing,
ECP was a dormant Florida LLC, but owned a citrus fruit dealer license active for the 2015-2016 growing season. This qualified
ECP under newly enacted legislation in the state of Florida to apply for a license to produce and sell medical cannabis. Until
such time as ECP is granted a medical cannabis license, the $500 paid into ECP may only be expended by ECP in acquiring a medical
cannabis license.
In the quarter ended March 31, 2020, the
Company and ECP agreed to unwind the transaction. The Company returned its membership interest, the $1 million promissory note
was cancelled and the remaining equity method investment of approximately. $236 was written off to loss from equity method investees
on the statement of operations and ECP returned $232 of cash to the Company.
Mortgages
payable
On
January 16, 2018 the Company consummated a “Contract for Sale” for a Farm Property in Mulino OR (the “Mulino
Property”). The purchase price was $1,700,000 which was reduced by a rental credit of approximately $135,000 which is equivalent
to nine months’ rent at $15,000 a month and an additional credit of $9,500 for additional work done on the property. In
connection with the purchase of the property, the Company made a cash payment as down payment plus payment of closing costs in
the amount of $370,637 and issued a promissory note in the amount of $1,200,000 with a maturity of January 2020. The Company will
pay monthly installments of principal and interest (at a rate of 2% per annum) in the amount of $13,500, commencing in July 2018
through the maturity date (January 2020), at which time the entire unpaid principal balance and any remaining accrued interest
shall be due and payable in full. No amount was recorded for the premium for the below market rate feature of the note as it was
immaterial. The note is secured by a deed of trust on the property. The Company performed an analysis and determined that the
rate obtained was below market, however, no premium was recorded as the Company determined it was immaterial. At March 31, 2020,
the balance due is $958,500. Currently the Company has received a verbal extension through the next quarter to procure additional
financing on this property to pay off the indebtedness.
On
February 28, 2018, the Company executed a $550,000 mortgage payable on the Willamette property to acquire additional funds. The
mortgage bears interest at 15% per annum. Monthly interest only payments began 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. The amount outstanding
was $550,000 under this mortgage. In March 2020, the Company completed a refinance of this mortgage. In the refinance, the Company
entered into a mortgage, secured by the property with an additional personal guaranty of the CEO of the Company, for $700,000
with an annual interest rate of 15%, paid points at closing totaling $42,000 and a maturity date of March 31, 2022. The Company
has included the mortgage outstanding as of March 31, 2020 in long-term liabilities as a result of the success refinance.
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 paid costs of approximately $19,000 to close on the mortgage.
The mortgage terms do not allow participations by the lender in either the appreciation in the fair value of the mortgaged real
estate project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the CEO
and Director of the Company. The amount outstanding was $314,000. In January 2020, the Company completed a refinance of this mortgage.
In the refinance, the Company entered into a mortgage, secured by the property with an additional personal guaranty of the CEO
plus an assignment of the right and title in all of CEO’s common shares of the Company as collateral under the mortgage,
for $400,000 with an annual interest rate of 15%, paid points at closing totaling $24,000 and a maturity date of January 31, 2022.
The Company has included the mortgage outstanding as of March 31, 2020 in long-term liabilities as a result of the successful
refinance.
In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment
to contribute $1.275 million to NVD which included the purchase price of $600,000 and an additional commitment to pay tenant improvement
costs of $675,000. In the year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The
funds from this mortgage were advanced to the Company. The advance is undocumented, non-interest bearing and due on demand. At
March 31, 2020, the balance due totals $300,000.
In
March 2020, the Company executed a $1,585,000 mortgage payable on property located in Oregon to acquire additional funds. The
mortgage bears interest at 11.55% per annum. Monthly interest only payments began April 1, 2020 and continue each month thereafter
until paid. The entire unpaid balance is due on April 1, 2023, the maturity date of the mortgage, and is secured by the underlying
property. The Company paid costs of approximately $120,000 to close on the mortgage. The mortgage terms do not allow participation
by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of
the mortgaged real estate project. The note has been cross guaranteed by the CEO and Director of the Company. The Company has
included the mortgage outstanding as of March 31, 2020 in long-term liabilities.
Acquisition
Notes Payable
In
April 2019, the Company entered into a promissory note with a principal balance of $0.4 million related to its acquisition of
Yerba Buena, Oregon LLC. The note was issued on April 8, 2019 and is due on April 8, 2021. The note has a coupon interest rate
of 8%. As of March 31, 2020, the Company has not made any principal and interest payments.
In
September 2018, the Company entered into an agreement to acquire 50% of the membership interest of YMY. In connection with this
agreement, the Company recorded a note payable of approximately $0.3 million. As of March 31, 2020, the Company has not made any
payments related to this note.
Other
Promissory Notes
In
January 2020, the Company issued two promissory notes with a principal balance of $500,000 to accredited investors (the “Note
Holders”). The notes mature in July 2020 and has an annual rate of interest of 12%. In connection with the issuance of the
promissory notes, the Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the issuance
date, $0.85 per.
In
January 2020, the Company issued two promissory notes with a principal balance of $500,000 to accredited investors (the “Note
Holders”). The notes mature in October 2020 and has an annual rate of interest of 12%. In connection with the issuance of
the promissory notes, the Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the
issuance date, $0.85 per.
12.
Convertible debt
8%
Convertible notes
Six-month
term
During
the year ended September 30, 2018, the Company issued convertible promissory notes with a principal balance of $975,000 to accredited
investors (the “Note Holders”). The notes matured in March 2019 and had an annual rate of interest of 8%. Unless the
notes are prepaid, the notes will automatically convert at the maturity date into shares of the Company’s common stock at
a conversion price of $2.50 per share. In October 2018, the Company offered the convertible note holders the opportunity to receive
a reduced conversion price from $2.50 per share to $1.80 per share as an inducement for the Note Holders to convert the notes.
As of October 31, 2018, all of the convertible note holders agreed to convert at the reduced price offered by the Company. The
Company issued 541,668 shares of common stock in conversion of the notes. The Company recognized an inducement cost associated
with the conversion of the convertible promissory notes of approximately $0.368 million with a corresponding credit to additional
paid-in capital.
In
connection with the issuance of the convertible promissory notes, the Company issued the Note Holders common stock purchase warrants
with a three year term from the issuance date, providing the Note Holders the right to purchase 97,500 shares of the Company’s
common stock at $2.50 per share, with standard anti-dilution protection. After allocating issuance proceeds to the warrant liability,
the effective conversion price of the convertible promissory notes was below the quoted market price of the Company’s common
stock. As such, the Company recognized beneficial conversion feature equal to the intrinsic value of the conversion feature on
the issuance date, resulting in an additional discount to the initial carrying value of the convertible promissory notes of approximately
$0.5 million with a corresponding credit to additional paid-in capital. As of March 31, 2020 the remaining balance of the warrant
liability for these debentures is $20,951.
Twelve-month
term
In
May and June 2018, the Company issued senior unsecured convertible notes with a principal balance of $1.5 million to accredited
investors (the “Note Holders”). The notes matured in May 2019 and had an annual rate of interest at 8%. Accrued interest
was payable quarterly in arrears on the fifth day of each calendar quarter. The notes ranked senior to all obligations not designated
as a primary obligation by the Company. The Note Holders were entitled to convert all or any amount of the principal balance then
outstanding into shares of the Company’s common stock at a conversion price of $2.50 per share. On November 1, 2018, the
Company reduced the conversion price from $2.50 per share to $1.80 per share as an inducement for the Note Holders to convert
the notes. Since the notes are optionally convertible by the Note Holders, were issued at par value and did not contain any detachable
instruments, the effective conversion price is equal to the stated conversion price of $1.80 per share. The Company recognized
an inducement cost associated with the conversion of the convertible promissory notes of approximately $0.9 million with a corresponding
credit to additional paid-in capital.
During
October 2018, the Note Holders fully converted the notes into 833,333 shares of the Company’s common stock and the debt
discount related to the notes was fully amortized.
Canaccord
On
December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of
up to 10,000 convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross
proceeds of up to CDN$10,000,000 (the “Offering”). The net proceeds of the Offering were used for expansion initiatives
and general corporate purposes. The Company’s functional currency is U.S. dollars.
In
December 2018 and January 2019, the Company issued 3,121 CD Special Warrants in the first closing of the Offering, at a price
of CDN $1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $3.1 million or $2.3 million USD. In connection
with this offering, the Company issued the agents in such offering 52,430 convertible debenture special warrants (the “Broker
CD Special Warrants”) as partial satisfaction of a selling commission.
On
March 14, 2019, the Company issued 962 CD Special Warrants in the second and final closing of the Offering, at a price of CDN
$1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $1.0 million or $0.7 million USD. In connection with
this offering, the Company issued the agents in such offering 5,600 convertible debenture special warrants (the “Broker
CD Special Warrants”) as partial satisfaction of a selling commission.
The
total aggregate proceeds of the Offering totaled $4.1 million CDN or $3.1 million USD.
Each
CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration)
for one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third
business day after the date on which both (A) a receipt (the “Receipt”) for a (final) 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. The CD Special Warrants were exchanged for Convertible Debenture Units after
six months as U.S. and Canadian registrations were not effective at that time.
Each
Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible
Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant
entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of
CDN $3.90 per Warrant Share for a period of 24 months following the closing of the Offering (see Note 17).
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. Since the CD Special Warrants were exchanged for Convertible Debenture Units
after 6 months as U.S. and Canadian registrations were not effective at that time, the holders received 1.05 Convertible Debenture
Units per CD Special Warrant.
The
brokered portion of the Offering (CDN $2.5 million, $1.9 million USD) was completed by a syndicate of agents (collectively, the
“Agents”). The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the brokered
portion of the Offering. As additional consideration, the Company issued the Agents such number of non-transferable broker convertible
debenture special warrants (the “Broker CD Special Warrants”) as is equal to 7.0% of the number of CD Special Warrants
sold under the brokered portion of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD
Special Warrants, into broker warrants of the Company (the “Broker Warrants”). Each Broker Warrant entitles the holder
to acquire one Convertible Debenture Unit at an exercise price of CDN $1,000, until the date that is 24 months from the closing
date of the Offering. The distribution of the Broker Warrants issuable upon the exchange of the Broker CD Special Warrants shall
also be qualified under the Qualification Prospectus and the resale of the common shares underlying the Broker Warrants will be
registered under the Registration Statement. The Company also paid the lead agent a commission noted above of CDN$157,290, corporate
finance fee equal to CDN $50,000 in cash and as to $50,000 in common shares of the Company at a price per share of CDN $3.00 plus
additional expenses of CDN$20,000. In addition, the Company paid the trustees legal fees of CDN$181,365. In total the Company
approx. USD $0.32 million in fees and expenses associated with the offering.
The
issuance of the securities was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as
amended (the “Securities Act”), for the offer and sale of securities not involving a public offering, Regulation D
promulgated under the Securities Act, Regulation S, in Canada to “accredited investors” within the meaning of National
Instrument 45106 and other exempt purchasers in each province of Canada, except Quebec, and/or outside Canada and the United States
on a basis which does not require the qualification or registration. The securities being offered have not been registered under
the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent
registration or an applicable exemption from the registration requirements.
The
Convertible Debenture features contain the following embedded derivatives:
|
●
|
Conversion
Option - The Convertible Debentures provide the holder the right to convert all or any portion of the outstanding principal
into common shares of the Company at a conversion price of C$3.00 such that 333.33 common shares are issued for each C$1,000
of principal of Convertible Debentures converted.
|
|
●
|
Contingent
Put - Upon an Event of Default, the Convertible Debentures settle for cash at the outstanding principal and interest amount
(at discretion of the Indenture Trustee or upon request of Holders of 25% or more of principal of the Convertible Debentures).
|
|
●
|
Contingent
Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding amount and principal and interest
* 105% (where Holder accepts a Change of Control Offer).
|
The
conversion option, the contingent put feature upon an Event of Default, and the contingent put feature upon a Change in Control
should be bifurcated and recognized collectively as a compound embedded derivative at fair value at inception and at each quarterly
reporting period.
A
five percent penalty assessed for failure to timely file a registration statement to register the stock underlying the CD special
warrants.
The
Company valued the warrants granted using the Black-Scholes pricing model and determined that the value at grant date was approximately
$424,000 USD (this includes the warrants issued as part of the penalty for failure to timely file the required registration statement
under the indenture agreement). The significant assumptions used in the valuation are as follows:
Fair value of underlying common shares
|
|
$
|
1.78 to 2.10
|
|
Exercise price (converted to USD)
|
|
$
|
2.925
|
|
Dividend yield
|
|
|
-
|
|
Historical volatility
|
|
|
107
|
%
|
Risk free interest rate
|
|
|
1.40 to 1.90
|
%
|
The
warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not
meet the scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance
with the guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in
fair value recognized in earnings each reporting period.
The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Canaccord convertible
notes and the subsequent fair value measurement during the six months ended March 31, 2020 in USD, (in thousands):
|
|
Warrant Liability
|
|
|
Derivative Liability
|
|
Balance at September 30, 2019
|
|
$
|
42
|
|
|
$
|
158
|
|
Change in fair value
|
|
|
(7
|
)
|
|
|
(21
|
)
|
Balance at December 31, 2019
|
|
|
35
|
|
|
|
137
|
|
Change in fair value
|
|
|
(15
|
)
|
|
|
(121
|
)
|
Balance at March 31, 2020
|
|
$
|
20
|
|
|
$
|
16
|
|
The
table below shows the net amount of convertible notes as of March 31, 2020 in USD (in thousands):
|
|
March 31, 2020
|
|
Principal value of 8%, convertible at $2.27 at March 31, 2020, due December 27, 2020 including penalty provision of $155,239
|
|
$
|
3,243
|
|
Principal value of 10%, convertible at $1.18 at March 31, 2020, due May 30, 2021
|
|
|
3,410
|
|
Debt discount
|
|
|
(1,079
|
)
|
Cumulative foreign currency impact
|
|
|
55
|
|
Carrying value of convertible notes
|
|
$
|
5,629
|
|
Total long-term carrying value of convertible notes
|
|
$
|
5,629
|
|
In
April, 2020 the Company received approval of the holders Warrantholders of the warrants and the holders debentureholders of the
Convertible Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing,
which closed on December 27, 2018 and March 14, 2019. The share purchase warrants of the Company issued in connection with the
financing will be repriced to C$1.50 per Common Share and the convertible debentures of the Company issued in connection with
the financing will be repriced to C$1.15 per common share. Additionally, the Debentureholders have approved the following amendments
to the terms of the convertible debentures: (i) an extension to the maturity date of the convertible debentures to three years
from the date of issuance; and (ii) an amendment to permit the Company to force the conversion of the principal amount of the
then outstanding convertible debentures and any accrued and unpaid interest thereof at the new conversion price on not less than
30 days’ prior written notice if the closing trading price of the shares of common stock of the Company’s common shares
exceeds C$1.90 for a period of 10 consecutive trading days on the CSE. The Warrantholders have also approved the inclusion of
an early acceleration feature in accordance with the policies of the Canadian Securities Exchange, permitting the Company to accelerate
the expiry date of the warrants should the closing trading price of the Common Shares exceed C$1.87 for a period of 10 consecutive
trading days on the CSE.
13.
Fair Value Measurements
In
accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding
warrants and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value
of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair
value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable
inputs. An explanation of each level in the hierarchy is described below:
Level
1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement
date
Level
2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level
3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
The
following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy
as of March 31, 2020 (in thousands):
|
|
Fair value measured at March 31, 2020
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
prices in
active
markets
|
|
|
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
Fair value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Warrant liability
|
|
$
|
1,417
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,417
|
|
Embedded derivative liability
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
Total fair value
|
|
$
|
1,433
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,433
|
|
There
were no transfers between Level 1, 2 or 3 during the six months ended March 31, 2020.
The
following table presents changes in Level 3 liabilities measured at fair value for the six months ended March 31, 2020. Both observable
and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3
category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that
were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long- dated volatilities) inputs (in thousands).
|
|
|
|
|
Embedded
|
|
|
|
|
|
|
Warrant Liability
|
|
|
Derivative Liability
|
|
|
Total
|
|
Balance – September 30, 2019
|
|
$
|
283
|
|
|
$
|
158
|
|
|
$
|
441
|
|
Warrants granted for stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in fair value
|
|
|
(38
|
)
|
|
|
(21
|
)
|
|
|
(59
|
)
|
Balance - December 31, 2019
|
|
|
245
|
|
|
|
137
|
|
|
|
382
|
|
Warrants issued pursuant to acquisition (see Note 5)
|
|
|
823
|
|
|
|
|
|
|
|
823
|
|
Warrants granted for stock-based compensation
|
|
|
105
|
|
|
|
-
|
|
|
|
105
|
|
Change in fair value
|
|
|
254
|
|
|
|
(121
|
)
|
|
|
133
|
|
Other
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
Balance - March 31, 2020
|
|
$
|
1,417
|
|
|
$
|
16
|
|
|
$
|
1,433
|
|
A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of March
31, 2020 is as follows:
|
|
Warrant Liability
|
|
|
|
As of
March 31, 2020
|
|
Strike price
|
|
$
|
0.86
|
|
Contractual term (years)
|
|
|
3 to 5
|
|
Volatility (annual)
|
|
|
189
|
%
|
Risk-free rate
|
|
|
1.65
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
|
|
Embedded Derivative Liability
|
|
|
|
As of
March 31, 2020
|
|
|
As of
September 30, 2019
|
|
Strike price
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
Contractual term (years)
|
|
|
0.6
|
|
|
|
1.2
|
|
Volatility (annual)
|
|
|
107
|
|
%
|
|
85
|
%
|
Risk-free rate
|
|
|
1.68
|
|
%
|
|
1.68
|
%
|
Dividend yield (per share)
|
|
|
11.12
|
|
%
|
|
11.12
|
%
|
The
Company used a lattice based trinomial model developed by Tsiveriotis, K. and Fernades in which the three lattices incorporate
(1) the Company’s underlying common stock price; (2) the value of the debt components of the convertible notes; and (3)
the value of the equity component of the convertible notes. The main drivers of sensitivity for the model are volatility and the
credit spread. The model used will vary by approximately 1.5% for a 4% change in volatility and will vary by less than 1% for
each 1% change in credit spread.
14.
Shareholders’ Equity
Preferred
shares
The
Company had two series of preferred shares designated with no preferred shares issued and outstanding as of March 31, 2020 and
September 30, 2019.
Common
shares
During the six months ended March 31, 2020,
the Company issued 394,270 shares of its common stock in connection with a Membership Interest Purchase Agreement for real property
located in Eugene, Oregon. The agreed upon purchase price was $500 less the lien of $106. The Company acquired the property
from a related party and recorded the building at its’ carrying value of approximately $500. In connection with this transaction
the Company issued 394,270 common shares at $1.00 per share.
Pursuant to the acquisition of 7LV, the Company
issued 11,999,008 shares of common stock to former shareholders of 7LV. The Company also issued an aggregate 682,000 shares and
replacement 10% unsecured convertible debentures in the aggregate principal amount of C$4,571 ($3,410 USD) (the “Replacement
Debentures”), convertible into shares at a conversion price of C$1.67 per share at any time prior to May 3, 2021, to former
holders of unsecured convertible debentures of 7LV.
The
Company issued 202,350 common shares for the fair value of $121 related to interest on convertible notes in connection with
the Seven Leaf Ventures Corporation acquisition.
Common
stock issuances for compensation:
During
the three months ended December 31, 2019, the Company issued 5,000 shares of its common stock related to a consulting agreement
for a fair value of approximately $4 or $0.89 per share.
During
the three months ended December 31, 2019, the Company issued 100,000 shares of its common stock related to an employment agreement
for a fair value of approximately $498.
During
the three months ended March 31, 2020, the Company issued 970,416 shares of its common stock related to various consulting agreements
for a fair value of approximately $850 or $0.88 per share. During the same period, the Company cancelled 700,000 common shares
related to consulting agreements.
During
the three months ended March 31, 2020, the Company issued 303,756 shares of its common stock related to various employment agreements
for a fair value of approximately $47.
15.
Stock Based Compensation
Stock
Options
The
fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of
the awards was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend
yield is 0%. The expected term for stock options granted with service conditions represents the average period the stock options
are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities
and Exchange Commission’s Staff Accounting Bulletin for “plain vanilla” options for options granted in 2019.
The expected term for stock options granted with performance and/or market conditions represents the period estimated by management
by which the performance conditions will be met. The Company obtained the risk-free interest rate from publicly available data
published by the Federal Reserve. The Company uses a methodology in estimating its volatility percentage from a computation that
was based on a comparison of average volatility rates of similar companies to a computation based on the standard deviation of
the Company’s own underlying stock price’s daily logarithmic returns. The fair value of options granted during the
six months ended March 31, 2020 were estimated using the following weighted-average assumptions:
Options:
|
|
For the Six Months Ended
March 31, 2020
|
|
Exercise price
|
|
|
$0.94 - $2.40
|
|
Expected term (years)
|
|
|
2.0 - 4.0
|
|
Expected stock price volatility
|
|
|
108.8% - 188.6
|
%
|
Risk-free rate of interest
|
|
|
1.56
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
A
summary of option activity under the Company’s stock option plan for six months ended March 31, 2020 is presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Total
Intrinsic Value
|
|
|
Weighted
Average Remaining Contractual Life (in years)
|
|
Outstanding
as of September 30, 2019
|
|
|
3,210,416
|
|
|
$
|
2.45
|
|
|
$
|
-
|
|
|
|
2.1
|
|
Granted
|
|
|
1,262,500
|
|
|
$
|
1.19
|
|
|
$
|
-
|
|
|
|
2.3
|
|
Outstanding
as of December 31, 2019
|
|
|
4,472,916
|
|
|
$
|
2.09
|
|
|
$
|
-
|
|
|
|
2.0
|
|
Granted
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of March 31, 2020
|
|
|
4,747,916
|
|
|
|
2.03
|
|
|
|
-
|
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable
|
|
|
3,872,916
|
|
|
$
|
2.23
|
|
|
$
|
-
|
|
|
|
1.6
|
|
Estimated
future stock-based compensation expense relating to unvested stock options was approximately $0.3 million as of March 31, 2020.
Weighted average remaining contractual life of the options is 2.0 years.
Stock-based
Compensation Expense
Stock-based
compensation expense for the three and six months ended March 31, 2020 and 2019 was comprised of the following (in thousands):
|
|
Three months ended March
31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock grants
|
|
$
|
1,105
|
|
|
$
|
641
|
|
Stock options
|
|
|
200
|
|
|
|
35
|
|
Warrants
|
|
|
105
|
|
|
|
612
|
|
Total stock-based compensation
|
|
$
|
1,410
|
|
|
$
|
1,288
|
|
|
|
Six months ended March
31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock grants
|
|
$
|
1,187
|
|
|
$
|
1,996
|
|
Stock options
|
|
|
615
|
|
|
|
343
|
|
Warrants
|
|
|
105
|
|
|
|
697
|
|
Total stock-based compensation
|
|
$
|
1,907
|
|
|
$
|
3,036
|
|
In
the 4th quarter of fiscal year ended September 30, 2019, the Company changed its policy for recognizing prepaid fully
vested non-employee stock-based compensation. Historically, the Company would initially record a prepaid asset based upon the
fair value of the award on the grant date and subsequently record this award over an implicit service period. The Company now
expenses at grant all fully vested non-employee stock-based compensation on the grant date as there is no substantive future service
period on the grant date. This change in accounting method was applied retrospectively, and this change resulted in an increase
in stock based compensation of $273 for the six months ended March 31, 2019. This change increased the loss per share by $(0.01)
from $(0.46) loss per share to $(0.47) per share for the six months ended March 31, 2019.
16.
Commitments and Contingencies
As
noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States
Federal Government. This raises several possible issues which may impact the Company’s overall operations, not the least
of which are related to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level,
and most traditional banks are federally insured, those financial institutions will not service cannabis businesses. In states
where medical or recreational marijuana is legal, dispensary owners, manufacturers, and anybody who “touches the plant,”
continue to face a host of operational hurdles. While local, state-chartered banks and credit unions now accept cannabis commerce,
there remains a reluctance by traditional banks to do business with them. Aside from a huge inconvenience and the need to find
creative ways to manage financial flow, payroll logistics, and payment of taxes, this also poses tremendous risks to controls
as a result of operating a lucrative business in cash. This lack of access to traditional banking may inhibit industry growth.
In the period ended March 31, 2020, the Company’s accounts with a major money center bank were closed as the bank would
not allow the Company to continue to use its banking network.
Despite
the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these
risks will have a substantive impact on its planned operations in the near term.
As
of March 31, 2020, the Company has acquired interests in several entities. As part of those interests, the Company has commitments
to fund the acquisition of licenses and permits to allow for the cultivation and sale of cannabis and related products in the
United States and Eswatini. As of March 31, 2020, Company estimates that its investees will need up to approximately $2.5 million
to complete the acquisition of licenses and permits, to fund the buildout or expansion of facilities to fully operate in their
respective cannabis markets, which will encompass several years of development.
Effective
January 2019, the Company entered into a one-year Board Member agreement, and as part of that agreement for services agreed to
issue 250,000 shares of the Company’s common stock and 250,000 options priced at $1.00.
Effective
January 2019, the Company entered into a multi-year Advisory Board Engagement agreement, and as part of that agreement for services
agreed to issue a warrant to purchase 350,000 shares of the Company’s common stock. The price per share is exercisable at
the price of the stock exchange as of the effective date of the agreement.
In
January 2020, the Company entered into a two-year consulting agreement, and as part of that agreement for professional services,
agreed to issue a total of 500,000 shares of the Company’s common stock and $180,000 cash compensation per annum. Pursuant
to the agreement, all 500,000 shares of common stock will be restricted securities.
On February 27, 2020, a subsidiary of the
Company (YMY Ventures, LLC) was served with a Summons and Second Amended Complaint in a matter pending in the District Court of
Clark County Nevada (Case # A-19-787004-B) which is styled “D.H. Flamingo, Inc. v. Department of Taxation, et. al.”
(the DOT Litigation”). In this matter, the Plaintiff is alleging that certain parties (including YMY Ventures, LLC) received
Conditional Recreational Marijuana Establishment Licenses, while certain other parties (including Plaintiff) were denied licenses.
In the matter, Plaintiff seeks declaratory relief, injunctive relief, relief from violation of procedural and substantive due
process, violation of equal protection, unjust enrichment, judicial review of the entire matter, together with a Petition for
Writ of Mandamus. The Plaintiff seeks damages in an unspecified amount. Thereafter, on April 20, 2020, YMY Ventures, LLC filed
a Notice of Non-Participation and Request for Dismissal. The Company believes it will ultimately be dismissed from the action
without any liability exposure. Notwithstanding, there is no guarantee at this time that this will occur, and the ultimate result
of the matter could potentially be the loss of YMY Ventures, LLC’s Conditional Recreational Marijuana Establishment License.
The Company believes that this result would be highly unlikely and that the matter will be fully resolved as to YMY Ventures,
LLC in the near term.
In
March 2020, the Company entered into a six-month consulting agreement, and as part of that agreement for professional services,
agreed to issue a total of 350,000 shares of the Company’s common stock and $100,000 cash compensation. Pursuant to the
agreement, all 350,000 shares of common stock will be restricted securities.
In
March 2020, the Company entered into a six-month consulting agreement, and as part of that agreement for professional services,
agreed to issue a total of 100,000 shares of the Company’s common stock and $10,000 cash compensation. Pursuant to the agreement,
all 100,000 shares of common stock will be restricted securities.
17.
Subsequent Events
In April, 2020
the Company received approval of the Warrant holders and the debenture holders of the Convertible Debentures to reprice the convertible
securities issued in connection with the Company’s special warrant financing, which closed on December 27, 2018 and March
14, 2019. The share purchase warrants of the Company issued in connection with the financing will be repriced to C$1.50 per Common
Share and the convertible debentures of the Company issued in connection with the financing will be repriced to C$1.15 per common
share. Additionally, the Debentureholders have approved the following amendments to the terms of the convertible debentures: (i)
an extension to the maturity date of the convertible debentures to three years from the date of issuance; and (ii) an amendment
to permit the Company to force the conversion of the principal amount of the then outstanding convertible debentures and any accrued
and unpaid interest thereof at the new conversion price on not less than 30 days’ prior written notice if the closing trading
price of the shares of common stock of the Company’s common shares exceeds C$1.90 for a period of 10 consecutive trading
days on the CSE. The Warrantholders have also approved the inclusion of an early acceleration feature in accordance with the policies
of the Canadian Securities Exchange, permitting the Company to accelerate the expiry date of the warrants should the closing trading
price of the Common Shares exceed C$1.87 for a period of 10 consecutive trading days on the CSE.
During
the period from April 1, 2020 through June 5, 2020, the Company issued an aggregate of 26,666 shares ($13,968 cost basis) to consultants;
12,500 shares ($4,625 cost basis) to an employee; 62,500 shares ($55,000 cost basis) to a new director and 386,030 shares
($196,875 cost basis) to shareholders of NVD RE Corporation pursuant to a Share Exchange Agreement.
This
prospectus is part of a registration statement we filed with the SEC. You should rely only on the information or representations
provided in or incorporated by reference into this prospectus. We have not authorized anyone else to provide you with different
information. You should not assume that the information in this prospectus or any supplement is accurate as of any date other
than the date on the front of those documents.
No
dealer, salesperson or any other person has been authorized to give any information or to make any representations other than
those contained in or incorporated by reference in this prospectus in connection with the offer made by this prospectus, and,
if given or made, such information or representations must not be relied upon as having been authorized by us. This prospectus
does not constitute an offer to sell, or a solicitation of an offer to buy any security other than the securities offered hereby,
nor does it constitute an offer to sell or a solicitation of any offer to buy any of the shares offered by anyone in any jurisdiction
in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified
to do so, or to any person to whom it is unlawful to make such offer or solicitation.
Neither
the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
The
date of this prospectus is June 17, 2020.