UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal quarter ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
(Exact name of small business issuer as specified in its charter)
(State of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
(Address of principal executive offices) (Zip code)
Issuer’s
telephone number:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of exchange on which registered | ||
| OTCQX |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ☐
| Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Smaller
Reporting Company | |
| Emerging
Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
There were shares outstanding of registrant’s common stock, par value $0.001 per share, as of August 10, 2022.
Transitional Small Business Disclosure Format (check one): Yes ☐ No ☒
TABLE OF CONTENTS
| 2 |
PART I
ITEM 1. FINANCIAL STATEMENTS
STEM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | * | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts | ||||||||
| Note receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Assets held for sale | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Investment in equity method investees | ||||||||
| Investments in affiliates | ||||||||
| Deposits and other assets | ||||||||
| Right of use asset | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Due from related party | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Convertible notes, net | ||||||||
| Convertible notes, net related party | ||||||||
| Current maturities of long-term debt | ||||||||
| Short term notes and advances | ||||||||
| Due to related party | ||||||||
| Derivative liability | ||||||||
| Lease liability | ||||||||
| Warrant liability | ||||||||
| Liabilities held for sale | ||||||||
| Total current liabilities | ||||||||
| Lease liability - long term | ||||||||
| Finance liability | ||||||||
| Long-term debt, mortgages | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 17) | ||||||||
| Shareholders’ equity | ||||||||
| Preferred stock, Series A; $ par value; shares authorized, outstanding as of June 30, 2022 and September 30, 2021 | ||||||||
| Preferred stock, Series B; $ par value; shares authorized, outstanding as of June 30, 2022 and September 30, 2021 | ||||||||
| Common stock, $ par value; shares authorized; and shares issued, issuable and outstanding as of June 30, 2022 and September 30, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Stock subscription receivable | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stem Holdings stockholder’s equity | ||||||||
| Noncontrolling interest | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
| * |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
STEM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share amounts)
| For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Consulting fees | ||||||||||||||||
| Professional fees | ||||||||||||||||
| General and administration | ||||||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses), net | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liability | ||||||||||||||||
| Change in fair value of warrant liability | ||||||||||||||||
| Foreign currency exchange gain (loss) | ||||||||||||||||
| Other income | ||||||||||||||||
| Gain on extinguishment of debt | ||||||||||||||||
| Other loss | ( | ) | ||||||||||||||
| Gain from disposal of subsidiary | ||||||||||||||||
| Total other income | ||||||||||||||||
| Income (loss) from continuing operations | ( | ) | ( | ) | ||||||||||||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Net loss attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to Stem Holdings | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic and diluted net income (loss) from continuing operations, per share | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Basic and diluted net income (loss) from discontinued operations, per share | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Basic and diluted net income (loss), per share | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Weighted-average shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
STEM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
(in thousands, except share amounts)
| Total Stem | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Subscription | Accumulated | Holdings Shareholders’ | Non-Controlling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Deficit | Equity | Interest | Equity | |||||||||||||||||||||||||
| Balance as of September 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with consulting agreement | ||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to interest expense | ||||||||||||||||||||||||||||||||
| Common stock cancelled related to discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common stock in connection with employment agreement | ||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to interest expense | - | |||||||||||||||||||||||||||||||
| Common stock cancelled related to discontinued operations | - | |||||||||||||||||||||||||||||||
| Issuance of warrants in connection with consulting agreement | - | |||||||||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common stock related to interest expense | ||||||||||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Issuance of warrants in connection with extension of debenture maturity | - | |||||||||||||||||||||||||||||||
| Net gain (loss) | - | ( | ) | |||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common stock in connection with consulting agreement | ||||||||||||||||||||||||||||||||
| Common stock to be issued | ||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Cancellation of common stock related to convertible notes | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Issuance of common stock related to rent and interest expense | ||||||||||||||||||||||||||||||||
| Issuance of subscription receivable | - | ( | ) | |||||||||||||||||||||||||||||
| Issuance of warrants in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Acquisition of Driven Deliveries, Inc. | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| Issuance of common stock in connection with consulting agreement | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with convertible debt | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with deposit for an asset acquisition | ||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to interest expense | ||||||||||||||||||||||||||||||||
| Issuance of warrants in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Issuance of common stock related to settlement payment | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to Private Placement Memorandum, net | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to Prospectus | ||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| Issuance of common stock related to cash purchase | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with consulting agreement | ||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with convertible debt | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to exercise of options | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to Private Placement Memorandum, net | ||||||||||||||||||||||||||||||||
| Issuance of common stock in related to commission expense | ||||||||||||||||||||||||||||||||
| Cancellation of common stock related to investments | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of options in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Issuance of warrants in connection with employment agreement | - | |||||||||||||||||||||||||||||||
| Issuance of common stock related to Prospectus | ||||||||||||||||||||||||||||||||
| Recognition of non-controlling interest related to asset acquisition | - | ( | ) | |||||||||||||||||||||||||||||
| Share exchange agreement adjustment | - | |||||||||||||||||||||||||||||||
| Net loss | - | $ | ( | ) | ||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
STEM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| For the Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations, net of tax | ||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | ||||||||
| Issuance of common stock in connection with consulting agreements | ||||||||
| Issuance of common stock related to rent and interest expense | ||||||||
| Impairment of investments | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of intangible assets | ||||||||
Gain on extinguishment of debt | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Gain on sale of equity method investments | ( | ) | ||||||
| Recognition of derivative liability | ( | ) | ||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||
| Foreign currency adjustment | ( | ) | ( | ) | ||||
| Gain from disposal of subsidiary | ( | ) | ||||||
| Gain on sale of property | ( | ) | ( | ) | ||||
| Other | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net of allowance for doubtful accounts | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Other assets | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Net cash used in continuing operating activities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) discontinued operating activities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Investment in equity method investees, Michigan & Massachusetts | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Project costs | ( | ) | ||||||
| Sale of property | ||||||||
| Cash received related to sale of equity method investment | ||||||||
| Issuance of note receivable | ( | ) | ||||||
| Investments | ( | ) | ||||||
| Related party payments | ( | ) | ||||||
| Net cash provided by continuing investing activities | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of common stock | ||||||||
| Notes payable and advanced proceeds | ||||||||
| Repayments of notes payable and advances | ( | ) | ||||||
| PPP and debt forgiveness | ( | ) | ||||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Net cash provided by financing activities from continuing operations | ||||||||
| Net cash provided by financing activities from discontinued operations | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at the beginning of the period | ||||||||
| Cash and cash equivalents at the end of the period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Supplemental disclosure of noncash activities: | ||||||||
| Non-cash repayment of finance liability | $ | $ | ||||||
| Financed Insurance | $ | $ | ||||||
| Interest paid in the form of common stock | $ | $ | ||||||
| Issuance of common stock related to separation agreement | $ | $ | ||||||
| Conversion of debt and accrued interest to equity | $ | $ | ||||||
| Issuance of common stock for settlement | $ | $ | ||||||
| Refinancing of mortgage | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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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, and is a leading omnichannel, vertically-integrated cannabis branded products and technology company with state-of-the-art cultivation, processing, extraction, retail, distribution, and delivery-as-a-service (DaaS) operations throughout the United States. Stem’s family of award-winning brands includes TJ’s Gardens™, TravisxJames™, and Yerba Buena™ flower and extracts; Cannavore™ edible confections; and e-commerce delivery platforms provide direct-to consumer proprietary logistics and an omnichannel UX (user experience)/CX (customer experience).
The Company purchases, improves, leases, operates, and invests in properties for use in the production, distribution and sales of cannabis and cannabis-infused products licensed under the laws of the states of Oregon, Nevada, and California. As of June 30, 2022, Stem had ownership interests in 23 state issued cannabis licenses including nine (9) licenses for cannabis cultivation, three (3) licenses for cannabis processing, two (2) licenses for cannabis wholesale distribution, three (3) licenses for hemp production and (6) cannabis dispensary licenses.
The Company has nine wholly-owned subsidiaries, including Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri, Inc., Stem Holdings Oregon Acquisitions 1, Corp., Stem Holdings Oregon Acquisitions 2, Corp., Stem Holdings Oregon Acquisitions 3, Corp., Stem Holdings Oregon Acquisitions 4 Corp., 2336034 Alberta Ltd., Stem, through its subsidiaries, is currently in the process of the acquisition of entities or be acquired by entities directly in the production and sale of cannabis. Driven Deliveries, Inc., a former wholly-owned subsidiary, was sold during the quarter ended December 31, 2021 (see Note 3).
The Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the symbol “STEM” and the OTCQX exchange under the symbol “STMH”.
In June 2021, the Company’s shareholders approved a proposal to amend the Company’s Articles of Incorporation to increase the number of authorized common shares from shares to shares.
Going Concern
On
June 30, 2022, the Company had approximate balances of cash and cash equivalents of
These unaudited consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.
The United States federal government regulates drugs in large part through the Controlled Substances Act or CSA. Marijuana, which refers to certain parts and derivatives of the cannabis plant, is classified as a Schedule I controlled substance. As a Schedule I controlled substance, the federal Drug Enforcement Agency, or DEA, considers marijuana to have a high potential for abuse, no currently accepted medical use in treatment in the United States, and a lack of accepted safety for use of the drug under medical supervision. According to the U.S. federal government, cannabis having a concentration of tetrahydrocannabinol, or THC, greater than 0.3% is marijuana. Cannabis with a THC content below 0.3% is classified as hemp. The scheduling of marijuana as a Schedule I controlled substance is inconsistent with what we believe to be widely accepted medical uses for marijuana by physicians, researchers, customers, and others. Moreover, as of December 31, 2021, and despite the conflict with U.S. federal law, at least 36 states, the District of Columbia, the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands have legalized marijuana for medical use. Eighteen of those states and the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam have legalized the adult use of cannabis for recreational purposes. In November 2020, voters in Arizona, Montana, New Jersey, and South Dakota voted by referendum to legalize marijuana for adult use, and voters in Mississippi and South Dakota voted to legalize marijuana for medical use, although South Dakota’s adult-use measure has been declared unconstitutional by the State Supreme Court. In 2021, the states of Connecticut, New Mexico, New York, and Virginia enacted laws legalizing the adult use of cannabis.
Marijuana is largely regulated at the state level in the United States. State laws regulating marijuana conflict with the CSA, making marijuana use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use marijuana production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of marijuana and any related drug paraphernalia is illegal. Although our activities are compliant with the applicable state and local laws in those states where we maintain such licenses, strict compliance with state and local laws with respect to cannabis may neither absolve us of liability under United States federal law nor provide a defense to any federal criminal action that may be brought against us.
In 2013, as more and more states began to legalize medical and/or adult-use marijuana, the federal government attempted to provide clarity on the incongruity between federal law and these state-legal regulatory frameworks. Until 2018, the federal government provided guidance to federal agencies and banking institutions through a series of DOJ memoranda. The most notable of this guidance came in the form of a memorandum issued by former U.S. Deputy Attorney General James Cole on August 29, 2013, which we refer to as the Cole Memorandum.
The Cole Memorandum offered guidance to federal agencies on how to prioritize civil enforcement, criminal investigations, and prosecutions regarding marijuana in all states and quickly set a standard with which marijuana-related businesses would comply. The Cole Memorandum put forth eight prosecution priorities:
1. Preventing the distribution of marijuana to minors;
2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
4. Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
| 7 |
7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
8. Preventing marijuana possession or use on federal property.
On January 4, 2018, former United States Attorney General Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United States Attorneys, which we refer to as the Sessions Memo. Rather than establishing national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana activity was legal under state law, the Sessions Memo simply rescinded the Cole Memorandum and other Department of Justice memorandums providing prosecutorial guidance on state and tribally authorized medical and adult-use cannabis activities and instructed that “[i]n deciding which marijuana activities to prosecute... with the [DOJ’s] finite resources, prosecutors should follow the well- established principles that govern all federal prosecutions.” Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.
On January 21, 2021, Joseph R. Biden, Jr. was sworn in as President of the United States. President Biden’s Attorney General, Merrick Garland, was confirmed by the United States Senate on March 10, 2021. It is not yet known whether the Department of Justice, under President Biden and Attorney General Garland, will re-adopt the Cole Memorandum or announce a substantive marijuana enforcement policy. During his Senate confirmation, Merrick Garland told Senator Cory Booker (D-NJ), “It does not seem to me useful the use of limited resources that we have to be pursuing prosecutions in states that have legalized and are regulating the use of marijuana, either medically or otherwise.” Such statements are not official declarations or policies of the DOJ and are not binding on the DOJ, any United States Attorney, or the United States federal courts. Substantial uncertainty regarding United States federal enforcement remains. To date, there have been no new federal cannabis memorandums issued by the Biden Administration or any published change in federal enforcement policy.
Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of marijuana will not be repealed or overturned or that local government authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to marijuana (and as to the timing or scope of any such potential amendments, there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law. Currently, in the absence of uniform federal guidance, as had been established by the Cole Memorandum, enforcement priorities are determined by respective United States Attorneys.
As an industry best practice, despite the rescission of the Cole Memorandum, we abide by the following standard operating policies and procedures, which are designed to ensure compliance with the guidance provided by the Cole Memorandum:
1. Continuously monitor our operations for compliance with all licensing requirements as established by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions;
2. Ensure that our cannabis-related activities adhere to the scope of the licensing obtained (for example: in the states where cannabis is permitted only for adult-use, the products are only sold to individuals who meet the requisite age requirements);
3. Implement policies and procedures to prevent the distribution of our cannabis products to minors;
4. Implement policies and procedures in place to avoid the distribution of the proceeds from our operations to criminal enterprises, gangs, or cartels;
5. Implement an inventory tracking system and necessary procedures to reliably track inventory and prevent the diversion of cannabis or cannabis products into those states where cannabis is not permitted by state law or across any state lines in general;
6. Monitor the operations at our facilities so that our state-authorized cannabis business activity is not used as a cover or pretense for trafficking of other illegal drugs or engaging in any other illegal activity; and
7. Implement quality controls so that our products comply with applicable regulations and contain necessary disclaimers about the contents of the products to avoid adverse public health consequences from cannabis use and discourage impaired driving.
In addition, we frequently conduct background checks to confirm that the principals and management of our operating subsidiaries are of good character and have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or the use of firearms in the cultivation, manufacturing, or distribution of cannabis. We also conduct ongoing reviews of the activities of our cannabis businesses, the premises on which they operate, and the policies and procedures related to the possession of cannabis or cannabis products outside of the licensed premises.
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Moreover, in recent years, certain temporary federal legislative enactments that protect the medical marijuana and hemp industries have also been in effect. For instance, certain marijuana businesses receive a measure of protection from federal prosecution by operation of temporary appropriations measures that have been enacted into law as amendments (or “riders”) to federal spending bills passed by Congress and signed by Presidents Obama, Trump, and, most recently, President Biden. For instance, in the Appropriations Act of 2015, Congress included a budget “rider” that prohibits DOJ from expending any funds to enforce any law that interferes with a state’s implementation of its own medical marijuana laws. The rider originally known as the “Rohrbacher-Farr” Amendment after its original lead sponsors is now known as the “Joyce” Amendment after its current sponsor. Originally, a Republican-controlled House and Democratic-controlled Senate passed the Rohrbacher-Farr Amendment. The bill was “a bipartisan appropriations measure that looks to prohibit the DEA from spending funds to arrest state-licensed medical marijuana patients and providers.” Subsequently, the rider t has been included in multiple budgets passed by successive Congresses controlled by both major political parties. Most recently, on February 18, 2022, the Amendment was renewed through the signing of an additional stopgap spending bill, H.R.6617 - Further Additional Extending Government Funding Act, effective through March 11, 2022. While the Amendment has been included in successive appropriations legislation or resolutions since 2015, its inclusion or non-inclusion is subject to political change.
Notably, Joyce Amendment has applied only to medical marijuana programs and has not provided the same protections to enforcement against adult-use activities. If the Amendment is no longer in effect, the risk of federal enforcement and override of state marijuana laws would increase.
In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to several other countries, including the United States. On June 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, as of the time of the filing of this 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 its closing of the acquisition or investment in entities that engage directly in the production and or sale of cannabis.
Management believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities. However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce, eliminating outside consultants, and reducing legal fees to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed financial statements included herein are unaudited. Such financial statements, in the opinion of management, contain all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of the results to be expected for the year ending September 30, 2022, 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, 2021, filed on January 13, 2022. The Company believes that the disclosures are adequate to make the interim information presented not misleading
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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 consolidated financial statements are those associated with the assumptions used to value equity instruments, valuation of its long live assets for impairment testing, valuation of intangible assets, and the valuation of inventory. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable given the circumstances that exist at the time the financial statements are prepared. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Reclassifications
Certain amounts in the Company’s consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.
Principles of Consolidation
The Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock. In addition, the Company consolidates entities that meet the definition of a variable interest entity (“VIE”) for which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third party’s holding of equity interest is presented as noncontrolling interests in the Company’s Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity. The portion of net loss attributable to the noncontrolling interests is presented as net loss attributable to noncontrolling interests in the Company’s Consolidated Statements of Operations.
The accompanying consolidated financial statements include the accounts of Stem Holdings, Inc. and its wholly owned subsidiaries, Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Holdings Agri, Inc., Stem Oregon Acquisitions 2 Corp., Stem Oregon Acquisitions 3 Corp., Stem Oregon Acquisitions 4 Corp., 7LV USA Corporation, and Stem Oregon Acquisitions 1 Corp., and Driven Deliveries, Inc., which was divested. In addition, the Company has consolidated YMY Ventures, WCV, LLC and NVD RE, Inc. under the variable interest requirements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s cash is primarily maintained in checking accounts. These balances may, at times, exceed the U.S. Federal Deposit Insurance Corporation insurance limits. As of June 30, 2022, and September 30, 2021, the Company had no cash equivalents or short-term investments. The Company has not experienced any losses on deposits of cash and cash equivalents.
Accounts Receivable
Accounts
receivable is shown on the face of the consolidated balance sheets, net of an allowance for doubtful accounts. The Company analyzes the
aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance
for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. As of June 30, 2022, the reserve
for doubtful accounts was approximately $
Inventory
Inventory is comprised of raw materials, finished goods and work-in-progress such as pre-harvested cannabis plants and by-products to be extracted. The costs of growing cannabis including but not limited to labor, utilities, nutrition, and irrigation, are capitalized into inventory until the time of harvest.
Inventory is stated at the lower of cost or net realizable value, determined using weighted average cost. Cost includes expenditures directly related to manufacturing and distribution of the products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes.
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Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure inventory at the lower of cost or net realizable value. Factors considered in the determination of obsolescence include slow-moving or non-marketable items.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include consulting, advertising, insurance, and service or other contracts requiring up-front payments.
Property and Equipment
Property,
equipment, and leasehold improvements are stated at cost less accumulated depreciation.
Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance, and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. The Company continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. See “Note 3 – Property, Equipment and Leasehold Improvements”.
Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line method over the estimated useful lives of the assets. The Company estimates useful lives as follows:
| Buildings | |
| Leasehold improvements | |
| Furniture and equipment | |
| Signage | |
| Software and related |
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.
An
impairment expense of $
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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 to exercise their option. All amounts shown capitalized prior to acquisition of a property are included under the caption of Project Costs within the “Prepaid expenses and other current 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
During
the nine months ended June 30, 2022, the Company recorded $
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 nine months ended June 30, 2022, and 2021, the Company determined that there were
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Business Combinations
The Company applies the provisions of ASC 805 in the accounting for acquisitions. ASC 805 requires the Company to recognize separately from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.
Contingent Consideration
The Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations” (“FASB ASC 805”). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction. FASB ASC 805 uses the fair value definition in Fair Value Measurements, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As defined in FASB ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree, if specified future events occur or conditions are met or (ii) the right of the acquirer to the return of previously transferred consideration if specified conditions are met.
Warrant Liability
The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s consolidated statements of operations. The fair value of the warrants issued by the Company has been estimated using a Black Scholes model.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the statement of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition. When the Company records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. As of September 30, 2021, and 2020, such net operating losses were offset entirely by a valuation allowance.
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
| 13 |
In
December 2017, the Tax Cuts and Jobs Act (TCJA or the Act) was enacted, which significantly changes U.S. tax law. In accordance with
ASC 740, “Income Taxes”, the Company is required to account for the new requirements in the period that includes the date
of enactment. The Act reduced the overall corporate income tax rate to
In
December 2020, the Company issued a significant number of new shares in its acquisition of Driven (see Note . The effect of these issuances
is most likely, the Company and Driven have experienced the requisite change of control as promulgated under the US Internal Revenue
Code section 382. The effect of this will be that going forward, the ability of the Company and Driven to utilize their respective U.S.
Federal net operating loss carryforwards from prior to December 29, 2020, will be limited in its usage. In order to determine the specific
effect, the Company must perform the computations required under the Internal Revenue Code, which have not yet been performed. The Company
expects it will perform the required computations in the coming fiscal year. On December 15, 2021, pursuant to a Share Exchange Agreement,
the Company sold Driven Deliveries and its subsidiaries to the shareholders of Budee, Inc. in a transaction which the Company fully divested
all of its interests in Driven Deliveries and all of its subsidiaries. Included in the terms of the Share Exchange Agreement, the shareholder
of Budee, Inc., and prior officer of Driven Deliveries returned approximately million shares of the Company’s common stock
and assumed approximately $
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.
Effective October 1, 2019, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective method. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues related to wholesale and retail revenue are recorded upon transfer of merchandise to the customer, which was the effective policy under ASC 605 previously.
The following policies reflect specific criteria for the various revenue streams of the Company:
Cannabis Dispensary, Cultivation and Production
Revenue is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance obligation is complete. Terms are generally between cash on delivery to 30 days for the Company’s wholesale customers.
The Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale) there are essentially no returns allowed or warranty available to the customer under the various state laws.
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Delivery
| 1) | Identify the contract with a customer |
The Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.
| 2) | Identify the performance obligations in the contract |
The Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any necessary deliveries of those products.
| 3) | Determine the transaction price |
The sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost that those goods are being sold for plus any additional delivery costs.
| 4) | Allocate the transaction price to performance obligations in the contract |
For the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery fees that may be incurred to deliver to the customer.
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
For the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.
Leases
The Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably assured.
The Company makes estimates of the collectability of its tenant receivables related to base rents, straight-line rent, and other revenues. In the current fiscal year, the Company began significant rental operations. The Company considers such things as historical bad debts, tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments relevant to a tenant’s business, and changes in tenants’ payment patterns in its analysis of accounts receivable and its evaluation of the adequacy of the allowance for doubtful accounts. Specifically, for straight-line rent receivables, the Company’s assessment includes an estimation of a tenant’s ability to fulfill its rental obligations over the remaining lease term.
On October 1, 2020, the Company adopted ASC 842 and elected to apply the new standard at the adoption date and recognize a cumulative effect as an adjustment to retained earnings. Upon calculation the effect on retained earnings was immaterial and no adjustment was deemed necessary. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use (“ROU”) assets.
Our lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing rate on June 30, 2022, for all leases that commenced prior to that date. In determining this rate, which is used to determine the present value of future lease payments, we estimate the rate of interest we would pay on a collateralized basis, with similar payment terms as the lease and in a similar economic environment.
Under
Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Lease costs were approximately $
Lease Costs
| Nine Months Ended | Nine Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2022 | 2021 | |||||||
| Components of total lease costs: | ||||||||
| Operating lease expense | $ | $ | ||||||
| Total lease costs | $ | $ | ||||||
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Lease positions as of June 30, 2022
ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:
June 30, 2022 | ||||
| Assets | ||||
| Right of use asset | $ | |||
| Total assets | $ | |||
| Liabilities | ||||
| Operating lease liabilities – short term | $ | |||
| Operating lease liabilities – long term | ||||
| Total lease liability | $ | |||
Lease Terms and Discount Rate
| Weighted average remaining lease term (in years) – operating lease | ||||
| Weighted average discount rate – operating lease | % |
Cash Flows
| Nine Months Ended | ||||
| June 30, 2022 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| ROU amortization | $ | |||
| Cash paydowns of operating liability | $ | ( | ) | |
The future remaining minimum lease payments under the leases are as follows for the years ended September 30:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total future minimum lease payments | ||||
| Less: Lease imputed interest | ( | ) | ||
| Total | $ |
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Disaggregation of Revenue
For the period ended June 30, 2022, revenue reported was primarily from the sale of cannabis and related products accounted for under ASC 606.
The following table illustrates our revenue by type related to the three months ended June 30, 2022, and 2021 respectively:
| Three Months Ended June 30, | 2022 | 2021 | ||||||
| Revenue | ||||||||
| Wholesale | $ | $ | ||||||
| Retail | ||||||||
| Rental | ||||||||
| Other | ||||||||
| Total revenue | ||||||||
| Discounts and returns | ( | ) | ( | ) | ||||
| Net Revenue | $ | $ | ||||||
The following table illustrates our revenue by type related to the nine months ended June 30, 2022, and 2021 respectively:
| Nine Months Ended June 30, | 2022 | 2021 | ||||||
| Revenue | ||||||||
| Wholesale | $ | $ | ||||||
| Retail | ||||||||
| Rental | ||||||||
| Product Sales | ||||||||
| Other | ||||||||
| Total revenue | ||||||||
| Discounts and returns | ( | ) | ( | ) | ||||
| Net Revenue | $ | $ | ||||||
Geographical Concentrations
As of June 30, 2022, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational use in 15 states and D.C., with lesser legalization, such as for medical use in an additional 21 states and D.C., as of the time of these consolidated financial statements. In addition, the United States Congress has passed legislation, specifically the Agriculture Improvement Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of hemp and associated products from Schedule 1 of the Controlled Substances Act.
Cost of Goods Sold
Cost of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The Company recognizes the cost of sales as the associated revenues are recognized.
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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.
| 18 |
ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only incurred losses, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share as of June 30, 2022, and September 30, 2021, are as follows:
| June 30, | September 30, | |||||||
| Potentially dilutive share-based instruments: | 2022 | 2021 | ||||||
| Convertible notes | ||||||||
| Options to purchase common stock | ||||||||
| Unvested restricted stock awards | ||||||||
| Warrants to purchase common stock | ||||||||
Advertising Costs
The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was approximately $
Related parties
Parties are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Segment reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision–maker is its chief executive officer. The Company currently operates in
Recent Accounting Guidance
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
| 19 |
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods beginning January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and requires lessees
to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year
or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors,
accounting for leases under the new guidance is substantially the same as in prior periods but eliminates current real estate-specific
provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases
that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition
relief. Full retrospective application is prohibited. The standard was adopted as of October 1, 2020. As of June 30, 2022, the Company
recognized additional operating liabilities of approximately $
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 provides guidance for recognizing credit losses on financial instruments based on an estimate of current expected credit losses model. The amendments are effective for fiscal years beginning after December 15, 2019. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar year 2023. The Company is currently assessing the impact of the adoption of this ASU on its financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods beginning after December 15, 2021 and interim periods within those annual periods and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
3. Discontinued Operations, Assets and Liabilities Held for Sale
Discontinued Operations
On
December 15, 2021, pursuant to a Share Exchange Agreement, the Company sold Driven Deliveries and its subsidiaries to the shareholders
of Budee, Inc. in a transaction which the Company fully divested all of its interests in Driven Deliveries and all of its subsidiaries.
Included in the terms of the Share Exchange Agreement, the shareholder of Budee, Inc., and prior officer of Driven Deliveries returned
approximately million shares of the Company’s common stock and assumed approximately $
| 20 |
The following table presents the assets and liabilities associated with the divestiture of Driven Deliveries; Inc. as follows (in thousands):
| December 15, | September 30, | |||||||
| 2021 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset | ||||||||
| Intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Short term notes and advances | ||||||||
| Settlement payable | ||||||||
| Acquisition notes payable | ||||||||
| Lease liability | ||||||||
| Total current liabilities | ||||||||
| Lease liability - long term | ||||||||
| Total liabilities | $ | $ | ||||||
The total assets and total liabilities in the above table for the year ended September 30, 2021, are presented in the balance sheet as of September 30, 2021, as Assets held for sale and Liabilities held for sale.
The following table presents the operating results related to the divestiture of Driven Deliveries; Inc. (in thousands):
| Nine Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross Profit | ||||||||
| Operating expenses: | ||||||||
| Consulting fees | ||||||||
| Professional fees | ||||||||
| General and administration | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expenses) | ||||||||
| Interest expense | ( | ) | ||||||
| Other income | ||||||||
| Total other income (expense) | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| 21 |
4. Property, Plant & Equipment
Property and equipment consist of the following (in thousands):
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Land | $ | $ | ||||||
| Automobiles | ||||||||
| Signage | ||||||||
| Furniture and equipment | ||||||||
| Leasehold improvements | ||||||||
| Buildings and property improvements | ||||||||
| Computer software | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was approximately $
5. Inventory
Inventory consists of the following (in thousands):
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Total Inventory | $ | $ | ||||||
Raw
materials and work-in-progress include the costs incurred for cultivation materials and live plants. Finished goods consists of cannabis
products sent to retail locations or ready to be sold.
6. Prepaid expenses and other current assets
Prepaid
expenses and other current assets are assets and payments previously made, that benefit future periods. The balance as of June 30, 2022,
includes the Employee Retention Tax Credit (“ERTC”) program from the U.S Treasury, as part of the COVID-19 stimulus package.
During the fiscal year ended September 30, 2021, the Company applied for certain ERTC credits in the approximate amount of $
Prepaid and other current assets comprised of the following:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Prepaid expenses | $ | $ | ||||||
| ERTC credits | ||||||||
| Deposits and other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
| 22 |
7. Equity method investments
Tilstar Medical, LLC
In
April 2019, the Company entered into an agreement to acquire
Community Growth Partners, Inc
On
January 6, 2020,
8. Note Receivable
On
January 4, 2020, the Company issued a $
On
January 6, 2020, the Company issued a convertible non-negotiable revolving credit promissory note up to $
In
September 2020 a former employee received funds on behalf of the Company. On October 1, 2020, the Company executed a $
| 23 |
9. Consolidated Asset Acquisitions
YMY Ventures LLC
In
September 2018, the Company entered into an agreement to acquire
NVD RE Corp.
In
April 2018, the Company received a
Michigan RE 1
On
January 4, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with Michigan RE 1, Inc. (“MRE1”)
pursuant to a private placement offering of up to an aggregate amount of $ comprising up to shares of MRE1’s common stock
which represents
| 24 |
Kaya Holdings, Corp.
On
April 13, 2021, the Company executed an Investors’ Rights Agreement in conjunction with a Subscription Agreement with Kaya Holdings,
Corp. The Company purchased shares of Class B common stock of Kaya Holdings, Corp for a total investment of $
10. Non-Controlling Interests
Non-controlling interests in consolidated entities are as follows (in thousands):
| As of September 30, 2021 | ||||||||||||||||
NCI Equity Share | Net Loss Attributable to NCI | NCI in Consolidated Entities | Non- Controlling Ownership % | |||||||||||||
| NVD RE Corp. | $ | $ | ( | ) | $ | % | ||||||||||
| Western Coast Ventures, Inc. | ( | ) | % | |||||||||||||
| YMY Ventures, Inc. | % | |||||||||||||||
| Michigan RE 1, Inc. | ( | ) | ( | ) | % | |||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
| As of June 30, 2022 | ||||||||||||||||
NCI Equity Share | Net Loss Attributable to NCI | NCI in Consolidated Entities | Non- Controlling Ownership % | |||||||||||||
| NVD RE Corp. | $ | $ | ( | ) | $ | % | ||||||||||
| Western Coast Ventures, Inc. | $ | ( | ) | % | ||||||||||||
| YMY Ventures, Inc. | $ | % | ||||||||||||||
| Michigan RE 1, Inc. | ( | ) | $ | ( | ) | ( | ) | % | ||||||||
| $ | $ | ( | ) | $ | ||||||||||||
11. Business Combination
Artifact
On
September 17, 2021, pursuant to an Agreement and Plan of Reorganization (“Agreement”) the Company acquired a marijuana processor
business and a marijuana retailer business located in Eugene, Oregon; a marijuana retailer business located in Salem, Oregon; and certain
intellectual property assets, including but not limited to the “ARTIFACT EXTRACTS” trademark that is used by the retail businesses
acquired in connection with the Agreement. In connection with the Agreement, the Company acquired fixed assets and intangible assets
in exchange for common shares of the Company valued at $
| 25 |
Purchase Price Allocation
As of September 17, 2021, 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):
| Purchase Consideration | ||||
| Stock Consideration | $ | |||
| Total Purchase Consideration | $ | |||
| Allocation of Purchase Consideration | ||||
| Working Capital | $ | |||
| Fixed Assets | ||||
| Customer Relationships | ||||
| License | ||||
| Tradename | ||||
| Goodwill | ||||
| Total Purchase Consideration | $ | |||
The
goodwill of $
The following unaudited proforma condensed consolidated results of operations have been prepared as if the acquisition above occurred October 1, 2020.
| Three Months Ended | Nine Months Ended | |||||||
| June 30, 2021 | June 30, 2021 | |||||||
| Revenue | $ | $ | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
The unaudited proforma condensed consolidated results of operations are not necessarily indicative of results that would have occurred had the acquisitions occurred as of October 1, 2020, nor are they necessarily indicative of the results that may occur in the future.
12. Intangible Assets, net
Intangible assets as of June 30, 2022, and September 2021 (in thousands):
Estimated Useful Life | Cannabis Licenses | Tradename | Customer Relationship | Non- compete | Technology | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
| Balance as September 30, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| YMY Ventures | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Western Coast Ventures, Inc. | ||||||||||||||||||||||||||||||
| Yerba Buena | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foothill (7LV) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Driven Deliveries | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| JV Retail 3 | ( | ) | ( | ) | ||||||||||||||||||||||||||
| JV Retail 4 | ( | ) | ( | ) | ||||||||||||||||||||||||||
| JV Extraction | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||
| Balance as March 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Actual
amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions,
changes in useful lives or other relevant factors or changes. Amortization expense for the three and nine months ended June 30, 2022,
was $
| 26 |
The following table is the future remaining expected amortization for the fiscal years ended September 30:
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| $ |
13. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following (in thousands):
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | |||||||
| Accrued credit cards | ||||||||
| Accrued interest | ||||||||
| Accrued payroll | ||||||||
| Accrued sales tax liability | ||||||||
| Other | ||||||||
| Total Accounts Payable and Accrued Expenses | $ | $ | ||||||
14. Notes Payable and Advances
The following table summarizes the Company’s short-term notes and advances, acquisition note payable, due to related party loans, and long-term debt, mortgages as of June 30, 2022, and September 30, 2021:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Equipment financing | $ | $ | ||||||
| Insurance financing | ||||||||
| Promissory note | ||||||||
| Total notes payable and advances | $ | $ | ||||||
| Current portion of long-term debt | $ | $ | ||||||
| Long-term mortgages, net of current portion | ||||||||
| Total long-term debt, net of current portion | $ | $ | ||||||
Equipment financing
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 $
| 27 |
Pursuant
to the Company’s acquisition of Yerba Buena the Company assumed a note payable obligation dated July 2017 related to a tractor
which had a 60-month premium finance agreement. The principal amount was $
January
2021, the Company entered into a promissory note in the amount of $
Insurance financing
Effective
February 17, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $
Effective
December 4, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $
Effective
February 24, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $
Effective
April 10, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $
Effective
April 17, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $
Effective
May 31, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $
Effective
July 16, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $
Effective
July 17, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $
Effective
August 30, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $
Effective
October 26, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $
| 28 |
Effective
February 9, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $
Effective
February 24, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $
Effective
April 6, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $
Effective
May 23, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal
amount of $
Effective
April 5, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $
Promissory note
In
January 2020, the Company issued two promissory notes with a principal balance of $
In
April 2022, the Company has completed a private placement of a $
Long-term debt, mortgages
In
January 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears
interest at
| 29 |
In
March 2020, the Company executed a $
In
March 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at
In
July 2020, the Company executed a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at
In
April 2018, the Company received a
The following is a table of the 5-year runoff of our long-term debt as of June 30:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Less current portion of long-term debt: | ( | ) | ||
| $ |
Finance liability
In
November 2020, the Company executed a mortgage payable on property located in Mulino, Oregon to acquire additional funds. The mortgage
bears interest at
| 30 |
15. Convertible debt
Canaccord
On
December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of up to
convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross proceeds of
up to CDN$
In
December 2018 and January 2019, the Company issued
On
March 14, 2019, the Company issued
The
total aggregate proceeds of the Offering totaled $
Each CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration) for one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third business day after the date on which both (A) a receipt (the “Receipt”) for a (final) document (the “Qualification Document”) qualifying the distribution of the Convertible Debentures (as defined below) and Warrants (as defined below) issuable upon exercise of the CD Special Warrants has been issued by the applicable securities regulatory authorities in the Canadian jurisdictions in which purchasers of the CD Special Warrants are resident (the “Canadian Jurisdictions”), and (B) a registration statement (the “Registration Statement”) registering the resale of the common shares underlying the Convertible Debentures and Warrants has been declared effective by the U.S. Securities and Exchange Commission (the “Registration”); and (ii) the date that is six months following the closing of the Offering. The Company has also provided certain registration rights to purchasers of the CD Special Warrants. The CD Special Warrants were exchanged for Convertible Debenture Units after six months as U.S. and Canadian registrations were not effective at that time.
Each
Convertible Debenture Unit is comprised of CDN $
The
Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the Offering.
If the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that is 120 days following the closing
of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof to receive,
The
brokered portion of the Offering (CDN $
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.
| 31 |
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$
such that common shares are issued for each C$ |
|
| ● | 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 |
|
| ● | Contingent
Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding
amount and principal and interest * |
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
$
| Fair value of underlying common shares | $ | to $ | ||
| Exercise price (converted to USD) | $ | |||
| Dividend yield | ||||
| Historical volatility | % | |||
| Risk free interest rate | % |
The warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not meet the scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance with the guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in fair value recognized in earnings each reporting period.
In
April 2020, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the Convertible
Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing, which closed
on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in connection with the financing will be repriced
to C$ per Common Share and the convertible debentures of the Company issued in connection with the financing will be repriced to
C$ per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible debentures:
(i) an extension to the maturity date of the convertible debentures to three years from the date of issuance; and (ii) an amendment to
permit the Company to force the conversion of the principal amount of the then outstanding convertible debentures and any accrued and
unpaid interest thereof at the new conversion price on not less than June days’ prior written notice if the closing trading price
of the shares of common stock of the Company’s common shares exceeds C$ for a period of 10 consecutive trading days on the
CSE. The Warrant holders have also approved the inclusion of an early acceleration feature in accordance with the policies of the Canadian
Securities Exchange, permitting the Company to accelerate the expiry date of the warrants should the closing trading price of the Common
Shares exceed C$ for a period of 10 consecutive trading days on the CSE. As of September 30, 2021, the convertible debt related to
the above debentures is $
| 32 |
In
June 2022, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the
Convertible Debentures to reprice the convertible securities issued in connection with the Company’s special warrant
financing, which initially closed on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in
connection with the financing will be repriced to C$
per Common Share and the convertible debentures of the Company issued in connection with the financing will be repriced to C$
per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible
debentures: (i) an extension to the maturity date of the convertible debentures to three years ; 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$
for a period of 10 consecutive trading days on the CSE, (iii) the payment of
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 for the period ended June 30, 2022, in USD, (in thousands):
| Warrant Liability | Derivative Liability | |||||||
| Balance as of September 30, 2021 | $ | $ | ||||||
| Change in fair value | ( | ) | ( | ) | ||||
| Balance as of March 31, 2022 | ||||||||
| Options issued | ||||||||
| Balance as of June 30, 2022 | $ | $ | ||||||
16. 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 the period ended June 30, 2022 (in thousands):
| Fair value measured at June 30, 2022 | ||||||||||||||||
| Quoted prices in active | Significant other | Significant | ||||||||||||||
| markets | observable inputs | unobservable inputs | ||||||||||||||
| Fair value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Warrant liability | $ | $ | $ | $ | ||||||||||||
| Embedded derivative liability | ||||||||||||||||
| Total fair value | $ | $ | $ | $ | ||||||||||||
There were no transfers between Level 1, 2 or 3 during the period ended June 30, 2022.
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The following table presents changes in Level 3 liabilities measured at fair value for the period ended June 30, 2022. 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).
| Warrant Liability | Derivative Liability | Total | ||||||||||
| Balance – September 30, 2021 | $ | $ | $ | |||||||||
| Warrants granted for services | ||||||||||||
| Change in fair value | ( | ) | ( | ) | ||||||||
| Balance – December 31, 2021 | ||||||||||||
| Issuance of warrants - compensation | ||||||||||||
| Change in fair value | ( | ) | ( | ) | ||||||||
| Balance – March 31, 2022 | ||||||||||||
| Options issued | ||||||||||||
| Change in fair value | ( | ) | ( | ) | ||||||||
| Balance – June 30, 2022 | $ | $ | $ | |||||||||
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of June 30, 2022, and September 2021 is as follows:
| Warrant Liability | ||||||||
| As of June 30, | As of September 30, | |||||||
| 2022 | 2021 | |||||||
| Strike price | $ | $ | ||||||
| Contractual term (years) | ||||||||
| Volatility (annual) | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend yield (per share) | % | % | ||||||
| Embedded Derivative Liability | ||||||||
| As of June 30, | As of September 30, | |||||||
| 2022 | 2021 | |||||||
| Strike price | $ | $ | ||||||
| Contractual term (years) | ||||||||
| Volatility (annual) | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend yield (per share) | % | % | ||||||
| Credit spread | % | % | ||||||
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17. Shareholders’ Equity
In 2016, the Company adopted a plan to allow the Company to compensate prospective and current employees, directors, and consultants through the issuance of equity instruments of the Company. The plan has an effective life of 10 years. The plan is administered by the board of directors of the Company until such time as the board transfers responsibility to a committee of the board. The plan is limited to issuing common shares of the Company up to 15% of the total shares then outstanding. No limitations exist on any other instruments issuable under the plan. In the event of a change in control of the Company, all unvested instruments issued under the plan become immediately vested.
Pursuant to the shareholders meeting on June 25, 2021, the Company has amended its certificate of incorporation to increase the number of authorized Company Common Shares from to .
Preferred shares
The Company had two series of preferred shares designated with no preferred shares issued and outstanding as of June 30, 2022, and September 30, 2021.
Common shares
During the quarter ended December 31, 2021, the Company issued shares of its common stock related to a stock purchase agreement for cash of $.
During
the quarter ended December 31, 2021, the Company issued shares of its common stock related to various consulting agreements for
a fair value of approximately $
During the quarter ended December 31, 2021, the Company issued shares of its common stock valued at $ as stock-based compensation.
During the quarter ended March 31, 2021, the Company issued shares of its common stock valued at $ as stock-based compensation.
During
the quarter ended March 31, 2021, the Company issued shares of its common stock related to various consulting agreements for
a fair value of approximately $
During
the quarter ended March 31, 2021, the Company issued shares of its common stock with a fair value of $
During
the quarter ended March 31, 2021, the Company converted $
During
the quarter ended March 31, 2021, the Company issued shares of its common stock in connection with a settlement agreement for
settlement liability of $
Pursuant
to a prospectus the Company has been tendered $
During
the quarter ended March 31, 2021, the Company raised $
During the quarter ended December 31, 2021, the Company cancelled shares of the company’s common stock as part of the Share Exchange Agreement, more fully described in Note 3.
During
the quarter ended December 31, 2021, the Company converted $
During the quarter ended March 31, 2022, the Company issued shares of its common stock valued at $ as stock-based compensation.
During the quarter ended June 30, 2022, the Company issued shares of its common stock valued at $ as interest related to Canaccord.
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18. 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 %. 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. 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.
Options:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Exercise price | $ | $ | - $ | |||||
| Expected term (years) | - | |||||||
| Expected stock price volatility | % | % - | % | |||||
| Risk-free rate of interest | % | % - | % | |||||
| Expected dividend rate | % | % | ||||||
Number of Shares | Weighted Average Exercise Price | Total Intrinsic Value | Weighted Average Remaining Contractual Life (in years) | |||||||||||||
| Outstanding as of October 1, 2020 | $ | $ | ||||||||||||||
| Granted | $ | $ | ||||||||||||||
| Outstanding as of September 30, 2021 | $ | $ | ||||||||||||||
| Expired | ( | ) | $ | $ | ||||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||||||
| Expired and cancelled | ( | ) | $ | $ | ||||||||||||
| Outstanding as of March 31, 2022 | $ | $ | ||||||||||||||
| Expired | ( | ) | $ | $ | ||||||||||||
| Granted | $ | $ | ||||||||||||||
| Outstanding as of June 30, 2022 | $ | $ | ||||||||||||||
| Options vested and exercisable | $ | $ | ||||||||||||||
Estimated future stock-based compensation expense relating to unvested stock options was nominal as of June 30, 2022, and 2021. Weighted average remaining contractual life of the options is years.
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Stock-based Compensation Expense
| Three months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Stock grants | $ | $ | ||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Total stock-based compensation | $ | $ | ||||||
| Nine months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Stock grants | $ | $ | ||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Total stock-based compensation | $ | $ | ||||||
19. Commitments and contingencies
As noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States Federal Government. This raises several possible issues which may impact the Company’s overall operations, not the least of which are related to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level, and most traditional banks are federally insured, those financial institutions will not service cannabis businesses. In states where medical or recreational marijuana is legal, dispensary owners, manufacturers, and anybody who “touches the plant,” continue to face a host of operational hurdles. While local, state-chartered banks and credit unions now accept cannabis commerce, there remains a reluctance by traditional banks to do business with them. Aside from a huge inconvenience and the need to find creative ways to manage financial flow, payroll logistics, and payment of taxes, his also poses tremendous risks to controls as a result of operating a lucrative business in cash. This lack of access to traditional banking may inhibit industry growth. For the period ended June 30, 2022, the Company’s has accounts with a Florida bank and several credit unions located in Washington and California.
Despite the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these risks will have a substantive impact on its planned operations in the near term.
In
July 2016, the Company entered into a
In
January 2019, the Company entered into a
In
February 2019, the Company entered into a
In
September 2019, the Company entered into a
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Pursuant
to the execution of a sale lease back agreement with the Company’s Wallis property, a/k/a Never Again, the Company in May 2021,
entered into a
In
September 2021, the Company executed an assignment and assumption of lease for the occupancy of a store front retail location in Oregon.
The lease requires the Company to pay a starting base rental fee of $
In
September 2021, the Company entered into a
In
May 2022, the Company executed a sale lease back agreement with the Company’s Mulino property, and entered into a
The
Company executed an Agency Agreement and in consideration of the services rendered by the Agent and in connection with the Offering,
the Company has agreed to pay the Agent, on the Closing Date a commission equal to % of the gross proceeds of the Offering (including
in respect of any exercise of the Over-Allotment Option, if any) payable in cash (the “Agent’s Commission”),
subject to a reduced fee equal to 1% for Units sold to certain purchasers designated by the Company on a president’s list
(the “President’s List”). In addition the Agent will receive a number of share purchase warrants (the
“Broker Warrants”) to purchase up to that number of shares of common stock of the Company (each, a “Broker
Share”) that is equal to % of the aggregate number of Units issued under the Offering (including any Additional Units
(as hereinafter defined) issued upon exercise of the Over-Allotment Option, if any), subject to a reduced number of Broker Warrants
equal to
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Legal Proceedings
D.H. Flamingo, Inc. v. Department of Taxation, et. al.
On February 27, 2020, a subsidiary of the Company (YMY Ventures, LLC) was served with a Summons and Second Amended Complaint in a matter pending in the District Court of Clark County Nevada (Case # A-19-787004-B) which is styled “D.H. Flamingo, Inc. v. Department of Taxation, et. al.” (the DOT Litigation”). In this matter, the Plaintiff is alleging that certain parties (including YMY Ventures, LLC) received Conditional Recreational Marijuana Establishment Licenses, while certain other parties (including Plaintiff) were denied licenses. In the matter, Plaintiff seeks declaratory relief, injunctive relief, relief from violation of procedural and substantive due process, violation of equal protection, unjust enrichment, judicial review of the entire matter, together with a Petition for Writ of Mandamus. The Plaintiff seeks damages in an unspecified amount. Thereafter, on April 20, 2020, YMY Ventures, LLC filed a Notice of Non-Participation and Request for Dismissal. The Company believes it will ultimately be dismissed from the action without any liability exposure. Notwithstanding, there is no guarantee at this time that this will occur, and the ultimate result of the matter could potentially be the loss of YMY Ventures, LLC’s Conditional Recreational Marijuana Establishment License. This matter has now been fully resolved without any financial exposure on the part of the Company.
Herbalcure vs Driven Deliveries, Inc.
On
May 6, 2021, Herbalcure Corporation (“Herbalcure”) filed a Complaint for preliminary and permanent injunction in the Superior
Court of California Central District County of Los Angeles (Case # 21STCV17099) alleging that Driven Deliveries, Inc. owes Herbalcure
Corporation approximately $
Additionally, the Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business.
20. Subsequent events
In
June 2022, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the Convertible
Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing, which initially
closed on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in connection with the financing will
be repriced to C$ per Common Share and the convertible debentures of the Company issued in connection with the financing will be
repriced to C$ per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible
debentures: In July 2022, the following has been formalized: extension to the maturity date of the convertible debentures to three years;
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$ for a period of 10 consecutive trading
days on the CSE, (iii) and, a payment of $
In
April 2022, the Company has completed a private placement of a $
In
July 2022, the Company executed 7 Independent Director Agreements having their term renewable commensurate with
annual shareholder meetings. The Directors shall be entitled to cash payments of $
In August 2022, the Company executed a non-binding term sheet, proposing the merger of the Company with a west coast company (“Survivor”). Pursuant to the terms and conditions of the term sheet, it is contemplated, on a pro-forma basis, where the post transaction capital structure of the survivor on a fully-diluted basis would be allocated as (a) Survivor 90% and (b) the Company 10%. All warrants, options and rights of the Company are proposed to carry over to the Surviving Entity, without amendment to their terms. At the proposed closing, unless invited to continue in their positions by the Survivor, the Company’s present officers and directors would resign in favor of officers and directors designated by the Survivor, provided that at least one current director of the Company shall remain in office until at least 10 days after the Company makes the proposed filing with the SEC required by Rule 14f-1 promulgated under the Securities Exchange Act of 1934, and mails the statement required by said Rule to the Surviving Entity’s shareholders of record. The Parties propose to undertake a closing of the transaction within ninety (90) days of the date the Term Sheet was executed.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
This Interim Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PLSRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding Stem Holdings, Inc. (the “Company” or “Stem”, also referred to as “us”, “we” or “our”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” detailed in the Company’s Form 10 and S-1 registration statements and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as the result of new information, future events, or otherwise. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA.
For the three and nine months ended June 30, 2022, the financial statements have been prepared by management in accordance with the standards of the Public Company Accounting Oversight Board (United States). For the three and nine months ended June 30, 2022, the unaudited interim financial statements have been prepared by management in accordance with the condensing rules of the United States Securities and Exchange Commission.
Results of Operations
| For the Three Months Ended June 30, | Change | |||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Gross Revenue | $ | 4,823 | $ | 6,362 | (1,539 | ) | (24 | )% | ||||||||
| Discounts and returns | (652 | ) | (934 | ) | 282 | (30 | )% | |||||||||
| Cost of goods sold | 3,500 | 3,948 | (448 | ) | (11 | )% | ||||||||||
| Consulting fees | 104 | 614 | (510 | ) | (83 | )% | ||||||||||
| Professional fees | 551 | 849 | (298 | ) | (35 | )% | ||||||||||
| General and administration | 2,555 | 3,489 | (934 | ) | (27 | )% | ||||||||||
| Other income, net | 3,011 | 7,143 | (4,132 | ) | 58 | % | ||||||||||
| Loss from discontinued operations | - | (1,082 | ) | 1,082 | (100 | )% | ||||||||||
| Net income (loss) | $ | 471 | $ | 2,589 | ||||||||||||
Comparison of the results of operations for the three months ended June 30, 2022, compared to the three months ended June 30, 2021
The Company had net revenues during the three months ended June 30, 2022, of $4,171 compared with $5,428 for the comparable period of 2021, the decrease in revenue was primarily related to a decrease in flower sales related to general market conditions.
Cost of goods for the three months ended June 30, 2022, amounted to $3,500 compared to $3,948 in the comparable period of the prior year. These costs include both the cost of finished product purchased for retail and the cost of cultivation and processing for the grow facilities and sold at the wholesale level.
In the three months ended June 30, 2022, we incurred consulting costs of $104 compared to $614 in the comparable period of the prior year. The decrease in consulting fees was attributed to a decrease in stock-based consulting expenses.
In the three months ended June 30, 2022, we incurred professional fees of $551 compared to $849 in the comparable period of the prior year. Those fees are primarily for legal, accounting, and related services that pertains to our being a public company in both the United States and Canada.
In the three months ended June 30, 2022, we incurred general and administrative costs of $2,555 compared to $3,489. This decrease relates primarily to a decrease in costs related to advertising and promotion, office expenses, and salaries.
| 40 |
| For the Nine Months Ended June 30, | Change | |||||||||||||||
| ($ in thousands) | 2022 | 2021 | $ | % | ||||||||||||
| Gross Revenue | $ | 14,578 | $ | 18,883 | (4,305 | ) | (23 | )% | ||||||||
| Discounts and returns | (2,061 | ) | (2,697 | ) | (635 | ) | (24 | )% | ||||||||
| Cost of goods sold | 10,691 | 10,969 | (278 | ) | (3 | )% | ||||||||||
| Consulting fees | 633 | 2,676 | (2,043 | ) | (76 | )% | ||||||||||
| Professional fees | 2,543 | 2,635 | (92 | ) | (3 | )% | ||||||||||
| General and administration | 8,744 | 8,385 | 359 | 4 | % | |||||||||||
| Impairment of intangibles | 795 | - | 795 | 100 | % | |||||||||||
| Other income (expenses), net | 5,458 | 1,109 | 4,349 | (392 | )% | |||||||||||
| Loss from discontinued operations | (1,745 | ) | (1,946 | ) | 201 | 10 | % | |||||||||
| Net loss | $ | (7,177 | ) | $ | (9,316 | ) | ||||||||||
Comparison of the results of operations for the nine months ended June 30, 2022, compared to the nine months ended June 30, 2021
The Company had net revenues during the nine months ended June 30, 2022, of $12,517 compared with $16,186 for the comparable period of 2021, the decrease in revenue was primarily related to a decrease in flower sales related to general market conditions.
Cost of goods for the nine months ended June 30, 2022, amounted to $10,691 compared to $10,969 in the comparable period of the prior year. These costs include both the cost of finished product purchased for retail and the cost of cultivation and processing for the grow facilities and sold at the wholesale level.
In the nine months ended June 30, 2022, we incurred consulting costs of $663 compared to $2,676 in the comparable period of the prior year. We mitigated our consulting expenses which were stock based in the prior year.
In the nine months ended June 30, 2022, we incurred professional fees of $2,543 compared to $2,635 in the comparable period of the prior year. Those fees are primarily for legal, accounting and related services relating to our being a public company in both the United States and Canada.
In nine months ended June 30, 2022, we incurred general and administrative costs of $8,744 compared to $8,385, these costs include payroll, depreciation and amortization, insurance, rent expense and other general costs. We expect that these costs will increase as we increase our operations.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity and Capital Resources
The Company had cash of $3,400 as of June 30, 2022. On April 13, 2022, the Company closed on a stock purchase and note purchase agreement to sell its minority equity ownership interest in its Massachusetts cannabis license for a total of $1.65 million in cash.
Cash Flow
For the nine months ended June 30, 2022, and 2021
Net cash flows used in continuing operating activities was $5,764 for the nine months ended June 30, 2022, as compared net cash flow used in continuing operating activities to $6,653 for the nine months ended June 30, 2021, a change of $889.
● Net cash flow used in operating activities for the nine months ended June 30, 2022 primarily reflected a net loss of $7,177 adjusted for the add-back of non-cash items consisting of loss from discontinued operations of $1,745, depreciation and amortization of approximately $1,247, stock-based compensation and consulting expense of approximately $880, amortization of debt discount of $13, amortization of intangible assets of $655, impairment of investments of $288, issuance of common stock in connection with consulting agreements and interest payments of $189, recognition of derivative liability of $340, offset by a decrease in warrant liability of $2,183, gain on extinguishment of debt of $803, foreign currency translation adjustment of $62, a gain from disposal of a subsidiary of $831, gain on sale of property of $1,155, change operating assets and liabilities consisting of a decrease in inventory of $21, a decrease in accounts payable and accrued expenses of $124, a decrease in prepaids of $217, an increase in other of $103, and a decrease in other assets of $1,402. Net cash flow used in operating activities for the nine months ended June 30, 2021 primarily reflected a net loss of $9,316 adjusted for the add-back of non-cash items consisting of loss from discontinued operations of $1,946, depreciation and amortization of $3,745, stock-based compensation expense of $4,284, non-cash rent and interest $331, amortization of debt discount of $606, and other adjustments of $209 offset by the change in foreign currency translation of $29, a gain in sale of equity method investments of $200, and a gain on the sale of a property of $766, a change in the fair value of derivative and warrant liabilities of $675, a change in operating assets and liabilities consisting of an decrease in accounts payable and accrued expenses of $3,248, an increase in prepaid expenses and other operating assets of $3,540.
| 41 |
● Net cash flow provided by investing activities for the nine months ended June 30, 2022, amounted to $3,329 and consisted of $206 used in the purchase of property and equipment, $1,651 provided from the sale of an equity method investment, and $2,173 provided from the sale of a property. Additionally, a net of $288 was provided by investments, and $1 related to repayment of a related party. Net cash flow provided by investing activities for the nine months ended June 30, 2021, amounted to $591 and consisted of $425 used in the purchase of property and equipment, $179 for project costs and an additional $560 was used in investments, offset by cash received related to the sale of a property of $1,505 and a net of $250 related to investment in equity method investees.
● Net cash provided by financing activities was $31 for the nine months ended June 30, 2022, as compared to $14,985 for the nine months ended June 30, 2021. During the nine months ended June 30, 2022, we received proceeds of $285 for the issuance of common shares, $625 related to note payables offset by repayments of $879 of notes payable. During the nine months ended June 30, 2021, we received proceeds from the issuance of common shares of $17,713 offset by $1,697 of repayment on notes payable was incurred and $1,031 for the forgiveness of debt.
CRITICAL ACCOUNTING POLICIES
Principles of Consolidation
The Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock. In addition, the Company consolidates entities that meet the definition of a variable interest entity (“VIE”) for which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third party’s holding of equity interest is presented as noncontrolling interests in the Company’s Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity. The portion of net loss attributable to the noncontrolling interests is presented as net loss attributable to noncontrolling interests in the Company’s Consolidated Statements of Operations.
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 consolidated financial statements are those associated with the assumptions used to value equity instruments, valuation of its long live assets for impairment testing, valuation of intangible assets, and the valuation of inventory. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable given the circumstances that exist at the time the financial statements are prepared. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.
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An impairment expense of approximately $795,000 was recorded for the nine months ended June 30, 2022. During the nine months ended June 30, 2021, the Company determined that no impairment was required.
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 nine months ended June 30, 2022, and 2021, the Company determined that there were $0 and $0 losses related to the impairment of goodwill and intangible assets, respectively.
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.
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Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.
Effective October 1, 2019, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective method. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues related to wholesale and retail revenue are recorded upon transfer of merchandise to the customer, which was the effective policy under ASC 605 previously.
The following policies reflect specific criteria for the various revenue streams of the Company:
Cannabis Dispensary, Cultivation and Production
Revenue is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance obligation is complete. Terms are generally between cash on delivery to 30 days for the Company’s wholesale customers.
The Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale) there are essentially no returns allowed or warranty available to the customer under the various state laws.
Delivery
| 1) | Identify the contract with a customer |
The Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.
| 2) | Identify the performance obligations in the contract |
The Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any necessary deliveries of those products.
| 3) | Determine the transaction price |
The sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost that those goods are being sold for plus any additional delivery costs.
| 4) | Allocate the transaction price to performance obligations in the contract |
For the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery fees that may be incurred to deliver to the customer.
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
For the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
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.
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 June 30, 2022, 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. As of June 30, 2022, Company estimates that its investees will need up to approximately $500,000 to complete the acquisition of licenses and permits, to fund the buildout or expansion of facilities to fully operate in their respective cannabis markets, which will encompass several years of development.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (also our principal executive officer) and our chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2022 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The principal basis for this conclusion is the lack of segregation of duties within our financial function and the lack of an operating Audit Committee.
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(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
We carried out an assessment, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our internal controls over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on that assessment and on those criteria, our CEO and CFO concluded that our internal control over financial reporting was not effective as of June 30, 2022. The principal basis for this conclusion is (i) failure to engage sufficient resources regarding our accounting and reporting obligations during our startup and (ii) failure to fully document our internal control policies and procedures.
This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only the management’s report in this quarterly report.
The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
(c) Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business. To the best of our knowledge, as of August 10, 2022, the Company was not a party to any other material litigation, claim or suit whose outcome could have a material effect on the Company’s financial statements.
ITEM 1A. RISK FACTORS
Smaller reporting companies are not required to provide the information required by this item. Notwithstanding, in addition to risk factors highlighted in previous reports, the Company adds the following additional risk factor:
We could be substantially affected by the Coronavirus (COVID-19) pandemic
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 quarterly report on Form 10-Q, several states in the United States have declared states of emergency, and several countries around the world, including the United States, have taken steps to restrict travel. The existence of a worldwide pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments in response to COVID-19, or any, pandemic, to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business operations disruptions to our retail operations and our ability to collect rent from the properties which we own, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects throughout our business. If we need to close any of our facilities or a critical number of our employees become too ill to work, our production ability could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse consequences due to COVID-19, or any other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the markets in which we operate. Any of these uncertainties could have a material adverse effect on our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth all securities issued by Stem between October 1, 2021, and June 30, 2022:
| Security | No. Shares | |||||
| Compensation | Common Stock | 1,000,000 | ||||
| Interest Expense | Common Stock | 15,372 | ||||
| 1,015,372 | ||||||
All of the aforementioned shares were issued by the Company pursuant to an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No. |
Description | |
| 31.1/31.2 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule15d- 14(a) of the Securities Exchange Act of 1934, as amended | |
| 32.1/32.2 | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STEM HOLDINGS, INC. | ||
| August 15, 2022 | By: | /s/ Matthew J. Cohen |
| Matthew J. Cohen, President, Chief Executive Officer and Chief Financial Officer | ||
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