NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Incorporation and Operations and Going Concern
Stem
Holdings, Inc. (“Stem” or the “Company”) is a Nevada corporation incorporated on June 7, 2016, and is a leading
omnichannel, vertically-integrated cannabis branded products and technology company with state-of-the-art cultivation, processing, extraction,
retail, distribution, and delivery-as-a-service (DaaS) operations throughout the United States. Stem’s family of award-winning
brands includes TJ’s Gardens™, TravisxJames™, and Yerba Buena™ flower and extracts; Cannavore™ edible confections;
and e-commerce delivery platforms provide direct-to consumer proprietary logistics and an omnichannel UX (user experience)/CX (customer
experience).
The
Company leases and operates 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 March 31, 2023, Stem had
ownership interests in 21 state issued cannabis licenses including nine (9) licenses for cannabis cultivation, two (2) licenses for cannabis
processing, one (1) license for cannabis wholesale distribution, three (3) licenses for hemp production and (6) cannabis dispensary licenses.
The
Company has eight wholly-owned subsidiaries, including Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Oregon Acquisitions 1, Corp., Stem Oregon Acquisitions 2, Corp., Stem Oregon Acquisitions 3,
Corp., Stem Oregon Acquisitions 4 Corp., 2336034 Alberta Ltd. Stem, through its subsidiaries, is currently in the process
of seeking to 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
OTCQB exchange under the symbol “STMH”.
In
June 2021, the Company’s shareholders approved a proposal to amend the Company’s Articles of Incorporation to increase the
number of authorized common shares from 300,000,000 shares to 750,000,000 shares.
Going
Concern
On
March 31, 2023, the Company had approximate balances of cash and cash equivalents of $1 million, negative working capital of approximately
$3.7 million, and an accumulated deficit of $139.4 million.
These
unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will
be able to realize its assets and discharge its liabilities in the normal course of business.
While
the recreational use of cannabis is legal under the laws of certain States, the use and possession of cannabis is illegal
under United States Federal Law for any purpose, by way of Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970,
otherwise known as the Controlled Substances Act of 1970 (the “ACT”). Cannabis is currently included under Schedule 1 of
the Act, making it illegal to cultivate, sell or otherwise possess in the United States.
On
January 4, 2018, the office of the Attorney General published a memo regarding cannabis enforcement that rescinds directives promulgated
under former President Obama that eased federal enforcement. In a January 8, 2018 memo, Jefferson B. Sessions, then Attorney General
of the United States, indicated enforcement decisions will be left up to the U.S. Attorney’s in their respective states clearly
indicating that the burden is with “federal prosecutors deciding which cases to prosecute by weighing all relevant considerations,
including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of federal
prosecution, and the cumulative impact of particular crimes on the community.” Subsequently, in April 2018, former President Trump
promised to support congressional efforts to protect states that have legalized the cultivation, sale and possession of cannabis;
however, a bill has not yet been finalized in order to implement legislation that would, in effect, make clear the federal government
cannot interfere with states that have voted to legalize cannabis. Further in December 2018, the U.S. Congress passed legislation, which
the President signed on December 20, 2018, removing hemp from being included with Cannabis in Schedule I of the Act.
In
December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to several other
countries, including the United States. On June 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition,
as of the time of the filing of this 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. The Company is also in the process of seeking business combinations by entities directly in the production and sale of cannabis. 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
Company’s consolidated financial statements been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.
All material intercompany accounts and transactions have been eliminated during the consolidation process. The Company manages its operations
as a single segment for the purposes of assessing performance and making operating decisions.
The
accompanying interim condensed consolidated financial statements are unaudited. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all the normal recurring adjustments necessary to present fairly the financial position
and results of operations as of and for the periods presented. The interim results are not necessarily indicative of the results to be
expected for the full year or any future period.
Certain
information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). The Company believes that the disclosures are adequate to make the interim information presented
not misleading. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial
statements and the notes thereto included in the Company’s Report on Form 10-K filed on January 13, 2023, for the year ended September
30, 2022.
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 Oregon Acquisitions 2 Corp., Stem Oregon Acquisitions
3 Corp., Stem Oregon Acquisitions 4 Corp., 7LV USA Corporation, and Stem Oregon Acquisitions 1 Corp., which
was subsequently 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 March 31, 2023, and September 30, 2022, the Company had no cash equivalents or short-term investments.
The Company has not experienced any losses on deposits of cash and cash equivalents to date.
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 March 31, 2023, and September
30, 2022 the reserve for doubtful accounts was $79 for both periods.
Inventory
Inventory
is comprised of raw materials, finished goods and work-in-progress such as pre-harvested cannabis plants and by-products to be extracted.
The costs of growing cannabis including but not limited to labor, utilities, nutrition, and irrigation, are capitalized into inventory
until the time of harvest.
Inventory
is stated at the lower of cost or net realizable value, determined using weighted average cost. Cost includes expenditures directly related
to manufacturing and distribution of the products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and
the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing overhead and related
expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes.
Net
realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure
inventory at the lower of cost or net realizable value. Factors considered in the determination of obsolescence include slow-moving or
non-marketable items.
Prepaid
Expenses and Other Current Assets
Prepaid
expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid
expenses include consulting, advertising, insurance, and service or other contracts requiring up-front payments.
Property
and Equipment
Property,
equipment, and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Repairs and maintenance expenditures that do not extend the useful lives of related
assets are expensed as incurred.
Expenditures
for major renewals and improvements are capitalized, while minor replacements, maintenance, and repairs, which do not extend the asset
lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from
the accounts and any gain or loss is included in operations. The Company continually monitors events and changes in circumstances that
could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance
with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present,
the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered
through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets,
the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. See “Note
3 – Property, Equipment and Leasehold Improvements”.
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line method over the estimated
useful lives of the assets. The Company estimates useful lives as follows:
Schedule
of Estimated Useful Life of Assets
| Buildings |
20
years |
| Leasehold
improvements |
Shorter
of term of lease or economic life of improvement* |
| Furniture
and equipment |
5
years |
| Signage |
5
years |
| Software
and related |
5
years |
| * |
|
Unless
the relevant lease is classified as a sales-type lease, under which the assets are depreciated over the estimated useful life. |
Impairment
of Long-Lived Assets
The
Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment whenever
events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company considers
the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or
losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use
of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s
overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant
decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets
for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test
for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.
The
Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the
related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying
amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized
equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined
using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined
to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values
of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.
Equity
Method Investments
Investments
in unconsolidated affiliates are accounted for under the equity method of accounting, as appropriate. The Company accounts for investments
in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5.0% of the investee’s outstanding
voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s investment and
adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.
During
the six months ended March 31, 2023, the Company recorded $0 of investee losses.
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. No goodwill impairment expense was incurred for the six months ended March
31, 2023 and 2022, respectively.
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. During the six months ended March 31, 2023, the Company entered into an asset purchase agreement which included the sale of intangible assets of approximately $222,000. No definite-lived intangible assets were impaired for
the six months ended March 31, 2023 and 2022, respectively.
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.
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 March 31, 2023 and September 30, 2022, such net operating losses were offset entirely
by a valuation allowance.
The
Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely
than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately
realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company
classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively,
on the consolidated statements of operations.
In
December 2017, the Tax Cuts and Jobs Act (TCJA or the Act) was enacted, which significantly changes U.S. tax law. In accordance with
ASC 740, “Income Taxes”, the Company is required to account for the new requirements in the period that includes the date
of enactment. The Act reduced the overall corporate income tax rate to 21.0%, created a territorial tax system (with a one-time mandatory
transition tax on previously deferred foreign earnings), broadened the tax base and allowed for the immediate capital expensing of certain
qualified property.
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.
The
following policies reflect specific criteria for the various revenue streams of the Company:
Cannabis
Dispensary, Cultivation and Production
Revenue
is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is
complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance obligation
is complete. Terms are generally between cash on delivery to 30 days for the Company’s wholesale customers.
The
Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale)
there are essentially no returns allowed or warranty available to the customer under the various state laws.
Delivery
| 1) |
Identify
the contract with a customer |
The
Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial
substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.
| 2) |
Identify
the performance obligations in the contract |
The
Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any
necessary deliveries of those products.
| 3) |
Determine
the transaction price |
The
sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost
that those goods are being sold for plus any additional delivery costs.
| 4) |
Allocate
the transaction price to performance obligations in the contract |
For
the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery
fees that may be incurred to deliver to the customer.
| 5) |
Recognize
revenue when or as the Company satisfies a performance obligation |
For
the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.
Leases
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 March 31, 2023, 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 $323,000
and $687,000, respectively for the three and six months ended March 31, 2023 and approximately $202,000 and $529,000, respectively for
the three and six months ended March 31, 2022. The Company has nine operating leases consisting with remaining lease terms ranging from
7 months to 167 months.
Lease
Costs
Schedule of Lease Costs
| | |
Six Months
Ended | | |
Six Months
Ended | |
| | |
March 31, | | |
March 31, | |
| | |
2023 | | |
2022 | |
| Components of total lease costs: | |
| | | |
| | |
| Operating
lease expense | |
$ | 687 | | |
$ | 529 | |
| Total lease costs | |
$ | 687 | | |
$ | 529 | |
Lease
positions as of March 31, 2023
ROU
lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:
Schedule
of Right-of-Use Assets and Liabilities
| | |
March
31, 2023 | |
| Assets | |
| | |
| Right
of use asset | |
$ | 6,408 | |
| Total assets | |
$ | 6,408 | |
| | |
| | |
| Liabilities | |
| | |
| Operating lease liabilities – short
term | |
$ | 474 | |
| Operating lease liabilities
– long term | |
| 6,164 | |
| Total lease liability | |
$ | 6,638 | |
Lease
Terms and Discount Rate
Schedule
of Lease Terms and Discount Rate
| Weighted average remaining lease
term (in years) – operating lease | |
| 12.07 | |
| Weighted average discount rate – operating
lease | |
| 11.11 | % |
Cash
Flows
Schedule
of Cash Flow Related to Lease
| | |
Six Months
Ended | |
| | |
March
31, 2023 | |
| Cash paid for amounts included in the measurement
of lease liabilities: | |
| | |
| ROU amortization | |
$ | 687 | |
| Cash paydowns of operating liability | |
$ | (687 | ) |
The
future minimum lease payments under the leases are as follows:
Schedule
of Future Minimum Lease Payments
| | |
| | |
| 2023 | |
$ | 631 | |
| 2024 | |
| 1,078 | |
| 2025 | |
| 1,012 | |
| 2026 | |
| 1,027 | |
| 2027 | |
| 831 | |
| Thereafter | |
| 8,345 | |
| Total future minimum lease payments | |
| 12,924 | |
| Less: Lease imputed
interest | |
| (6,286 | ) |
| Total | |
$ | 6,638 | |
Disaggregation
of Revenue
In
the six months ended March 31, 2023, 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 March 31, 2023, and 2022 respectively:
Schedule
of Disaggregation of Revenue
| Three
Months Ended March 31, | |
2023 | | |
2022 | |
| Revenue | |
| | | |
| | |
| Wholesale | |
$ | 909 | | |
$ | 1,576 | |
| Retail | |
| 3,736 | | |
| 3,221 | |
| Other | |
| 22 | | |
| 18 | |
| Total revenue | |
| 4,667 | | |
| 4,815 | |
| Discounts
and returns | |
| (773 | ) | |
| (679 | ) |
| Net
Revenue | |
$ | 3,894 | | |
$ | 4,136 | |
The
following table illustrates our revenue by type related to the six months ended March 31, 2023, and 2022 respectively:
| Six
Months Ended March 31, | |
2023 | | |
2022 | |
| Revenue | |
| | | |
| | |
| Wholesale | |
$ | 1,798 | | |
$ | 2,130 | |
| Retail | |
| 7,657 | | |
| 7,587 | |
| Other | |
| 34 | | |
| 40 | |
| Total revenue | |
| 9,489 | | |
| 9,757 | |
| Discounts
and returns | |
| (1,536 | ) | |
| (1,411 | ) |
| Net
Revenue | |
$ | 7,953 | | |
$ | 8,346 | |
Geographical
Concentrations
As
of March 31, 2023, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational use
in 19 states and D.C., with lesser legalization, such as for medical use in an additional 18, as of the time of these consolidated financial
statements. In addition, the United States Congress has passed legislation, specifically the Agriculture Improvement Act of 2018 (also
known as the “Farm Bill”) that has removed production and consumption of hemp and associated products from Schedule 1 of
the Controlled Substances Act.
Cost
of Goods Sold
Cost
of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw
materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities.
Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The
Company recognizes the cost of sales as the associated revenues are recognized.
Fair
Value of Financial Instruments
As
defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
To
estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated or generally unobservable.
The
authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements)
and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy are
as follows:
Level
1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level
2 — Other inputs that are observable, directly, or indirectly, such as quoted prices in markets that are not active, or inputs
which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level
3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market
participants would price the assets and liabilities.
In
instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Stock-based
Compensation
The
Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options
issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price
of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest on
the grant date or over a one-year period.
The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment.
Expected
Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding
based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected
Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free
Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues
with an equivalent remaining term.
Expected
Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends
in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
Effective
January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update (“ASU”)
2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making this
election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have a significant history of forfeitures.
Earnings
(Loss) per Share
ASC
260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic
EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the
entity.
Basic
net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company 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 March 31, 2023, and September 30, 2022, are as follows:
Schedule
of Computation of Diluted Loss
| Potentially dilutive share-based instruments: | |
March 31, | | |
September 30, | |
| | |
2023 | | |
2022 | |
| Convertible notes | |
| 74,736,220 | | |
| 34,736,220 | |
| Options to purchase common stock | |
| 9,005,685 | | |
| 5,518,185 | |
| Unvested restricted stock awards | |
| - | | |
| - | |
| Warrants to purchase common stock | |
| 42,015,215 | | |
| 65,783,059 | |
| Anti-dilutive Securities | |
| 125,757,120 | | |
| 106,037,464 | |
The
company has determined that the amount of interest expense and gains and losses for the derivative liabilities associated with the Company’s
convertible notes is immaterial and inclusion would be anti-dilutive and has therefore not included an Earnings Per Share table recording
the diluted earnings.
Advertising
Costs
The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was approximately $40,000
and $48,000 three months ended March 31, 2023, and 2022, respectively. Advertising expense was approximately $70,000 thousand and $170,000
for six months ended March 31, 2023, and 2022, respectively.
Related
parties
Parties
are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the
immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one
party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own separate interests.
Segment
reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision–maker is its chief executive officer. The Company currently operates in one segment.
Recent
Accounting Guidance
In
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. The adoption of this standard did not have a material impact on the Company’s consolidated
financial statements and related disclosures.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity,
and also improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods beginning
after December 15, 2021, and interim periods within those annual periods and early adoption is permitted. We are currently evaluating
the impact of the new guidance on our consolidated financial statements.
3.
Property, Plant & Equipment
Property
and equipment consist of the following (in thousands):
Schedule of Property, Plant and Equipment
| | |
March 31, | | |
September
30, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Land | |
$ | - | | |
$ | 1,151 | |
| Automobiles | |
| 72 | | |
| 93 | |
| Signage | |
| 19 | | |
| 19 | |
| Furniture and equipment | |
| 2,469 | | |
| 2,590 | |
| Leasehold improvements | |
| 3,532 | | |
| 3,532 | |
| Buildings and property improvements | |
| 7,456 | | |
| 7,460 | |
| Computer software | |
| 57 | | |
| 59 | |
| Property and equipment, gross | |
| 13,605 | | |
| 14,904 | |
| Accumulated depreciation | |
| (6,212 | ) | |
| (5,815 | ) |
| Property and equipment,
net | |
$ | 7,393 | | |
$ | 9,089 | |
Depreciation
expense was approximately $309,000 and $442,000 for the three months ended March 31, 2023, and 2022, respectively. Depreciation expense
was approximately $661,000 and $851,000 for the six months ended March 31, 2023, and 2022, respectively. Depreciation expense is included
in general and administrative expense.
4.
Inventory
Inventory
consists of the following (in thousands):
Schedule of Inventory
| | |
March 31, | | |
September
30, | |
| | |
2023 | | |
2022 | |
| Raw materials | |
$ | 269 | | |
$ | 569 | |
| Work-in-progress | |
| 171 | | |
| 450 | |
| Finished goods | |
| 955 | | |
| 1,656 | |
| Total
Inventory | |
$ | 1,395 | | |
$ | 2,675 | |
Raw
materials and work-in-progress include the costs incurred for cultivation materials and live plants. Finished goods consists of cannabis
products sent to retail locations or ready to be sold. No inventory reserve was recorded for the six months ended March 31, 2023, and
the year ended September 30, 2022, due to management’s assessment of the inventory on hand.
5.
Prepaid expenses and other current assets
Prepaid
expenses and other current assets are assets and payments previously made, that benefit future periods. The balance as of March 31, 2023,
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 $5.1 million,
which is reflected within the Statement of Operations as a reduction to general and administration expense. The remaining balance of
the ERTC receivable was $201 thousand as of March 31, 2023.
Prepaid
and other current assets comprised of the following:
Schedule of Prepaid Expenses and Other Current Assets
| | |
March 31, | | |
September 30, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Prepaid expenses | |
$ | 175 | | |
$ | 538 | |
| ERTC credits | |
| 201 | | |
| 201 | |
| Deposits and other current
assets | |
| 149 | | |
| 190 | |
| | |
| | | |
| | |
| Total prepaid expenses
and other current assets | |
$ | 525 | | |
$ | 929 | |
6.
Non-Controlling Interests
Non-controlling
interests in consolidated entities are as follows (in thousands):
Schedule of Non-Controlling Interests in Consolidated Entities
| | |
As
of September 30, 2022 | |
| | |
NCI Equity
Share | | |
Net
Loss Attributable to NCI | | |
NCI
in Consolidated Entities | | |
Non-Controlling
Ownership % | |
| NVD RE Corp. | |
$ | 553 | | |
$ | (37 | ) | |
$ | 516 | | |
| 36.2 | % |
| Western Coast Ventures, Inc. | |
| 842 | | |
$ | (3 | ) | |
| 839 | | |
| 49.0 | % |
| YMY Ventures, Inc. | |
| 299 | | |
$ | 30 | | |
| 329 | | |
| 50.0 | % |
| Michigan RE 1, Inc. | |
| (54 | ) | |
$ | (152 | ) | |
| (206 | ) | |
| 49.0 | % |
| | |
$ | 1,640 | | |
$ | (162 | ) | |
$ | 1,478 | | |
| | |
| | |
As
of March 31, 2023 | |
| | |
NCI Equity
Share | | |
Net
Loss Attributable to NCI | | |
NCI
in Consolidated Entities | | |
Non-Controlling
Ownership % | |
| NVD RE Corp. | |
$ | 516 | | |
$ | (9 | ) | |
$ | 507 | | |
| 36.2 | % |
| Western Coast Ventures, Inc. | |
| 839 | | |
$ | - | | |
| 839 | | |
| 49.0 | % |
| YMY Ventures, Inc. | |
| 329 | | |
$ | (4 | ) | |
| 325 | | |
| 50.0 | % |
| Michigan RE 1, Inc. | |
| (206 | ) | |
$ | - | | |
| (206 | ) | |
| 49.0 | % |
| | |
$ | 1,478 | | |
$ | (13 | ) | |
$ | 1,465 | | |
| | |
7.
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 11.5 million shares of the Company’s common stock and assumed approximately $7.9 million of the Companies liabilities.
Notwithstanding, the Company will continue to be responsible for $210 thousand of accounts payable assumed in the acquisition of Driven
Deliveries.
The
following table presents the assets and liabilities associated with the divestiture of Driven Deliveries, Inc. as of December 15, 2021,
the date Driven was divested (in thousands):
Schedule
of Discontinued Operations of Assets and Liabilities
| | |
December
15, 2021 | |
| | |
| |
| ASSETS | |
| | |
| Current assets | |
| | |
| Cash and cash
equivalents | |
$ | 47 | |
| Inventory | |
| 509 | |
| Prepaid
expenses and other current assets | |
| 242 | |
| Total current assets | |
| 798 | |
| | |
| | |
| Property and equipment,
net | |
| 4 | |
| Right of use asset | |
| 327 | |
| Intangible
assets, net | |
| 7,049 | |
| Total
assets | |
$ | 8,178 | |
| | |
| | |
| LIABILITIES AND SHAREHOLDERS’
EQUITY | |
| | |
| Current liabilities | |
| | |
| Accounts payable and accrued
expenses | |
| 7,551 | |
| Short term notes and advances | |
| 3 | |
| Lease
liability | |
| 218 | |
| Total current liabilities | |
| 7,772 | |
| | |
| | |
| Lease
liability - long term | |
| 108 | |
| Total
liabilities | |
$ | 7,880 | |
The
following table presents the operating results related to the divestiture of Driven Deliveries; Inc. (in thousands):
| | |
Three
Months Ended December
31, | |
| | |
2021 | |
| | |
| |
| Revenues | |
$ | 3,805 | |
| Cost
of goods sold | |
| 3,772 | |
| Gross Profit | |
| 33 | |
| | |
| | |
| Operating expenses: | |
| | |
| Consulting fees | |
| 4 | |
| Professional fees | |
| 24 | |
| General
and administration | |
| 1,749 | |
| Total operating expenses | |
| 1,777 | |
| Loss
from operations | |
| (1,744 | ) |
| | |
| | |
| Other expenses | |
| | |
| Interest
expense | |
| 1 | |
| Total other expense | |
| 1 | |
| Loss
from discontinued operations | |
| (1,745 | ) |
| Gain from disposal of subsidiary | |
| 831 | |
| Loss from discontinued operations, net of tax and gain on disposal of $831 | |
$ | (914 | ) |
8.
Assets Sale
On
January 3, 2023, pursuant to an Oregon Real Estate Agreement, the Company sold its ownership interest in Never Again 2, LLC. The
purchase price for this land and its leasehold improvements was $275,000
and excluding the cultivation license. At the closing the Company received $56,055
net of a $200,000 mortgage that was paid off along with broker fees. The Company recorded a loss on sale of approximately $1
million.
On
March 15, 2023, the Company executed as Asset Purchase Agreement in which certain assets were sold for $200,000. In the terms of the
agreement the buyer purchased one Marijuana Processor License, one Marijuana Wholesaler license, assumed certain liabilities. The licenses
had a recorded value of $222,427 and accumulated amortization of $9,270. The purchase price for the assets was $200,000 with $10,000
payable immediately at closing and the balance of $190,000 payable in thirty-six monthly installments commencing the first business day
of the first calendar month after the closing date. The first 35 installments will be $5,278 and the last payment will be $5,278. The
Company realized a loss on sale of approximately $18,000.
9.
Intangible Assets, net
Intangible
assets as of September 30, 2022, and March 31, 2023 (in thousands):
Schedule of Intangible Assets
| | |
Estimated
Useful
Life | |
Cannabis
Licenses | | |
Tradename | | |
Customer
Relationship | | |
Non-compete | | |
Technology | | |
Accumulated
Amortization | | |
Net
Carrying Amount | |
| Balance as September 30, 2022 | |
| |
$ | 8,365 | | |
$ | 280 | | |
$ | 645 | | |
$ | 220 | | |
$ | 5 | | |
$ | (1,501 | ) | |
$ | 7,792 | |
| YMY Ventures | |
15 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (25 | ) | |
| (25 | ) |
| Yerba Buena | |
3-15 years | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (44 | ) | |
| (44 | ) |
| Foothill (7LV) | |
| |
| | |
| | |
| | |
| | |
| | |
| ) | |
| ) |
| JV Retail 3 | |
3-15 years | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (8 | ) | |
| (8 | ) |
| JV Retail 4 | |
3-15 years | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (8 | ) | |
| (8 | ) |
| JV Extraction | |
- years | |
| ) | |
| | |
| | |
| | |
| | |
| | |
| |
| Other | |
5 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Balance as March 31, 2023 | |
| |
$ | 8,143 | | |
$ | 280 | | |
$ | 645 | | |
$ | 220 | | |
$ | 5 | | |
$ | (1,848 | ) | |
$ | 7,445 | |
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. On March 15, 2023, the Company executed as Asset Purchase Agreement in
which included the sale of $222 of intangible assets. Amortization expense for the three and six months ended March 31, 2023, was
$179 and $358, respectively. Amortization expense for the three and six months ended March 31, 2022, was $221 and $439, respectively.
The
following table is a runoff of expected amortization in the following 5-year period as of March 31:
Schedule of Expected Amortization
| | |
| | |
| 2023 | |
$ | 507 | |
| 2024 | |
| 675 | |
| 2025 | |
| 675 | |
| 2026 | |
| 675 | |
| 2027 | |
| 675 | |
| Thereafter | |
| 4,238 | |
| Intangible assets, net | |
$ | 7,445 | |
10.
Accounts payable and accrued expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
Schedule of Accounts Payable and Accrued Expenses
| | |
March 31, | | |
September
30, | |
| | |
2023 | | |
2022 | |
| Accounts payable | |
| 2,273 | | |
$ | 1,790 | |
| Accrued credit cards | |
| 15 | | |
| 14 | |
| Accrued interest | |
| 131 | | |
| 111 | |
| Accrued payroll | |
| 82 | | |
| 109 | |
| Accrued sales tax liability | |
| 176 | | |
| 120 | |
| Other | |
| 273 | | |
| 166 | |
| Total
Accounts Payable and Accrued Expenses | |
$ | 2,950 | | |
$ | 2,310 | |
11.
Notes Payable and Advances
The
following table summarizes the Company’s short-term notes and long-term debt, mortgages as of March 31, 2023, and September 30,
2022:
Schedule of Short-term Notes and Advances
| | |
March 31, | | |
September
30, | |
| | |
2023 | | |
2022 | |
| Equipment financing | |
$ | 18 | | |
$ | 20 | |
| Insurance financing | |
| 7 | | |
| 230 | |
| Promissory note | |
| 264 | | |
| 201 | |
| Total
notes payable and advances | |
$ | 289 | | |
$ | 451 | |
| | |
| | | |
| | |
| Current
portion of long-term debt | |
$ | 1,000 | | |
$ | 1,000 | |
| | |
| | | |
| | |
| Long-term
mortgages, net of current portion | |
| 1,225 | | |
| 1,225 | |
| Total
long-term debt, net of current portion | |
$ | 2,225 | | |
$ | 1,225 | |
Equipment
financing
January
2021, the Company entered into a promissory note in the amount of $27,880 for the acquisition of a truck. The promissory note bears an
interest rate of 13.29% per annum and is secured by the financed vehicle. The note has a sixty-month term with monthly payment of $642.
As of March 31, 2023, the balance outstanding is $17,903.
Insurance
financing
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 $430,657. The note bears an annual interest rate of 7.64%. The Company paid $86,131 as a down payment on February
14, 2022, the note requires the Company to make 10 monthly payments of $35,795 over the remaining term of the note. As of March 31, 2023,
the obligation outstanding is $0.
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 $17,551. The note bears an annual interest rate of 7.37%. The Company paid $18,033 as a down payment on February
24, 2022, the note requires the Company to make 10 monthly payments of $1,327 over the remaining term of the note. As of March 31, 2023,
the obligation outstanding is $0.
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 $29,060. The note bears an annual interest rate of 9.65%. The Company paid $5,812 as a down payment on April 6, 2022,
the note requires the Company to make 9 monthly payments of $2,697.47 over the remaining term of the note. As of March 31, 2023, the
obligation outstanding is $0.
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 $7,599. The note bears an annual interest rate of 11.50%. The Company paid $2,121 as a down payment on May 23, 2022, the note
requires the Company to make 9 monthly payments of $640.41 over the remaining term of the note. As of March 31, 2023, the obligation
outstanding is $0.
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 $20,931. The note bears an annual interest rate of 10.50%. The Company paid $5,347 as a down payment on April 5,
2022, the note requires the Company to make 9 monthly payments of $1,808.22 over the remaining term of the note. As of March 31, 2023,
the obligation outstanding is $0.
Effective
July 7, 2022, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $10,150.
The note bears an annual interest rate of 11%. The Company paid $3,950 as a down payment in July 2022, the note requires the Company
to make 9 monthly payments of $837 over the remaining term of the note. As of March 31, 2023, the obligation outstanding is $838.
Effective
July 31, 2022, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $144,500.
The note bears an annual interest rate of 9.49%. The Company paid $35,803 as a down payment in August 2022, the note requires the Company
to make 10 monthly payments of $11,348 over the remaining term of the note. As of March 31, 2023, the obligation outstanding is $22,696.
Effective
November 26, 2022, the Company entered into a 10-month premium finance agreement for an insurance policy in the principal amount of $11,089.
The note bears an annual interest rate of 12.90 %. The Company paid $1,961 as a down payment in November 2022, the note requires the
Company to make 10 monthly payments of $971 over the remaining term of the note. As of March 31, 2023, the obligation outstanding is
$4,855.
Promissory
note
In
January 2020, the Company issued two promissory notes with a principal balance of $500,000 to accredited investors (the “Note Holders”).
The note matures in October 2020 and has an annual rate of interest of 12%. In connection with the issuance of the promissory note, the
Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the issuance date, $0.85 per. As of
July 2020, in consideration of the warrants being amended to $0.45 per share with an extended the term from five to a ten-year term,
the maturity date has been extended to December 13, 2020. As of September 30, 2022, the obligation outstanding was $200,548, which consisted
of remaining principal of $250,000 net of a debt discount of $49,452. During the three months ended December 31, 2022, the Company converted
$124,000 of the principal and issued 7,352,941 common shares. The remaining principal balance was $125,000, and the balance, $80,016,
was net of debt discount of $44,984 as of December 31, 2022. In January 2023, the remaining balance has been converted through the issuance
of 5,434,782 shares of common stock.
In
November 2022, the Company completed a private placement of a $250,000 unsecured promissory note and 250,000 common share purchase warrants
to an arm’s length lender. The Note becomes due and payable in three months, subject to extension by the Company for an additional
three months upon payment of a $5,000 extension fee to the lender. The Note bears an interest rate of 10% per annum payable at maturity.
The Company may prepay the outstanding principal amount of the obligation together with all accrued and unpaid interest, without penalty,
at any time prior to the maturity date of the note. Each warrant entitles the holder thereof to purchase one common share at a price
of $0.05 for a period of thirty-six (36) months after closing. The balance of the promissory note as of March 31, 2023, was $250,000.
Long-term
debt, mortgages
In
January 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears
interest at 15% per annum. Monthly interest only payments began February 1, 2020, payments will continue each month thereafter until
paid. The entire unpaid balance was due on January 31, 2022, the maturity date of the mortgage, and is secured by the underlying property.
The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate
project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director
of the Company. As of March 31, 2023, the Company paid off the existing debt of $400,000 and procured another mortgage in the amount
of $450,000. This obligation has no personal guarantee; however, a corporate guarantee has been perfected. The new interest is 12% on
a three-year term.
In
March 2020, the Company executed a $400,000 mortgage payable on property located in Oregon to acquire additional funds. The mortgage
bears interest at 11.55% per annum. Monthly interest only payments began May 1, 2020, payments will continue each month thereafter until
paid. The entire unpaid balance was due on April 1, 2022, the maturity date of the mortgage, and is secured by the underlying property.
The Company paid costs of approximately $38,000 to close on the mortgage. The mortgage terms do not allow participation by the lender
in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real
estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of March 31, 2023, the obligation
outstanding is $400,000. Subsequently, the Company has exercised its right to extend the maturity and is now due April 1, 2023.
In
March 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at 15% per annum. Monthly interest only payments began April 1, 2020, payments will continue each month thereafter until paid. The entire
unpaid balance was due on March 31, 2022, the maturity date of the mortgage, and is secured by the underlying property. The mortgage
terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the
results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the
Company. As of March 31, 2023, the Company paid off the existing debt of $700,000 and procured another mortgage in the amount of $775,000.
This obligation has no personal guarantee; however, a corporate guarantee has been perfected. The new interest is 12% on a two-year term.
In
July 2020, the Company executed a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at 14% per annum. Monthly interest only payments began August 1, 2020, payments will continue each month thereafter until paid. The entire
unpaid balance is due on July 31, 2023, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms
do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results
of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the Company.
As of March 31, 2023, the obligation outstanding is $200,000.
In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment to contribute
$1.275 million to NVD which included the purchase price of $600,000 and an additional commitment to pay tenant improvement costs of $675,000.
In the year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this mortgage
were advanced to the Company. The advance is undocumented, non-interest bearing and due on demand. As of September 30, 2019, the balance
due totals $300,000. In August 2020, the Company refinanced this obligation and paid the $300,000 balance. The refinanced mortgage term
is 36 months and includes and interest rate of 14% and monthly interest only payments of $4,667. As of March 31, 2023, the balance due
totals $400,000.
The
following is a table of the 5-year runoff of our long-term debt as of March 31:
Schedule of Maturities of Long Term Debt
| | |
| | |
| 2023 | |
$ | 1,000 | |
| 2024 | |
| 775 | |
| 2025 | |
| 450 | |
| 2026 | |
| - | |
| 2027 | |
| - | |
| Thereafter | |
| - | |
| Total long-term debt | |
| 2,225 | |
| Less current portion
of long-term debt: | |
| (1,000 | ) |
| Long
term debt | |
$ | 1,225 | |
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 15% per annum. The entire unpaid balance is due November 2022, the maturity date of the mortgage, and was secured by
the underlying property. The note was cross guaranteed by the former CEO and Director of the Company. On November 23, 2020, the Company
executed a real estate purchase agreement related to the Mulino Property which included the sale of the property and payoff of the mortgage.
Additionally, the Company entered into a lease agreement whereas the amount of $13,750 required as a rent payment through the lease is
being recorded as interest expense and the Company recorded a finance liability of $1,094,989 related to the lease under the guidance
of ASC 842 as a failed sale and leaseback transaction. During the fiscal year ended September 30, 2022, the Company executed a sale lease
back agreement with the Company’s Mulino property, and entered into a 15-year lease with an unrelated third party located in Englewood,
CO. The lease requires the Company to pay a starting base rental fee of $29,167 plus additional estimated triple net charges per month
including real estate taxes in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real
estate taxes), maintenance, and utilities are included and paid monthly. This transaction resulted in net proceeds to the Company in
the amount of $1.8 million and a gain on sale of $1.4 million, recorded in other income.
12.
Convertible debt
In
December 2022, the Company partially converted a $250,000 unsecured convertible promissory note and issued 7,352,941 common shares to
convert 50% of the note. In January 2023, the balance of $125,000 was converted through the issuance of 5,434,782 shares of common stock.
As of March 31, 2023, the balance on the convertible debenture is $0.
In January 2023,
the Company executed a $250,000 unsecured convertible promissory note and 500,000 common share purchase warrants to an arm’s length
lender. The Note becomes due and payable on March 31, 2023, and is subject to a voluntary conversion by the Holder at the conversion rate
of $0.01 a share. The Note bears an interest rate of 12% per annum payable at maturity. Each warrant entitles the holder thereof to purchase
one common share at a price of $0.005 for a period of thirty-six (36) months after closing. The note has matured, and the Company is currently
in negotiations with the note holder to extend the maturity date. A debt discount in the amount of $250,000 was recorded against the
proceeds of the note. As of March 31, 2023, the outstanding balance of the note was $250,000.
During March
2023, the Company executed a $100,000 unsecured convertible promissory note. The Note bears an interest rate of 7.5% per annum payable
quarterly either in cash or in kind . The Note becomes due and payable on March 7, 2024, and is subject to a voluntary conversion by the
Holder at the conversion rate of $0.01 a share. Additionally, upon this conversion, the noteholder is entitled to 100 percent cashless
warrant coverage entitling the holder to purchase one common share at a price of $0.02 for a period of five years, (60) months after conversion.
If the noteholder elects to redeem the note, the holder would be entitled to accrued interest along with three times cashless warrant
coverage based on the initial investment entitling the holder to purchase one common share at a price of $0.02 for a period of five years,
(60) months after redemption. A debt discount in the amount of $100,000 was recorded against the
proceeds of the note. As of March 31, 2023, the outstanding balance of the note was $1,500.
During March
2023, the Company executed a $50,000 unsecured convertible promissory note. The Note bears an interest rate of 7.5% per annum payable
quarterly either in cash or in kind. The Note becomes due and payable on March 7, 2024, and is subject to a voluntary conversion by the
Holder at the conversion rate of $0.01 a share. Additionally, upon this conversion, the noteholder is entitled to 100 percent cashless
warrant coverage entitling the holder to purchase one common share at a price of $0.02 for a period of five years, (60) months after conversion.
If the noteholder elects to redeem the note, the holder would be entitled to accrued interest along with three times cashless warrant
coverage based on the initial investment entitling the holder to purchase one common share at a price of $0.02 for a period of five years,
(60) months after redemption. A debt discount in the amount of $50,000 was recorded against the
proceeds of the note. As of March 31, 2023, the outstanding balance of the note was $1,000.
Canaccord
On
December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of up to
10,000 convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross proceeds of
up to CDN$10,000,000 (the “Offering”). The net proceeds of the Offering were used for expansion initiatives and general corporate
purposes. The Company’s functional currency is U.S. dollars.
In
December 2018 and January 2019, the Company issued 3,121 CD Special Warrants in the first closing of the Offering, at a price of CDN
$1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $3.1 million or $2.3 million USD. In connection with this
offering, the Company issued the agents in such offering 52,430 convertible debenture special warrants (the “Broker CD Special
Warrants”) as partial satisfaction of a selling commission.
On
March 14, 2019, the Company issued 962 CD Special Warrants in the second and final closing of the Offering, at a price of CDN $1,000
per CD Special Warrant, and received aggregate gross proceeds of CDN $1.0 million or $0.7 million USD. In connection with this offering,
the Company issued the agents in such offering 5,600 convertible debenture special warrants (the “Broker CD Special Warrants”)
as partial satisfaction of a selling commission.
The
total aggregate proceeds of the Offering totaled $4.1 million CDN or $3.1 million USD.
Each
CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration) for
one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third business
day after the date on which both (A) a receipt (the “Receipt”) for a (final) document (the “Qualification Document”)
qualifying the distribution of the Convertible Debentures (as defined below) and Warrants (as defined below) issuable upon exercise of
the CD Special Warrants has been issued by the applicable securities regulatory authorities in the Canadian jurisdictions in which purchasers
of the CD Special Warrants are resident (the “Canadian Jurisdictions”), and (B) a registration statement (the “Registration
Statement”) registering the resale of the common shares underlying the Convertible Debentures and Warrants has been declared effective
by the U.S. Securities and Exchange Commission (the “Registration”); and (ii) the date that is six months following the closing
of the Offering. The Company has also provided certain registration rights to purchasers of the CD Special Warrants. The CD Special Warrants
were exchanged for Convertible Debenture Units after six months as U.S. and Canadian registrations were not effective at that time.
Each
Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible
Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant
entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of CDN $3.90
per Warrant Share for a period of 24 months following the closing of the Offering.
The
Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the Offering.
If the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that is 120 days following the closing
of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof to receive, upon the exercise thereof
and at no additional cost, 1.05 Convertible Debenture Units per CD Special Warrant (instead of 1.0 Convertible Debenture Unit per CD
Special Warrant). Until the Receipt and Registration have been obtained, securities issued in connection with the Offering (including
any underlying securities issued upon conversion or exercise thereof) will be subject to a six (6)-month hold period from the date of
issue. Since the CD Special Warrants were exchanged for Convertible Debenture Units after six (6) months as U.S. and Canadian registrations
were not effective at that time, the holders received 1.05 Convertible Debenture Units per CD Special Warrant.
The
brokered portion of the Offering (CDN $2.5 million, $1.9 million USD) was completed by a syndicate of agents (collectively, the “Agents”).
The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the brokered portion of the Offering. As
additional consideration, the Company issued the Agents such number of non-transferable broker convertible debenture special warrants
(the “Broker CD Special Warrants”) as is equal to 7.0% of the number of CD Special Warrants sold under the brokered portion
of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD Special Warrants, into broker warrants
of the Company (the “Broker Warrants”). Each Broker Warrant entitles the holder to acquire one Convertible Debenture Unit
at an exercise price of CDN $1,000, until the date that is 24 months from the closing date of the Offering. The distribution of the Broker
Warrants issuable upon the exchange of the Broker CD Special Warrants shall also be qualified under the Qualification Document and the
resale of the common shares underlying the Broker Warrants will be registered under the Registration Statement. The Company also paid
the lead agent a commission noted above of CDN$157,290, corporate finance fee equal to CDN $50,000 in cash and as to $50,000 in common
shares of the Company at a price per share of CDN$3.00 plus additional expenses of CDN$20,000. In addition, the Company paid the trustees
legal fees of CDN$181,365. In total the Company approx. USD $0.32 million in fees and expenses associated with the offering.
The
issuance of the securities was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended
(the “Securities Act”), for the offer and sale of securities not involving a public offering, Regulation D promulgated under
the Securities Act, Regulation S, in Canada to “accredited investors” within the meaning of National Instrument 45106 and
other exempt purchasers in each province of Canada, except Quebec, and/or outside Canada and the United States on a basis which does
not require the qualification or registration. The securities being offered have not been registered under the Securities Act and may
not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration or an applicable
exemption from the registration requirements.
The
Convertible Debenture features contain the following embedded derivatives:
| |
● |
Conversion
Option - The Convertible Debentures provide the holder the right to convert all or any portion of the outstanding principal into
common shares of the Company at a conversion price of C$3.00 such that 333.33 common shares are issued for each C$1,000 of principal
of Convertible Debentures converted. |
| |
● |
Contingent
Put - Upon an Event of Default, the Convertible Debentures settle for cash at the outstanding principal and interest amount (at discretion
of the Indenture Trustee or upon request of Holders of 25% or more of principal of the Convertible Debentures). |
| |
● |
Contingent
Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding amount and principal and interest *
105% (where Holder accepts a Change of Control Offer). |
The
conversion option, the contingent put feature upon an Event of Default, and the contingent put feature upon a Change in Control should
be bifurcated and recognized collectively as a compound embedded derivative at fair value at inception and at each quarterly reporting
period.
A
five percent penalty assessed for failure to timely file a registration statement to register the stock underlying the CD special warrants.
The
Company valued the warrants granted using the Black-Scholes pricing model and determined that the value at grant date was approximately
$424,000 USD (this includes the warrants issued as part of the penalty for failure to timely file the required registration statement
under the indenture agreement). The significant assumptions used in the valuation were as follows:
Schedule
of Assumptions Used Valuations of Warrants
| Fair value of underlying common shares | |
$ | 1.78
to $2.10 | |
| Exercise price (converted to USD) | |
$ | 2.93 | |
| Dividend yield | |
| - | |
| Historical volatility | |
| 85 | % |
| Risk free interest rate | |
| 1.4%
to 1.9 | % |
The
warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not meet the
scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance with the
guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in fair value recognized
in earnings each reporting period.
In
April 2020, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the Convertible
Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing, which closed
on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in connection with the financing will be repriced
to C$1.50 per Common Share and the convertible debentures of the Company issued in connection with the financing will be repriced to
C$1.15 per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible debentures:
(i) an extension to the maturity date of the convertible debentures to three years from the date of issuance; and (ii) an amendment to
permit the Company to force the conversion of the principal amount of the then outstanding convertible debentures and any accrued and
unpaid interest thereof at the new conversion price on not less than June days’ prior written notice if the closing trading price
of the shares of common stock of the Company’s common shares exceeds C$1.90 for a period of 10 consecutive trading days on the
CSE. The Warrant holders have also approved the inclusion of an early acceleration feature in accordance with the policies of the Canadian
Securities Exchange, permitting the Company to accelerate the expiry date of the warrants should the closing trading price of the Common
Shares exceed C$1.87 for a period of 10 consecutive trading days on the CSE.
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$0.20 per Common Share and the convertible debentures of the Company issued in connection with the financing will be
repriced to C$0.10 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$0.80 for a period of 10 consecutive trading days on the CSE, (iii) the payment
of 5% of the principle amount. Share purchase warrants of the Company were issued in connection this repricing at 167 common share warrants
for each $1,000 debenture unit held. A debt discount of $1.2 million was recorded and will be amortized over the remaining life of the
convertible debt, and as part of the modification of convertible debt. This transaction was accounted for as extinguishment of debt which
resulted in a gain of $803 thousand. As of March 31, 2023, and September 30, 2022, the convertible debt related to the above debentures
was $2.0 million and $1.5 million, net of a debt discount of $900 thousand and $1.1 million, respectively.
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 six months ended March 31, 2023, in USD, (in thousands):
Schedule
of Warrant Liability and Embedded Derivative Liability
| | |
Warrant
Liability | | |
Derivative
Liability | |
| Balance
as of September 30, 2022 | |
$ | - | | |
$ | 370 | |
| Change in fair value | |
| - | | |
| (209 | ) |
| Balance as of March
31, 2023 | |
$ | - | | |
$ | 161 | |
13.
Fair Value Measurements
In
accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants
and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value of the liability.
ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives
the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each
level in the hierarchy is described below:
Level
1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement
date
Level
2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level
3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
The
following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy
as of March 31, 2023 (in thousands):
Schedule
of Liabilities Measured at Fair Value on a Recurring Basis
| | |
| | |
| | |
| | |
| |
| | |
Fair
value measured at March 31, 2023 | |
| | |
| | |
Quoted prices | | |
Significant other | | |
Significant | |
| | |
| | |
in active
markets | | |
observable inputs | | |
unobservable inputs | |
| | |
Fair
value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
| Warrant liability | |
$ | 43 | | |
$ | - | | |
$ | - | | |
$ | 43 | |
| Embedded derivative liability | |
| 161 | | |
| - | | |
| - | | |
| 161 | |
| Total fair value | |
$ | 204 | | |
$ | - | | |
$ | - | | |
$ | 204 | |
There
were no transfers between Level 1, 2 or 3 during the six months ended March 31, 2023.
The
following table presents changes in Level 3 liabilities measured at fair value for the six months ended March 31, 2023. Both observable
and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.
Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable
to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities)
inputs (in thousands).
Schedule
of Level 3 Liabilities Measured at Fair Value
| | |
| | |
Embedded | | |
| |
| | |
Warrant
Liability | | |
Derivative
Liability | | |
Total | |
| Balance – September 30,
2022 | |
$ | 55 | | |
$ | 370 | | |
$ | 425 | |
| Warrants granted for services | |
| - | | |
| - | | |
| - | |
| Change
in fair value | |
| 44 | | |
| (215 | ) | |
| (171 | ) |
| Balance – December
31, 2022 | |
| 99 | | |
| 155 | | |
| 254 | |
| Change
in fair value | |
| (56 | ) | |
| 6 | | |
| (50 | ) |
| Balance – March
31, 2023 | |
$ | 43 | | |
$ | 161 | | |
$ | 204 | |
A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of March 31, 2023, and September 2022 is as follows:
Summary
of Weighted Average Significant Unobservable Inputs
| | |
Embedded Derivative Liability | |
| | |
As of March 31, | | |
As of September 30, | |
| | |
2023 | | |
2022 | |
| Strike price | |
$ | 0.10 | | |
$ | 0.10 | |
| Contractual term (years) | |
| 2.3 | | |
| 2.8 | |
| Volatility (annual) | |
| 153 | % | |
| 141 | % |
| Risk-free rate | |
| 3.66 | % | |
| 4.00 | % |
| Dividend yield (per share) | |
| 0.00 | % | |
| 0.00 | % |
| Credit spread | |
| 14%
to 16 | % | |
| 14%
to 16 | % |
The
Company used a lattice based trinomial model developed by Tsiveriotis, K. and Fernades in which the three lattices incorporate (1) the
Company’s underlying common stock price; (2) the value of the debt components of the convertible notes; and (3) the value of the
equity component of the convertible notes. The main drivers of sensitivity for the model are volatility and the credit spread. The model
used will vary by approximately 1.5% for a 4% change in volatility and will vary by less than 1% for each 1% change in credit spread.
14.
Shareholders’ Equity
In
2016, the Company adopted a plan to allow the Company to compensate prospective and current employees, directors, and consultants through
the issuance of equity instruments of the Company. The plan has an effective life of 10 years. The plan is administered by the board
of directors of the Company until such time as the board transfers responsibility to a committee of the board. The plan is limited to
issuing common shares of the Company up to 15% of the total shares then outstanding. No limitations exist on any other instruments issuable
under the plan. In the event of a change in control of the Company, all unvested instruments issued under the plan become immediately
vested.
Pursuant
to the shareholders meeting on June 25, 2021, the Company has amended its certificate of incorporation to increase the number of authorized
Company Common Shares from 300,000,000 to 750,000,000.
Preferred
shares
The
Company had two series of preferred shares designated with no preferred shares issued and outstanding as of March 31, 2023, and September
30, 2022.
Common
shares
During
the quarter ended December 31, 2021, the Company issued 3,223,611 shares of its common stock related to a stock purchase agreement for
cash of $285,000.
During
the quarter ended December 31, 2021, the Company issued 130,000 shares of its common stock related to various consulting agreements for
a fair value of approximately $30,000 or $0.23 per share.
During
the quarter ended December 31, 2021, the Company issued 1,000,000 shares of its common stock valued at $220,000 as stock-based compensation.
During
the quarter ended December 31, 2021, the Company cancelled 11,506,700 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 $67,000 of its accrued interest related to convertible debt in exchange for
555,953 shares of the company’s common stock.
During
the quarter ended December 31, 2022, the Company issued 350,000 shares of its common stock related to various consulting agreements for
a fair value of approximately $9,000.
During
the quarter ended December 31, 2022, the Company issued 1,137,500 shares of its common stock valued at $23,000 as stock-based compensation.
During
the quarter ended December 31, 2022, the Company converted $124,000 of its convertible debt in exchange for 7,352,941 shares of the company’s
common stock.
During
the quarter ended March 31, 2022, the Company issued 1,000,000 shares of its common stock valued at $0.068 as stock-based compensation.
During
the quarter ended March 31, 2023, the Company converted $125,000 of its convertible debt in exchange for 5,434,782 shares of the company’s
common stock.
During
the quarter ended March 31, 2023, the Company issued 6,895,334 shares of the company’s common stock in payment of $144,573 of interest
and rent expense.
15.
Stock Based Compensation
Stock
Options
The
fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of the awards
was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend yield is 0%.
The expected term for stock options granted with service conditions represents the average period the stock options are expected to remain
outstanding and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission’s
Staff Accounting Bulletin for “plain vanilla” options. The expected term for stock options granted with performance and/or
market conditions represents the period estimated by management by which the performance conditions will be met. The Company obtained
the risk-free interest rate from publicly available data published by the Federal Reserve. The Company uses a methodology in estimating
its volatility percentage from a computation that was based on a comparison of average volatility rates of similar companies to a computation
based on the standard deviation of the Company’s own underlying stock price’s daily logarithmic returns.
The
fair value of options granted are estimated using weighted-average assumptions. There were no options granted during the six months ended
March 31, 2023 and 2022.
Options:
Schedule
of Fair Value of Options Granted
| | |
| For
the Three Months Ended March 31, | |
| | |
| 2023 | | |
| 2022 | |
| Exercise price | |
| 0.05 | | |
| n/a | |
| Expected term (years) | |
| 4.94 | | |
| n/a | |
| Expected stock price volatility | |
| 124% | | |
| n/a | |
| Risk-free rate of interest | |
| 2.42% | | |
| n/a | |
| Expected dividend rate | |
| 0% | | |
| n/a | |
A
summary of option activity under the Company’s stock option plan for the six months ended March 31, 2023, is presented below:
Schedule
of Stock Option Activity
| | |
Number
of Shares | | |
Weighted
Average Exercise Price | | |
Total
Intrinsic Value | | |
Weighted
Average Remaining Contractual Life (in years) | |
| Outstanding
as of October 1, 2021 | |
| 6,697,916 | | |
$ | 1.07 | | |
$ | 54 | | |
| 2.09 | |
| Granted | |
| 1,500,000 | | |
| 0.07 | | |
| - | | |
| 4.39 | |
| Expired | |
| (2,242,231 | ) | |
| (0.67 | ) | |
| - | | |
| - | |
| Outstanding as of September
30, 2022 | |
| 5,955,685 | | |
$ | 1.07 | | |
$ | - | | |
| 2.90 | |
| Granted | |
| 3,425,000 | | |
$ | 0.05 | | |
$ | - | | |
| 4.94 | |
| Outstanding as of March
31, 2023 | |
| 9,380,685 | | |
$ | 0.27 | | |
$ | - | | |
| 2.88 | |
| Options
vested and exercisable | |
| 9,005,685 | | |
$ | 0.35 | | |
$ | - | | |
| 2.58 | |
Estimated
future stock-based compensation expense relating to unvested stock options was nominal as of March 31, 2023, and 2022. Weighted average
remaining contractual life of the options is 4.64 years.
Stock-based
Compensation Expense
Stock-based
compensation expense for the three and six months quarters ended March 31, 2023, and 2022 was comprised of the following (in thousands):
Schedule
of Stock-based Compensation Expenses
| | |
| | | |
| | |
| | |
Three
months ended March 31, | |
| | |
2023 | | |
2022 | |
| Stock grants | |
$ | - | | |
$ | 68 | |
| Stock options | |
| 18 | | |
| 19 | |
| Warrants | |
| - | | |
| 158 | |
| Total
stock-based compensation | |
$ | 18 | | |
$ | 245 | |
| | |
| | | |
| | |
| | |
Six
months ended March 31, | |
| | |
2023 | | |
2022 | |
| Stock grants | |
$ | 32 | | |
$ | 288 | |
| Stock options | |
| 105 | | |
| 311 | |
| Warrants | |
| - | | |
| 158 | |
| Total
stock-based compensation | |
$ | 137 | | |
$ | 757 | |
16.
Commitments and contingencies
As
noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States Federal
Government. This raises several possible issues which may impact the Company’s overall operations, not the least of which are related
to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level, and most traditional banks
are federally insured, those financial institutions will not service cannabis businesses. In states where medical or recreational marijuana
is legal, dispensary owners, manufacturers, and anybody who “touches the plant,” continue to face a host of operational hurdles.
While local, state-chartered banks and credit unions now accept cannabis commerce, there remains a reluctance by traditional banks to
do business with them. Aside from a huge inconvenience and the need to find creative ways to manage financial flow, payroll logistics,
and payment of taxes, 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 March 31, 2023, the Company’s has accounts with
a Florida bank and several credit unions located in Washington and California.
Despite
the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these risks
will have a substantive impact on its planned operations in the near term.
In
July 2016, the Company entered into a 10-year lease for a commercial building from an unrelated third party in Springfield, Oregon. The
lease requires the Company to pay a starting base rental fee of $7,033 plus an additional estimated $315 per month in real estate taxes
in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance
and utilities are included at the end of each year as a one-time payment. In addition, the Company also remitted $14,000 for a security
deposit to the landlord. No amounts have been recorded for deferred rent in these financial statements as the amount was deemed immaterial
by the Company. The Company has subleased this space pursuant to a 10-year lease. On February 22, 2018, both parties executed a lease
addendum that adds contiguous property for 12,322 square feet. The term commences November 1, 2017, and continues through November 31,
2026, at a starting rate of $3,525 a month that escalates after the first year. The Company subleases this property to a related party
(see disclosures below under “Springfield Suites”). As of March 31, 2023, Company eliminates this rental income in consolidation.
In
September 2019, the Company entered into a 4-year lease for the occupancy of the Company’s new corporate office located in Boca
Raton, Florida. The lease requires the Company to pay a starting base rental fee of $4,285 per month with yearly increases thereafter.
As of November 23, 2020, the Company added an additional 2,000 rentable square feet to its current lease under the same terms and conditions.
In
January 2019, the Company entered into a 5-year lease for the occupancy of real estate and a building located in Hillsboro, Oregon. The
lease requires the Company to pay a starting base rental fee of $9,696 per month with yearly increases thereafter.
Pursuant
to the execution of a sale lease back agreement with the Company’s Wallis property, a/k/a Never Again, the Company in May 2021,
entered into a 15-year lease for the Wallis commercial building from an unrelated third party located in New York, NY. The lease requires
the Company to pay a starting base rental fee of $31,500 plus an additional estimated triple net charges per month including real estate
taxes in which the base rental fee escalates each year by approximately 2.5%. All taxes (including reconciling real estate taxes), maintenance
and utilities are included and paid monthly and reserved until payments are due. In addition, the Company also remitted $60,000 for a
security deposit to the landlord.
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 7% of the gross proceeds of the Offering (including
in respect of any exercise of the Over-Allotment Option, if any) payable in cash (the “Agent’s Commission”),
subject to a reduced fee equal to 1% for Units sold to certain purchasers designated by the Company on a president’s list
(the “President’s List”). In addition the Agent will receive a number of share purchase warrants (the
“Broker Warrants”) to purchase up to that number of shares of common stock of the Company (each, a “Broker
Share”) that is equal to 7% of the aggregate number of Units issued under the Offering (including any Additional Units
(as hereinafter defined) issued upon exercise of the Over-Allotment Option, if any), subject to a reduced number of Broker Warrants
equal to 3.5% of the Units sold to purchasers on the President’s List, at an exercise price of $0.55 CAD per Broker Share,
exercisable for a period of 24 months following the Closing Date. Pursuant to the Agency Agreement, the Company also agreed to pay to
the Agent a corporate finance fee of $100,000 CAD (the “Corporate Finance Fee”), such Corporate Finance Fee to be
payable as to $50,000 CAD in cash and as to $50,000 CAD by the issuance of 90,909 shares of common stock of the Company (the “Corporate
Finance Fee Shares”) at the Offering Price. After deducting the Agent’s Commission (assuming no President’s
List purchasers), the estimated expenses of the Offering of $350,000 CAD and the cash portion of the Corporate Finance Fee, which
will be paid out of the general funds of the Company. The Company has also granted to the Agent an over-allotment option (the “Over-Allotment
Option”), exercisable in whole or in part, at the Agent’s sole discretion, to purchase up to an additional 15% of the
number of Units sold pursuant to the Offering, being up to an additional 2,590,909 Units in the case of the Maximum Offering (the “Additional
Units”), each Additional Unit to be comprised of one Unit Share and one Warrant, at the Offering Price to cover the Agent’s
over-allocation position, if any, and for market stabilization purposes. The Over-Allotment Option is exercisable, in whole or in part,
at any time or times until the date that is 30 days immediately following the Closing Date. A purchaser who acquires Additional Units
forming part of the Agent’s over-allocation position acquires such Additional Units under this Prospectus, regardless of whether
the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. If
the Over-Allotment Option is exercised in full, the total Price to the Public, Agent’s Commission and Net Proceeds to the Company
(before deducting expenses of the Offering and assuming no President’s List purchasers) will be $9,200,000 CAD, $644,000 CAD and
$8,556,000 CAD, respectively, in the case of the Minimum Offering and, $10,925,000 CAD, $764,750 CAD and $10,160,250 CAD, respectively,
in the case of the Maximum Offering. Pursuant to the terms of the Agency Agreement, all subscription funds received from subscribers
will be retained in trust by the Agent until the Minimum Offering is obtained. Once the Minimum Offering has been obtained, the sale
of the Units shall be completed in accordance with the Agency Agreement. To date, all funds have been subscribed and will be held in
escrow for final approval. Additionally, the Company entered into an offering led by Canaccord Genuity Corp. (the “Agent”)
on a ‘commercially reasonable efforts’ basis and consisted of the sale of 16,926,019 Units (including 1,471,291 Units pursuant
to the partial exercise of the over-allotment option by the Agent) at a price of C$0.55 per Unit for aggregate gross proceeds of C$10,309,210
(including C$809,210.05 pursuant to the partial exercise of the over-allotment option by the Agent). Each Unit is comprised of one share
in the common stock of the Company (each a “Unit Share”) and one share purchase warrant of the Company (each, a “Warrant”).
Each Warrant is exercisable to acquire one share in the common stock of the Company (each, a “Warrant Share”) until April
23, 2023 at a price per Warrant Share of C$0.68, subject to adjustment in certain events. The net proceeds raised under the Offering
will be used for working capital and in furtherance of some or all of the business objectives described in the final short form prospectus
of the Company dated April 19, 2021 (the “Final Prospectus”). The Company has given notice to list the Unit Shares and the
Warrant Shares on the Canadian Securities Exchange (the “Exchange”). Listing will be subject to the Company fulfilling all
of the requirements of the Exchange. Concurrent with the Offering, the Company also conducted a non-brokered offering in the United States
of 972,092 units of the Company at a price of US$0.43 per unit for aggregate gross proceeds of approximately US$420,000 under the terms
of a registration statement on Form S-1, as amended, filed with the United States Securities and Exchange Commission under the U.S. Securities
Act on January 5, 2021.
Legal
Proceedings
D.H.
Flamingo, Inc. v. Department of Taxation, et. al.
On
February 27, 2020, a subsidiary of the Company (YMY Ventures, LLC) was served with a Summons and Second Amended Complaint in a matter
pending in the District Court of Clark County Nevada (Case # A-19-787004-B) which is styled “D.H. Flamingo, Inc. v. Department
of Taxation, et. al.” (the DOT Litigation”). In this matter, the Plaintiff alleged 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 sought 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 sought damages in an unspecified amount. Thereafter, on April 20, 2020, YMY Ventures, LLC filed a
Notice of Non-Participation and Request for Dismissal. This matter has now been fully resolved without any financial exposure on the
part of the Company.
Chris
Hass, et al. vs Brian Hayek, et al.
Plaintiffs
filed their initial complaint in the instant action on May 22, 2020. Plaintiffs filed the operative first amended complaint on August
18, 2020. On March 28, 2022, Plaintiffs obtained a stipulated judgment in this action in the amount of $349,876.69 against Defendants
Driven Deliveries, Brian Hayek (“Hayek”), and Christian Schenk (“Schenk”) (collectively, “Defendants”).
(3/28/22 Judgment.) Plaintiffs declare that during the litigation of the instant action, Baumgartner negotiated the essential terms of
a settlement with Driven Deliveries’ President, Salvador Villanueva(“Villanueva”), and Villanueva represented to Baumgartner
that he was in charge of the litigation and a deal could be worked out between the two of them to resolve the case. Plaintiffs declare
the basic terms of a settlement were reached between Villanueva and Baumgartner, and Plaintiffs signed a settlement agreement (“Settlement
Agreement”) on November 24, 2020. Defendants, including Hayek, signed the Agreement on November 30, 2020. Plaintiffs declare they
signed the Settlement Agreement because they knew Driven Deliveries was merging with Stem. Plaintiffs declare that for this reason, they
made sure to state in the Settlement Agreement that in the event of a merger between Driven Deliveries and Stem, Stem would be bound
by the Settlement Agreement and would be named on the Judgment. Plaintiffs also declare that when they signed the Settlement Agreement,
they relied on the fact Hayek, Stem’s new Agreement to bind his new company. Plaintiffs declare Defendants made payments on the
Settlement Agreement until November 2021, when payments stopped. Plaintiffs declare the settlement checks were mostly written by Villanueva.
Plaintiffs declare that shortly after they signed the Settlement Agreement, Driven Deliveries officially completed its merger with Stem,
and all of Plaintiffs’ shares in Driven Deliveries were converted to shares of Stem. In January 2022, Villanueva listed himself
as President, Secretary, and Treasurer of Driven Deliveries. Plaintiffs filed the instant motion on September 8, 2022. On October 3,
2022, Defendant Driven Deliveries filed its notice of bankruptcy proceedings, and the Court ordered a stay as to Driven Deliveries. On
October 20, 2022, nonparty Stem filed its opposition. On October 26, 2022, Plaintiffs filed their reply. At the November 2, 2022, hearing
on the instant motion, the Court requested Plaintiffs and Stem submit supplemental briefs on which state law to apply regarding successor
liability.
Under
California law, Stem, as Driven Deliveries’ prior parent company was legally required to assume Driven Deliveries’ debt to
Plaintiffs. If a domestic corporation owns all the outstanding shares, or owns less than all the outstanding shares but at least 90 percent
of the outstanding shares of each class, of a corporation or corporations, domestic or foreign, the merger of the subsidiary corporation
or corporations into the parent corporation or the merger into the subsidiary corporation of the parent corporation and any other subsidiary
corporation or corporations, may be effected by a resolution or plan of merger adopted and approved by the board of the parent corporation
and the filing of a certificate of ownership as provided in subdivision . The resolution or plan of merger shall provide for the merger
and shall provide that the surviving corporation assumes all the liabilities of each disappearing corporation and shall include any other
provisions required by this section. Stem’s S-4 Statement to the SEC states, “Driven is surviving the merger as a wholly
owned subsidiary of Stem (the ‘Merger’). Stem, together with Driven following the Merger, is referred to herein as the combined
company. Following the completion of the Merger, Stem will also assume Driven’s outstanding net indebtedness.” Plaintiffs
argue that while the merger with Stem was pending, Driven and Stem’s COO, Brian Hayek agreed to be bound by California law in executing
the Settlement Agreement. Accordingly, applying California law, Stem assumed Dirven’s liability to Plaintiffs. Accordingly, Plaintiffs
have demonstrated Stem is Driven Deliveries’ successor in interest. In the interest of justice this Court grants Plaintiffs’
motion to amend judgment to add nonparty Stem Holdings Inc. as an additional defendant.
Additionally,
the Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business.
17.
Subsequent events
As
of May 2023, the Company entered into several convertible promissory notes aggregating to $595,000. These Note bears an interest
rate of 7.5% per annum payable quarterly either in cash or in kind. These Notes become due and payable on April 16, 2024, and are subject
to a voluntary conversion by the Holder at the conversion rate of $0.01 a share. Additionally, upon a conversion, the noteholder is entitled
to 100 percent cashless warrant coverage entitling the holder to purchase one common share at a price of $0.02 for a period of five years,
(60) months after conversion. If the noteholder elects to redeem the note, the holder would be entitled to accrued interest along with
three times cashless warrant coverage based on the initial investment entitling the holder to purchase one common share at a price of
$0.02 for a period of five years, (60) months after redemption.
In
April 2023, the Company entered into a mutual settlement and release agreement with the landlord of one its indoor grow facilities in
Oregon. The mutual consideration between the parties was to sell and transfer certain property and equipment to the landlord in exchange
for complete termination of the existing lease and all of its obligations.
In
May 2023, pursuant to the execution of a sale lease back agreement with the Company’s Powell property, a/k/a Opco Retail 1, the
Company entered into a 10-year lease for the Powell dispensary building from an unrelated third party located in Wichita, Kansas. The
lease requires the Company to pay a starting base rental fee of $7,714 plus additional estimated triple net charges per month including
real estate taxes in which the base rental fee escalates each year by approximately 2.0%. All taxes (including reconciling real estate
taxes), maintenance and utilities are included and paid monthly and reserved until payments are due. In addition, the Company also remitted
$15,000 for a security deposit to the landlord.
In
May 2023, pursuant to the execution of a sale lease back agreement with the Company’s Willamette property, a/k/a JV Retail 2, the
Company, entered into a 10-year lease for the Willamette dispensary building from an unrelated third party located in Santa Cruz, CA.
The lease requires the Company to pay a starting base rental fee of $11,667 plus an additional estimated triple net charges per month
including real estate taxes in which the base rental fee escalates each year by approximately 2.0%. All taxes (including reconciling
real estate taxes), maintenance and utilities are included and paid monthly and reserved until payments are due. In addition, the Company
also remitted $15,000 for a security deposit to the landlord.
