~~2727 North 3rd Street~~4802 E Ray Road, Suite ~~201~~23, Phoenix, Arizona ~~85004~~85044

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated ~~filer,"~~filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2

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

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

As of February 14, ~~2022,~~2023, there were ~~95,041,184~~100,787,770 shares of the issuer's common stock, $0.0001 par value per share, outstanding.

Certain information included in this Quarterly Report on Form 10-Q and other filings of the Registrant under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as well as information communicated orally or in writing between the dates of such filings, contains or may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from expected results. Among these risks, trends and uncertainties are the availability of working capital to fund our operations, the competitive market in which we operate, the efficient and uninterrupted operation of our computer and communications systems, our ability to generate a profit and execute our business plan, the retention of key personnel, our ability to protect and defend our intellectual property, the effects of governmental regulation, and other risks identified in the Registrant's filings with the Securities and Exchange Commission from time to time.

In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Although the Registrant believes that the expectations reflected in the forward-looking statements contained herein are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Registrant, nor any other person, assumes responsibility for the accuracy and completeness of such statements. The Registrant is under no duty to update any of the forward-looking statements contained herein after the date of this Quarterly Report on Form 10-Q.

		December 31,			September 30,		December 31,			September 30,
		2021			2021		2022			2022
		(unaudited)						(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	160,711		$	1,454,460		$	21,781		$	85,637
Accounts receivable, net		1,622,604			1,448,280			601,923			586,270
Inventory		5,253,327			6,391,351			1,937,433			2,464,222
Prepaid expenses and other current assets		1,350,807			1,302,558			285,149			417,096
Total current assets		8,387,449			10,596,649			2,846,286			3,553,225

Property and equipment, net		19,206,064			10,877,848			23,009,284			21,019,724
Right of use asset		154,309			156,938			693,418			938,687
Deferred commissions		80,822			108,874
Escrow deposits		12,836,228			17,744,913
Other deposits		—			600,000
Construction escrow deposits								7,717,908			7,717,908
Deposits								80,000			86,604
Other assets								3,830,250			655,598
Assets held for sale								6,815,000			6,815,000
Intangible assets, net		18,291,328			18,659,095			11,444,700			11,741,487
Goodwill		58,064,816			58,064,816			58,233,386			58,233,386
Total Assets	$	117,021,016		$	116,809,133		$	114,670,232		$	110,761,619

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	4,487,717		$	3,759,818		$	6,378,820		$	6,422,196
Accrued payroll and payroll taxes		2,190,834			2,678,694			1,060,406			2,086,051
Accrued interest		1,612,987			1,391,766			4,078,706			3,070,415
Accrued expenses		1,561,454			1,169,776			4,187,460			3,328,222
Deferred revenue, current portion		319,992			119,992			169,992			219,992
Notes payable, current portion		3,521,822			4,536,002
Notes payable, current portion, net of discounts								21,221,322			15,924,033
Income tax payable								16,961			13,221
Operating lease liability, current portion		55,935			56,592			231,389			271,573
Convertible notes payable, net of discounts		1,988,040			1,277,394			3,730,000			3,750,000
Liabilities related to assets held for sale								5,500,000			5,500,000
Total current liabilities		15,738,781			14,990,034			46,575,056			40,585,703

Deferred revenue, net of current portion		450,853			655,851			330,861			335,859
Operating lease liability, net of current portion		104,677			104,406			470,814			682,752
Convertible notes payable, net of current portion and discounts								326,498			—
Notes payables, net of current portion and discounts		16,264,502			14,957,399			6,609,392			7,216,710

Total liabilities		32,558,813			30,707,690			54,312,621			48,821,024

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 107,243,344 and 107,074,417 shares issued and 94,943,344 and 94,774,417 shares outstanding at December 31, 2021 and September 30, 2021, respectively		10,724			10,707
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 112,302,264 and 109,950,509 shares issued and 100,002,264 and 97,650,509 shares outstanding at December 31, 2022 and September 30, 2022								11,230			10,995
Additional paid-in capital		135,120,587			133,414,830			142,081,468			140,417,114
Accumulated deficit		(37,219,108	)		(33,874,094	)		(68,274,382	)		(65,016,698	)
Treasury stock		(13,450,000	)		(13,450,000	)		(13,450,000	)		(13,450,000	)

Total Item 9 Labs Corp. Stockholders' Equity								60,368,316			61,961,411
Non-controlling interest								(10,705	)		(20,816	)

Total Stockholders' Equity		84,462,203			86,101,443			60,357,611			61,940,595

Total Liabilities and Stockholders' Equity	$	117,021,016		$	116,809,133		$	114,670,232		$	110,761,619

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

	For the three months ended			For the three months ended
	December 31, 2021			December 31, 2020
							For the three months ended December 31, 2022			For the three months ended December 31, 2021
Revenues, net	$	6,186,011		$	3,039,564		$	5,003,879		$	6,186,011
Cost of revenues		3,787,245			1,608,131			2,382,006			3,787,245
Gross profit		2,398,766			1,431,433			2,621,873			2,398,766

Operating expenses
Professional fees and outside services		657,445			293,955			855,660			657,445
Payroll and employee related expenses		2,150,706			1,103,304			2,189,824			2,150,706
Sales and marketing		439,436			43,181			287,949			439,436
Depreciation and amortization		439,135			142,545			379,356			439,135
Other operating expenses		846,668			214,537			494,549			846,668
Total expenses		4,533,390			1,797,522			4,207,338			4,533,390

Loss from operations		(2,134,624	)		(366,089	)		(1,585,465	)		(2,134,624	)

Other income (expense)
Interest expense		(1,210,390	)		(708,367	)		(1,661,853	)		(1,210,390	)
Other income								3,485			—
Total other income (expense), net		(1,210,390	)		(708,367	)		(1,658,368	)		(1,210,390	)

Net loss, before income tax provision (benefit)		(3,345,014	)		(1,074,456	)		(3,243,833	)		(3,345,014	)

Income tax provision (benefit)		—			—			3,740			—

Net loss	$	(3,345,014	)	$	(1,074,456	)		(3,247,573	)		(3,345,014	)
Less: Net net income attributable to non-controlling interest								10,111			—

Basic and diluted net loss per common share	$	(0.04	)	$	(0.02	)
Net loss attributable to Item 9 Labs Corp.							$	(3,257,684	)	$	(3,345,014	)

Basic and diluted weighted average common shares outstanding		94,910,167			58,488,133
Basic net loss per common share							$	(0.03	)	$	(0.04	)

Basic weighted average common shares outstanding								99,156,853			94,910,167

Diluted net loss per common share							$	(0.03	)	$	(0.04	)

Diluted weighted average common shares outstanding								99,156,853			94,910,167

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

					Additional
	Common Stock				Paid-in			Treasury Stock						Accumulated						Item 9 Labs Corp. Equity
	Shares		Amount		Capital			Shares			Amount			(Deficit)			Total							Additional												Non-
Balance at September 30, 2020		68,336,113	$	6,834	$	44,426,737			(12,300,000	)	$	(13,450,000.00	)	$	(22,968,322	)	$	8,015,249
																				Common Stock				Paid-in			Treasury Stock						Accumulated			Controlling
Stock issued for cash, net		6,813,206		681		5,790,544			—			—			—			5,791,225
Issuance of shares for services		111,765		11		163,225			—			—			—			163,236
Stock based compensation		—		—		304,672			—			—			—			304,672
Net loss		—		—		—			—			—			(1,074,456	)		(1,074,456	)
Balance at December 31, 2020		75,261,084	$	7,526	$	50,685,178			(12,300,000	)	$	(13,450,000	)	$	(24,042,778	)	$	13,199,926
																				Shares		Amount		Capital			Shares			Amount			(Deficit)			Interest			Total
Balance at September 30, 2021		107,074,417	$	10,707	$	133,414,830			(12,300,000	)	$	(13,450,000.00	)	$	(33,874,094	)	$	86,101,443			107,074,417	$	10,707	$	133,414,830			(12,300,000	)	$	(13,450,000	)	$	(33,874,094	)		—		$	86,101,443
Stock to be issued for debt inducement		142,365		14		128,348			—			—			—			128,362
Stock issued for debt inducement																					142,365		14		128,348			—			—			—			—			128,362
Warrants issued with debt		—		—		574,239			—			—			—			574,239			—		—		574,239			—			—			—			—			574,239
Beneficial conversion - convertible notes		—		—		470,047			—			—			—			470,047
Beneficial conversion feature																					—		—		470,047			—			—			—			—			470,047
Issuance of shares for services		16,666		2		25,830			—			—			—			25,832			16,666		2		25,830			—			—			—			—			25,832
Stock based compensation		—		—		507,294			—			—			—			507,294			—		—		507,294			—			—			—			—			507,294
Stock issued on exercise of options		9,896		1		(1	)		—			—			—			—			9,896		1		(1	)		—			—			—			—			—
Net loss		—		—		—			—			—			(3,345,014	)		(3,345,014	)		—		—		—			—			—			(3,345,014	)		—			(3,345,014	)
Balance at December 31, 2021		107,243,344		10,724		135,120,587			(12,300,000	)		(13,450,000	)		(37,219,108	)		84,462,203			107,243,344	$	10,724	$	135,120,587			(12,300,000	)	$	(13,450,000	)	$	(37,219,108	)	$	—		$	84,462,203

Balance at September 30, 2022																					109,950,509	$	10,995	$	140,417,114			(12,300,000	)	$	(13,450,000	)	$	(65,016,698	)	$	(20,816	)	$	61,940,595
Stock issued on debt conversion																					1,164,032		116		309,463			—			—			—			—			309,579
Stock issued for debt inducement																					1,045,000		105		246,715			—			—			—			—			246,820
Beneficial conversion feature																					—		—		5,000			—			—			—			—			5,000
Issuance of shares for services																					142,723		14		49,986			—			—			—			—			50,000
Stock based compensation																					—		—		1,053,190			—			—			—			—			1,053,190
Net loss																					—		—		—			—			—			(3,257,684	)		10,111			(3,247,573	)
Balance at December 31, 2022																					112,302,264	$	11,230	$	142,081,468			(12,300,000	)	$	(13,450,000	)	$	(68,274,382	)	$	(10,705	)	$	60,357,611

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

		For the three months ended			For the three months ended
		December 31, 2021			December 31, 2020		For the three months ended December 31, 2022			For the three months ended December 31, 2021
Operating Activities:
Net loss	$	(3,345,014	)	$	(1,074,456	)	$	(3,247,573	)	$	(3,345,014	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		71,368			32,484			82,569			71,368
Amortization of intangible assets		367,767			110,061			296,787			367,767
Amortization of right of use asset		2,629			16,136			63,751			2,629
Amortization of debt discount		990,281			119,298
Common stock issued for services		—			163,236
Amortization of debt discounts								504,501			990,281
Stock based compensation expense		507,294			304,672			1,053,190			507,294
Employee retention credits received								(952,805	)		—
Loss on disposal of fixed assets								30,952			—
Changes in operating assets and liabilities:
Accounts receivable		(174,324	)		(1,102,238	)		(15,653	)		(174,324	)
Inventory		1,138,024			(1,302,352	)		526,789			1,138,024
Prepaid expenses and other current assets		(20,197	)		(302,941	)
Prepaid expenses and other assets								(492,705	)		(20,197	)
Deposits								6,604			—
Accounts payable		841,910			569,641			(17,454	)		841,910
Accrued payroll		(487,860	)		(52,543	)
Accrued payroll and payroll taxes								(72,840	)		(487,860	)
Income tax payable								3,740			—
Accrued interest		144,459			270,191			698,692			144,459
Accrued expenses		(298,647	)		332,414			322,413			(298,647	)
Deferred revenue		(4,998	)		—			(54,998	)		(4,998	)
Operating lease liability		(386	)		(16,136	)		(70,604	)		(386	)
Net Cash Used in Operating Activities		(267,694	)		(1,932,533	)		(1,334,644	)		(267,694	)

Investing Activities:
Deposit on acquisition		—			(696,293	)
Purchases of property, equipment and construction in progress		(2,492,445	)		(499,452	)		(6,825	)		(2,492,445	)
Cash received from sale of Airware assets		—			5,000
Cash received from escrow accounts		1,053,290			—
Capitalized license fees		—			(130	)
Cash received from construction escrow accounts								—			1,053,290
Net Cash Used in Investing Activities		(1,439,155	)		(1,190,875	)		(6,825	)		(1,439,155	)

Financing Activities:
Proceeds from the sale of common stock		—			5,791,225
Payment of debt discount		(18,750	)		—			—			(18,750	)
Proceeds from the issuance of debt		1,500,000			—			1,597,500			1,500,000
Payment of debt		(1,068,150	)		(1,138,917	)		(319,887	)		(1,068,150	)
Net Cash Provided by Financing Activities		413,100			4,652,308			1,277,613			413,100

Net Increase (Decrease) in Cash		(1,293,749	)		1,528,900
Net Decrease in Cash								(63,856	)		(1,293,749	)

Cash and cash equivalents- Beginning of Period		1,454,460			84,677			85,637			1,454,460

Cash and cash equivalents - End of Period	$	160,711		$	1,613,577		$	21,781		$	160,711

Supplemental disclosure of cash flow information:
Interest paid in cash	$	75,650		$	318,878		$	458,660		$	75,650
Income taxes paid in cash	$	—		$	—		$	—		$	—

Supplemental disclosure of non-cash investing and financing activities:
Stock and warrants issued for debt	$	728,433		$	—		$	246,820		$	728,433
Fixed assets purchased with debt	$	—		$	50,914
Debt proceeds used to pay debt discounts							$	27,000		$	—
Transfer of accrued interest to debt	$	1,762		$	—		$	620,861		$	1,762
Land purchased with escrow funds and deposit	$	3,000,000		$	—		$	—		$	3,000,000
Stock issued to pay accounts payable and prepay expenses							$	50,000		$	—
Cancellation of operating lease right of use asset and liability							$	413,515		$	—
Addition of operating lease right of use asset and liability							$	231,997		$	—
Beneficial conversion feature on convertible debt	$	470,047		$	—		$	5,000		$	470,047
Escrow funds used to pay construction in progress	$	1,019,944		$	—
Construction in progress paid with escrow funds							$	—		$	1,019,944
Stock issued for conversion of debt							$	309,579		$	—
Accrued liabilities capitalized in construction in progress	$	1,125,776		$	—		$	1,467,285		$	1,125,776
Amortized debt discount capitalized in construction in progress	$	875,430		$	—		$	628,971		$	875,430
Debt proceeds used to fund other assets							$	2,500,000		$	—
Accounts payable converted debt							$	25,922		$	—

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

Note 1 - Description of Business and Summary of Significant Accounting Policies

Item 9 Labs Corp. ("Item 9 Labs" or, including its subsidiaries, the "Company"), formerly Airware Labs Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp.

Item 9 Labs ~~Corp.~~ is a holding company, investing in cannabis and cannabis-related businesses. Its subsidiaries currently compete in two different market segments: (1) producing of cannabis and cannabis-derived products and technologies through its Item 9 Labs brand (“Cultivation”), which is currently distributed though out the State of Arizona in licensed medical and adult-use dispensaries; and (2) sell medical and adult-use cannabis dispensary franchises under its franchise brand “Unity Rd.” (“Franchising”).

In March 2021, the Company closed on the acquisition of OCG, Inc, dba Unity Rd, a dispensary ~~franchisor. The transaction was structured as a reverse triangular merger,~~franchisor, with the effect of OCG, Inc. becoming a wholly owned subsidiary of the Company. Unity Rd has agreements with more than twenty (20) entrepreneurial groups to open more than ~~thirty-five (35)~~thirty (30) Unity Rd retail dispensary locations in ~~fourteen (14)~~twelve (12) states. The majority of the locations are in the licensing process. We currently have two franchisees operating in Hartford, South Dakota and Boulder, Colorado. Unity Rd will be the vehicle to bring Item 9 Labs products across the United States and internationally, while keeping dispensaries locally owned and operated, empowering entrepreneurs to operate their business and contribute to their local communities. As the Unity Rd dispensaries achieve sufficient market penetration, Item 9 Labs aims to offer its products in those locations to expand the distribution footprint of its premium product offerings.

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.

The accompanying condensed consolidated financial statements of the Company as of December 31, ~~2021~~2022 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and notes necessary for a presentation of financial position and results of operations in accordance with US GAAP and should be read in conjunction with our September 30, ~~2021~~2022 audited financial statements filed with the SEC on our Form 10-K on January 13, ~~2022.~~2023. It is management's opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. We derived the September 30, ~~2021~~2022 condensed consolidated balance sheet data from audited financial statements, however, we did not include all disclosures required by US GAAP. The results for the interim period ended December 31, ~~2021~~2022 are not necessarily indicative of the results to be expected for the year ending September 30, ~~2022.~~2023.

The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned ~~subsidiaries.~~subsidiaries and a consolidated variable interest entity (“VIE”). Intercompany balances and transactions have been eliminated.

Item 9 Labs consolidates a VIE in which the Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company makes significant judgments in determining whether an entity is a VIE and, for each reporting period, the Company assesses whether it is the primary beneficiary of the VIE.

Effective February 1, 2022, the Company was deemed the primary beneficiary of Elevated Connections, Inc. The equity in Elevated Connections, Inc. held by its stockholder has been presented on the balance sheet and the statement of operations as a non-controlling interest.

Certain prior period balances have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on the prior ~~period's~~periods’ net loss or accumulated deficit.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, inventory, accruals and contingencies, carrying value of goodwill and intangible assets, the fair value of common stock and the estimated fair value of stock options and warrants. Due to the uncertainties in the formation of accounting estimates, and the significance of these items, it is reasonably possible that these estimates could be materially changed in the near term.

Inventory is stated at the lower of cost or net realizable value with cost being determined on the first in first out method. Inventory primarily consists of the costs directly related to the production and cultivation of cannabis crops, cannabis oils, and cannabis concentrate products. Inventory is relieved to cost of revenues as products are delivered to dispensaries. Inventory consists primarily of labor, utilities, costs of raw materials, packaging, nutrients and overhead.

The Company routinely evaluates the carrying value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce inventory to its estimated net realizable value. ~~There were no inventory reserves recorded at December 31, 2021 and September 30, 2021.~~

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, including estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and recognizing revenue when (or as) the performance obligation is satisfied.

~~Substantially all~~All of the Company's cultivation revenue is associated with a customer contract that represents an obligation to provide cannabis products that are delivered at a single point in time. ~~Any costs incurred prior to the period in which the products are delivered are recorded to inventory and recognized as cost of revenues in the period in which the performance obligation is completed.~~ For the three months ended December 31, 2022 and 2021, 96% and ~~2020, substantially all~~99%, respectively, of the Company's net revenue was generated from performance obligations completed in the state of Arizona.

The Company recognizes revenue once the products are delivered. Revenue is considered earned upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is reasonably assured. The Company records revenue at the amount it expects to collect, 100% of the wholesale ~~sales revenue.~~sales. Beginning April 1, 2020, the Company entered into a three-year agreement with a dispensary, which calls for monthly payments of $40,000 to be paid by the Company. The fees paid for operating under the contract are expensed to cost of revenues.

The Company's revenues accounted for under ASC 606 do not require significant estimates or judgments based on the nature of the Company's revenue stream. The sales price is generally fixed at the point of sale and all consideration from the contract is included in the transaction price. The Company's contracts do not include multiple performance obligations, variable consideration, a significant contract, rights of return or warranties.

~~Through OCG, Inc., the~~The Company enters into franchise agreements and consulting agreements. The franchise agreement allows the franchisee to, among other things, establish a franchised outlet under the Company’s Unity Rd. brand. Under the consulting agreements, the Company assists customers with applying for and being awarded a retail cannabis license through the state license application process. The initial franchise fee and the consulting fee are due upon execution of the related agreement. These payments are deferred on the condensed consolidated balance ~~sheet and~~sheet. The initial franchise fee is recognized into revenue onratably over the ~~condensed consolidated statement~~term of ~~operations when (or as)~~the agreement and the consulting fee is recognized at the time the performance ~~obligations included in the agreements are~~obligation has been satisfied. ~~Deferred revenue had a balance of $770,845~~ ~~and $775,843~~ ~~at December 31, 2021 and September 30, 2021, respectively, and is included in deferred revenue on the condensed consolidated balance sheets.~~ Revenue recognized during the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 that was included in deferred revenue at September 30, 2022 and 2021 was $54,998 and ~~2020 was $~~$4,998, respectively.

Basic net loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted ~~earnings~~net loss per share reflects the potential dilution of securities that could share in the losses of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. The following table summarizes the securities outstanding at December 31, ~~2021~~2022 and ~~2020~~2021 that were excluded from the diluted net loss per share calculation for the three months ended December 31, 2022 and 2021 because the effect of including these potential shares was antidilutive due to the Company’s net loss.

The Company analyzes warrants issued with debt to determine if the warrants are required to be bifurcated and accounted for at fair value at each reporting period. When bifurcation is not required, the Company records a debt discount, based on the relative fair values of the warrants and the debt, with a corresponding charge to equity unless the terms of the warrant require it to be classified as a liability. The warrants and corresponding note discounts are valued using the Black-Scholes ~~valuation~~option-pricing model. This model uses estimates of volatility, risk free interest rate and the expected term of the warrants, along with the current market price of the Company's stock, to estimate the value of the outstanding warrants. The Company estimates the expected term using an average of the contractual term and vesting period of the award. The expected volatility is measured using the average historical daily changes in the market price of the Company's common stock over the expected term of the award or, if earlier, since March 20, 2018, the day of the merger between BSSD Group LLC ("BSSD") and Airware Labs Corp, and the risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards.

The Company also analyzes conversion options embedded with debt to determine if the conversion options are required to be bifurcated and accounted for at fair value at each reporting period or to determine if there is a beneficial conversion feature. At December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, none of the conversion options embedded in the Company’s debt were required to be bifurcated.

The Company analyzes the terms of its debt amendments to determine if the changes made to the terms have affected the debt’s cash flows. If the debt’s cash flows have been affected, the Company then determines if the amendment should be accounted for as a troubled debt restructuring, an extinguishment or a modification and the appropriate accounting model is applied.

The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing ~~performances.~~performance. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three months ended December 31, 2022 and 2021, the Company has identified two segments: the cultivation, production and sale of cannabis and cannabis derived products and technologies (“Cultivation”) and the sales of Unity Rd. franchises to dispensaries (“Franchising”).

The Company classifies long-lived assets or disposal groups and related liabilities as held-for-sale when management having the appropriate authority, generally our Board of Directors or certain of our Executive Officers, commits to a plan of sale, the disposal group is ready for immediate sale, an active program to locate a buyer has been initiated and the sale is probable and expected to be completed within one year. Once classified as held-for-sale disposal groups are valued at the lower of their carrying amount or fair value less estimated selling costs. Depreciation on these properties, if placed into service, is discontinued at the time they are classified as held for sale.

During the three months ended December 31, 2022, the Company received $952,805 of tax credits in accordance with the Employer Retention Credit (“ERC”) program, authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended. The Company’s policy is to account for the ERC as a grant using guidance analogous to government grants found in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with this guidance, the ERC is recognized as a reduction to Payroll and employee related expenses on the statement of operations when there is reasonable assurance that the Company will receive the ERC.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and current and long-term operating lease liabilities on our condensed consolidated balance sheets. We currently do not have any material finance lease arrangements.

Operating lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Generally, our leases do not provide an implicit rate. As such, we use our incremental borrowing rate in effect at the commencement date of the lease in determining the present value of future payments.

When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and if it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments -– Credit Losses (Topic 326), which provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for the Company on October 1, 2023, with early adoption permitted on October 1, 2019. We are assessing the provisions of this amended guidance; however, the adoption of the standard is not expected to have a material effect on our condensed consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging -– Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. For public business entities, excluding entities eligible to be smaller reporting companies, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic 606 as if the acquirer had originated the contracts. For public business entities, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those years and early adoption is permitted. We are currently evaluating the impact of ~~adoptions~~adoption of this standard on the Company’s condensed consolidated financial statements and disclosures.

There have been no other recent accounting pronouncements or changes in accounting pronouncements that have been issued but not yet adopted that are of significance, or potential significance, to us.

The accompanying condensed consolidated financial statements have been prepared ~~assuming the~~in conformity with US GAAP, which contemplates continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has incurred net losses since its inception. These losses, with the associated substantial accumulated deficit, are a direct result of the ~~Company's~~Company’s planned ramp up period as it is pursuing market acceptance and geographic expansion. In view of these matters, realization of a major portion of the assets in the accompanying condensed consolidated balance sheets is dependent upon continued operations of the Company which in turn is dependent upon the ~~Company's~~Company’s ability to meet its financing requirements, and the success of its future operations. The Company operates in a new, developing industry with a variety of competitors. These factors raise substantial doubt about the ~~Company's~~Company’s ability to continue as a going concern.

In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. ~~Management's~~Management’s plans in regard to these matters are described as follows:

Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing ~~its~~the products it produces to dispensaries throughout the state of Arizona. The ~~Company's~~Company’s revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of ~~Arizona, with construction of a cultivation and processing facility nearing completion in Nevada.~~Arizona. The Company believes that it will continue reducing the overall costs of revenues and costs of revenues will increase at a lower rate than revenues in future periods, which ~~will~~is expected to lead to increased profit margins.

Financing. To date, the Company has financed its operations primarily with loans from third parties and shareholders, private placement financings and sales revenue. Management believes that with continued production efficiencies, production growth, and continued marketing efforts, sales revenue will ~~continue to~~ grow, thus enabling the Company to reverse its negative cash flow from operations and raise additional capital as needed. However, there is no assurance that the ~~Company's~~Company’s overall efforts will be successful.

If the Company is unable to generate additional sales growth in the near term and raise additional capital, there is a risk that the Company could default on ~~its~~additional obligations and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

Inventory consisted of the following at December 31, ~~2021~~2022 and September 30, ~~2021.~~2022.

On ~~October 6, 2021,~~March 11, 2022, the Company entered into an Asset Purchase Agreement with The Herbal Cure LLC (“Seller”), pursuant to ~~purchase~~which, the Company is purchasing certain assets ~~which include licenses, a lease and certain personal property to operate a licensed recreational cannabis dispensary.~~from the Seller. The total purchase price for the assets to be acquired is $~~2.0~~ ~~million comprised of $1.0~~ ~~million of cash, a $200,000~~ ~~note, and~~ ~~300,000~~ ~~shares of the Company’s common stock. The note has an interest rate of~~ 5~~% per annum and a term of~~ 18 ~~months and~~$5,750,000, payable ~~in six installments on the last day of each three month period following the Closing Date.~~ as follows:

At December 31, ~~2021,~~2022, the $250,000 down payment was paid and is included in Other Assets on the condensed consolidated balance sheets. At December 31, 2022, this acquisition ~~had~~has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three months ended December 31, ~~2021.~~2022. The Company can provide no assurance that it will be successful in finalizing this acquisition.

On May 18, 2022, the Company and its wholly owned subsidiary, OCG Management Ontario, Inc., a corporation formed under the laws of the Province of Ontario (“Purchaser”) solely for the purpose of completing this transaction, entered into a Share Purchase Agreement pursuant to which the Purchaser is purchasing all, but not less than all, of the issued and outstanding shares in the capital of Wild Card Cannabis Incorporated, a corporation formed under the laws of the Province of Ontario free and clear of all Liens from the Shareholders.

The total purchase price for the Shares is $12,800,000 (the "Purchase Price"), as adjusted, plus the Earnout Payment, if any (collectively, the “Purchase Price”) payable as follows:

(i) The Company has delivered the Exclusivity Deposit in the amount of $156,902 to the Escrow Agent on March 4, 2022.

(ii) At the Closing, Purchaser shall pay to Shareholders the Estimated Purchase Price of $12,800,000, as adjusted, in immediately available funds;

(iii) $4,100,000, as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the First Earnout Period (the date that is 12 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the First Earnout Period is greater than or equal to the Target Net Revenue for the First Earnout Period; and

(iv) $4,100,000, as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the Second Earnout Period (the date that is 24 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the Second Earnout Period is greater than or equal to the Target Net Revenue for the Second Earnout Period.

At December 31, 2022, the $156,902 Exclusivity Deposit has been paid and is included in Other Assets on the condensed consolidated balance sheets. In addition, at December 31, 2022, the Company has placed $3.0 million in a deposit account related to the potential financing for this acquisition. The $3.0 million deposit is included in Other assets on the condensed consolidated balance sheet. At December 31, 2022, this acquisition has not yet been finalized. As such, the effects of this acquisition, which is expected to be accounted for under ASC 805, Business Combinations, have not been included in the Company’s condensed consolidated balance sheet or statement of operations as of and for the three months ended December 31, 2022. The Company can provide no assurance that it will be successful in finalizing this acquisition.

In January 2022, the Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. Under the terms of the Co-Management Agreement, the Company purchased substantially all of the assets of a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease. Further, under the Co-Management Agreement, the Company is to operate, staff, and otherwise manage the day-to-day operations of the dispensary. The Company shall also pay all claims, costs and liabilities associated with operating the dispensary.

The terms of the Co-Management Agreement provide the Company with, in its judgment, the ability to manage and make decisions that most significantly affect the operations of Elevated Connections and to absorb losses that could potentially be significant to Elevated Connections. As such, the Company has consolidated Elevated Connections effective February 1, 2022. The purpose of Elevated Connections, as a licensed dispensary, is to hold the cannabis and cannabis related products and licenses of the dispensary.

The assets of the VIE cannot be used to settle obligations of the Company or its wholly owned subsidiaries. However, liabilities recognized as a result of consolidating the VIE does represent additional claims on the Company’s general assets.

The following table presents the carrying values of the assets and liabilities of the entity that is a VIE and consolidated by the Company at December 31, 2022 and September 30, 2022.

The following table presents the operations (after intercompany eliminations) of the entity that is a VIE and consolidated by the Company for the three months ended December 31, 2022.

The following represents a summary of our property and equipment as of December 31, ~~2021~~2022 and September 30, ~~2021:~~2022:

December 31, September 30,
2021 2021
Cultivation and manufacturing equipment $ 506,271 $ 506,271
Computer equipment and software 266,427 266,427
Buildings and improvements 2,823,523 2,785,781
3,596,221 3,558,479
Accumulated Depreciation (550,688 ) (479,320 )
3,045,533 3,079,159
Land 3,455,563 380,584
Construction on progress 12,704,968 7,418,105
Property and Equipment, Net $ 19,206,064 $ 10,877,848

During the three months ended December 31, 2021, the Company completed the purchase of 44 acres of land from a related party for $~~3.0~~$3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.

Construction in progress relates to multiple capital projects ongoing during the three months ended December 31, ~~2021,~~2022, including the construction of the Nevada facility and the expansion of the Arizona ~~facility and implementation of an ERP system.~~facility. Construction in progress also includes interest and fees on debt that is directly related to the financing of the Company’s capital projects.

Depreciation expense for the three months ended December 31, 2022 and 2021 was $82,569 and ~~2020 was $71,368~~$71,368, respectively. ~~and $32,484, respectively.~~

On March 23, 2020 the Company borrowed proceeds from a related party, Viridis I9 Capital LLC (“Viridis”), in the amount of $~~1.1~~$1.1 million. The note is convertible at the lesser of a) $1.00 per share or, b) 20% discount to the ten day average closing price of the Company’s common stock, immediately prior to the conversion date. All principal and interest were due on the maturity date. ~~The lender has granted a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of~~ 15~~% per annum, will be paid at maturity, which has been postponed to a date that has not yet been determined.~~ At December 31, ~~2021~~2022 the Company was not in compliance with the terms of the Viridis note, however, during the three months ended December 31, 2022, the default cure period was ~~in default.~~extended to March 1, 2023. The convertible Viridis note ~~remains in default as~~included a provision for the issuance of ~~this filing, though~~5,000,000 warrants exercisable into the ~~parties are negotiating a long-term arrangement.~~

~~On October 1, 2021, the Company entered into a convertible note agreement. Up to fifty percent (50%) of the outstanding and unpaid principal amount is convertible into~~Company’s common stock. The ~~note included~~exercise price on the warrants ~~to purchase~~is $0.75 and the warrants have a ~~total~~term of 5 years.

The outstanding principal and accrued interest of C-3 was converted into 5,714 shares of the Company’s common stock during the three months ended December 31, 2022.

These two convertible notes were amended on September 30, 2022 to, among other terms, extend the maturity date to January 1, 2023 and to pledge the Company’s Colorado Retail Marijuana License as security for $3 ~~per share, with a~~ 4 ~~year term. Further,~~the note. These notes are currently passed their maturity date and the Company ~~issued~~ is working with the lenders on an amendment.

This note was amended on September 30, 2022 to, among other terms, extend the maturity date to January 1, 2023 and to pledge the Company’s Colorado Retail Marijuana License as security for the note. This note is currently passed its maturity date and the Company is working with the lender on an amendment.

This note was amended effective September 30, 2022 to, among other terms, extend the maturity date to March 31, 2023.

At December 31, 2022, Note C-11 was in default and the Company is working with the lenders to cure the default. As a result of the default, the Company is accruing an additional $2,500 of monthly default interest.

On October 24, 2022, the Company entered into a Secured Convertible Promissory Note in the amount of $250,000, which is payable at maturity on October 24, 2024. Interest on the note is 15% per annum and is payable quarterly. This note is secured by a first priority security interest in all assets of OCG Management Ontario Inc., a wholly owned subsidiary of the Company, until such time as the pending Sessions acquisition is finalized (see Note 4). Upon the finalization of the pending Sessions acquisition, this note will be secured by a second priority security interest in all assets of OCG Management Ontario, Inc. The outstanding principal and any accrued interest are convertible into shares of the Company’s common stock at $0.31 per share. The Company issued 75,000 shares of its common stock, valued at $~~112,500~~$15,000, as an inducement to the ~~lenders~~lender to enter into the note ~~agreements.~~agreement. The debt ~~included a beneficial conversion feature after consideration of the relative fair values of the warrants~~ and shares of common ~~stock. The debt, shares of common~~ stock ~~and warrants~~ were recorded at their relative fair ~~values, along with the beneficial conversion feature.~~values. The resulting discount of $~~597,606~~ ~~and an additional $75,000~~ ~~discount related to a one-time interest charge of 10% of the original principal amount,~~$15,000 is amortized to interest expense over the term of the debt. ~~The one-time interest charge was accrued at~~

~~On October 29, 2021,~~13, 2022, the Company entered into a ~~convertible~~Secured Convertible Promissory Note in the amount of $50,000, with a member of its board of directors. The note ~~agreement.~~is payable at maturity on December 13, 2024. Interest on the note is 15% per annum and is payable quarterly. This note is secured by a first priority security interest in all assets of OCG Management Ontario Inc., a wholly owned subsidiary of the Company, until such time as the pending Sessions acquisition is finalized (see Note 4). Upon the finalization of the pending Sessions acquisition, this note will be secured by a second priority security interest in all assets of OCG Management Ontario, Inc. The outstanding ~~and unpaid~~ principal and any accrued interest is convertible ~~in whole,~~ into shares of the Company’s common ~~stock.~~stock at $0.25 per share. The ~~notes included warrants to purchase a total of~~ ~~750,000~~Company issued 10,000 shares of ~~the Company’s~~its common stock, ~~for $~~3 ~~per share, with a~~ 2 ~~year term. Further, the Company issued~~ ~~75,000~~ ~~shares of common stock,~~ valued at $~~116,250~~$2,500, as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair ~~values~~value of the ~~warrants and~~ shares of common stock. The debt and shares of common stock ~~and warrants~~ were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $~~561,272, which also included debt issuance costs of $44,582~~,$5,000 is amortized to interest expense over the term of the debt.

On December 13, 2022, the Company entered into a Secured Convertible Promissory Note in the amount of $50,000, which is payable at maturity on December 13, 2024. Interest on the note is 15% per annum and is payable quarterly. This note is secured by a first priority security interest in all assets of OCG Management Ontario Inc., a wholly owned subsidiary of the Company, until such time as the pending Sessions acquisition is finalized (see Note 4). Upon the finalization of the pending Sessions acquisition, this note will be secured by a second priority security interest in all assets of OCG Management Ontario, Inc. The outstanding principal and any accrued interest is convertible into shares of the Company’s common stock at $0.25 per share. The Company issued 10,000 shares of its common stock, valued at $2,500, as an inducement to the lender to enter into the note agreement. The debt included a beneficial conversion feature after consideration of the relative fair value of the shares of common stock. The debt and shares of common stock were recorded at their relative fair values, along with the beneficial conversion feature. The resulting discount of $5,000 is amortized to interest expense over the term of the debt.

The future minimum payments of the Company’s convertible debt obligations as of December 31, ~~2021~~2022 are as follows. The unamortized discount will be amortized through ~~September 2022.~~December 2024.

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC ("Viridis"), a related party, in which Viridis agreed to loan the Company up to $~~1.2~~$1.2 million for the expansion of the Company's Arizona property. In exchange for the loan, Viridis was to be repaid in the form of waterfall revenue participation schedules. Viridis was to receive 5% of the Company's gross revenues from the Arizona operations until the loan was repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. The loan was originally collateralized with a Deed of Trust on the Company's 5-acre parcel in Coolidge, AZ and its two 10,000 square foot buildings. In August 2019, Viridis agreed to subordinate its first priority Deed of Trust and move into a 2^nd position. At that time, the loan was amended to include 6% annualized interest.

On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $~~1,200,000~~ $1,200,000 note payable. As part of the restructuring, the Company issued 1,555,556 warrants exercisable into the Company's common stock. The warrants have an exercise price of $~~1.00~~ $1.00 and a term of 5 years. Accrued interest in the amount of $~~186,370~~ $186,370 was added to the principal balance of the note, making the total principal $~~1,386,370~~.$1,386,370. Interest only payments of $~~11,553~~ $11,553 shall be paid monthly until November 1, 2020 at which time monthly principal and interest payments of $~~28,144~~ $28,144 are required for 36 months, with a balloon payment of all outstanding principal and interest due upon the note's maturity. The note also entitles Viridis to a gross revenue participation of the Arizona Operations equal to 1% of the gross sales (up to $20,000 monthly) upon the maturity of the note and for the subsequent 5 year period. The debt and warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. ~~The lender has granted a payment forbearance for~~At December 31, 2022 the ~~note and all unpaid principal and interest, accrued at~~Company was not in compliance with the ~~default interest rate~~terms of ~~12% per annum, will be added to the balloon payment at maturity.~~

~~In August 2021,~~ the Viridis AZ and Viridis NV debt was modified to subordinate these notes to the Pelorus Notes (see (q) and (r)). As part of this modification, it is anticipated that 2.0 million warrants were granted to Viridis. As of the date of these condensed consolidated financial statements, the terms of this modification have not been finalized. Based on the expected modification terms, this modification was accounted for as an extinguishment of the debtnote, however, during the ~~year~~three months ended ~~September 30, 2021. The 2.0 million warrants were allocated~~December 31, 2022, the default cure period was extended to the accrued interest outstanding on the Viridis NV debt at the payoff date and then to the Viridis AZ and Viridis NV debt based on the amount of each debt outstanding at the time the warrants were granted at the relative fair value. The resulting discount is amortized to interest expense over the term of the debt.March 1, 2023.

The Company's subsidiary, BSSD Group, LLC borrowed $~~269,000~~ $269,000 from Viridis, a related party, in December 2019. This note bears annualized interest at 15%15%. On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $~~269,000~~ $269,000 note payable. Accrued interest in the amount of $~~14,666~~ $14,666 was added to the principal balance of the note, making the total principal $~~283,666~~.$283,666. As part of the restructuring, the Company issued 400,000 warrants exercisable into the Company's common stock. The warrants have an exercise price of $~~.05~~ $.05 and a term of 5 years. Payments of principal and interest in the amount of $~~9,833~~ $9,833 are due monthly, with a balloon payment of all outstanding principal and interest is due upon the note's maturity. The debt and warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. ~~The lender has granted a payment forbearance for~~At December 31, 2022 the Company was not in compliance with the terms of this note, ~~and all unpaid principal and interest, accrued at~~however, during the three months ended December 31, 2022, the default ~~interest rate of 18% per annum, will be added~~cure period was extended to ~~the balloon payment at maturity.~~March 1, 2023.

As part of the OCG transaction in March 2021, the Company assumed the debt that OCG, Inc. owed to its officers. Principal and interest payments are due monthly with a balloon payment of all outstanding principal and interest due at maturity.One of these officers is a director and officer of the Company. See Note 10.

In February 2021, the Company and Stockbridge Enterprises, a related party, under a ~~trouble~~troubled debt restructuring, agreed to restructure and settle ~~the~~its outstanding notes. The total outstanding balance of $~~1,660,590,~~ $1,660,590, including accrued interest, were to be repaid under a new promissory note, calling for a down payment of $~~300,000~~ ~~(paid~~$300,000 (paid at time of signing), $~~120,000~~ $120,000 monthly payments for 11 months with the remaining balance of $~~40,590~~ $40,590 payable on February 1, 2022. This agreement was amended to extend the maturity date to March 31, 2022 and starting with the October 1, 2021 payment, the loan payments are interest only at an interest rate of 15%15% per annum until January 25, 2022. Principal payments in the amount of $~~50,000~~ ~~are~~$50,000 were due on January 25, 2022, February 15, 2022 and March 15, 2022, with a final payment of the remaining principal and accrued interest due on March 31, 2022. Upon closing of an equity raise of at least $~~750,000~~,$750,000, the Company will repay the outstanding balance plus any accrued interest immediately. As part of the amendment, the Company issued 164,744 warrants to purchase the Company’s common stock. The warrants have a two-year period and an exercise price of $~~1.00~~.$1.00. The resulting discount of $~~58,352~~$58,352 was fully amortized to interest expense during the ~~three months~~year ended ~~December 31, 2021.~~

~~500,000~~ ~~from Viridis Group I9 Capital LLC, a related party. The proceeds of~~

Effective March 31, 2022, the debt was amended to extend the maturity date to June 30, 2022, interest payments were ~~used to make a payment~~due on ~~the outstanding unpaid payroll tax liability. The debt is collateralized by restricted common stock~~April 1, May 1 and June 1, 2022. Principal payments in the amount of ~~twice~~$50,000 were due on April 15, May 15 and June 15, 2022 and a final balloon payment of outstanding principal and interest in the ~~balance~~amount of $223,972 was due on June 30, 2022. At December 31, 2022, this note was in default, however, on January 20, 2023, the Company and lender amended the note to extend the maturity date to July 15, 2023. See Note 14.

The Company entered into two notes payable with Pelorus Fund REIT, LLC in August 2021. The total $19,000,000 borrowing has a term of 18 months. Interest only payments in the amount of $253,333 are due monthly and all outstanding principal and interest are due on the maturity date. Upon payment in full of these notes, an exit fee of 1% of the ~~debt. It~~then outstanding balance is ~~anticipated that~~payable to the ~~note will include~~lender. The Company has accrued this success fee and it is amortized to interest expense over the term of the notes. The notes included warrants to purchase a total of ~~500,000~~ 2,850,000 shares of the Company’s common stock for $~~0.60~~ $1.75 per share, with a ~~five-year~~ 3.5 year term. ~~As of the date of these condensed consolidated financial statements, the terms of these warrants have not been finalized.~~ The debt and ~~anticipated~~ warrants were recorded at their relative fair values. The resulting discount is amortized to interest expense over the term of the debt. The ~~lender has granted~~Pelorus notes are currently in default and the Company is working with the lenders to cure the default.

On September 30, 2021, the Company borrowed $500,000 from Viridis Group I9 Capital LLC, a related party. The proceeds of the debt were used to make a payment ~~forbearance~~on the then outstanding unpaid payroll tax liability. The debt and warrants were recorded at their relative fair values. The resulting discount in the amount of $284,534 is amortized to interest expense over the term of the debt. During the three months ended December 31, 2022, this debt and related accrued interest were combined with other Viridis outstanding debt and related accrued interest into one Unsecured Promissory Note. See (w) below.

On November 2, 2022, the Company entered into a third short-term financing arrangement with Lendspark. The proceeds of $0.58 million were used to repay the previous Lendspark short-term financing. Payments of $7,967 are due weekly until $0.725 million has been repaid. This results in an effective interest rate of 25%. Fees in the amount of $12,000 have been recorded as a discount and are being amortized to interest expense over the term of the arrangement.

Effective December 1, 2022, the Company entered into an Unsecured Promissory Note with Viridis Group Holdings, LLC, a related party. The purpose of the Unsecured Promissory Note was to agree upon the terms for the ~~note and~~short term loans that this related party had previously provided to the Company. Including interest accrued from the date of the short-term loans to the effective date of the agreement, the principal amount of the Unsecured Promissory Note is $6,203,930. Interest only payments in the amount $82,396 will begin on May 21, 2023 with a final balloon payment of all ~~unpaid~~outstanding principal and interest ~~accrued at the default interest rate of 18% per annum beginning January 1, 2022, will~~to be paid at maturity ~~which has been postponed to a date that has not yet been determined.~~on May 21, 2024.

On March 10, 2022, the Company entered into a short-term promissory note for $250,000. The short-term promissory note was due and payable in monthly payments of interest only, with all principal and any accrued and unpaid interest due at maturity. Effective September 30, 2022, this note was amended to extend the maturity date to March 31, 2023. As part of the amendment, the Company issued 100,000 shares of its common stock. The resulting discount of $40,000 was recorded to interest expense on the date of the amendment.

Effective with the close of the Adams County acquisition, the Company entered into a note for $200,000 with the seller as part of the purchase price. The note is payable in six installments on the last day of each three-month period following the Closing Date. At December 31, 2022, this note was in default.

On October 28, 2022, the Company entered into a Secured Short Term Promissory Note in the amount of $2.0 million. Principal and interest in the amount of $2.35 million is due at maturity on January 31, 2023. The Company issued 650,000 shares of its common stock, valued at $166,819, to the lender as an inducement to the lender to enter into the note agreement. The debt and shares of common stock were recorded at their relative fair values. The resulting discount of $166,819 is amortized to interest expense over the term of the debt.

On November 2, 2022, the Company entered into a short-term financing arrangement with Lendspark. The Company received proceeds of $750,000. Payments of $1,720 are paid daily for the first three months and then payments of $19,658 are paid daily until a total of $862,500 has been repaid.

On October 26, 2022, the Company entered into a Secured Short Term Promissory Note with Viridis Group I9 Capital LLC, a related party, in the amount of $500,000. The note was due on November 16, 2022 and carried an interest rate of $1.94 per day per $1,000 outstanding. In addition, the note required a principal payment of $150,000 on November 4, 2022. The Secured Short Term Promissory Note is currently in default and the Company is working with the lender to cure the default.

On November 3, 2022, the Company entered into a short-term promissory note in the amount of $500,000. Interest only payments are due monthly and all principal and any unpaid interest are due at maturity. The Company issued 300,000 shares of its common stock, valued at $60,000, to the lender as an inducement to the lender to enter into the note agreement. The debt and shares of common stock were recorded at their relative fair values. The resulting discount of $60,000 is amortized to interest expense over the term of the debt.

As part of the lease termination of the Company’s corporate office (see Note 9), the Company entered into a note payable with VGI Citadel LLC, a related party, for $25,922, the amount of rent owed at the time of termination. The note carries an interest rate of 1% per annum, compounding weekly, and matures on December 20, 2022. This note is currently in default and the Company is working with the lender to cure the default.

The future minimum payments of the Company’s notes payable obligations as of December 31, ~~2021~~2022 are as follows. The unamortized discount will be amortized through ~~November 2023.~~July 2024.

Year ended
December 31, Amount
2022 $ 4,074,783
2023 20,631,773
2024 351,937
25,058,493
Less: unamortized discount (4,719,209 )
Less: imputed interest (552,960 )
19,786,324
Less: current portion (3,521,822 )
$ 16,264,502

A summary of interest expense for the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 is as follows.


	Three months ended December 31,					Three months ended December 31,
	2021			2020		2022			2021
Amortization of debt discounts from equity issuances and beneficial conversion features	$	1,559,401		$	126,264
Amortization of debt discounts from success and other fees		306,310			—
Amortization of debt discounts						$	1,133,472		$	1,865,711
Stated interest paid or accrued		1,203,932			569,444		2,007,295			1,203,932
Finance charges and other interest		817			12,659		7,245			817
		3,070,460			708,367		3,148,012			3,070,460
Less: interest capitalized to construction in progress		(1,860,070	)		—		(1,305,763	)		(1,860,070	)
	$	1,210,390		$	708,367	$	1,842,249		$	1,210,390

For the three months ended December 31, 2022 and 2021, 96% and ~~2020, substantially all~~99%, respectively, of the Company's revenue was generated from a single customer. Given the agreement with the license holder, although the Company’s products are distributed to numerous dispensaries throughout Arizona, all sales are made through the license holder. The Company's wholly owned subsidiary provides cannabis products to this customer under a three-year Cultivation Management Services Agreement that commenced on April 1, 2020. Provisions of the agreement require 30-day written notice to terminate except for the following circumstances, in which case the agreement is cancellable with no notice: (i) uncured default; (ii) gross negligence, intentional, or willful misconduct by either party; (iii) federal or state enforcement action against either party; (iv) any change or revocation of state or local law that has the effect of prohibiting the legal operation of the Cultivation Facility; (v) the dispensary license renewal is not approved; (vi) the dispensary fails to maintain its dispensary license in good standing with the regulators resulting in the revocation of the dispensary license. Two of our license holder’s customers that the Company’s products are distributed to account for approximately 46% and 11%, respectively, of our cultivation revenue for the three months ended December 31, 2022. Should our products no longer be distributed to these customers of our license holder, it would have a material adverse effect on our operations.

The production and possession of ~~marijuana~~cannabis is prohibited on a national level by the Controlled Substances Act, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. If the federal government decides to change its policy on the enforcement of the Controlled Substances Act, it would have a material adverse effect on our business.

The Company entered into a 60 month lease with VGI Citadel LLC, a related party, to rent office space for its corporate headquarters which began in June 2019. The monthly lease payments were $~~6,478~~ $6,478 for the first twelve months and include all utilities and an estimated amount for common area maintenance and real estate taxes. The monthly lease payments increase to $~~6,653, $6,828, $7,003~~,$6,653, $6,828, $7,003, and $~~7,178~~ $7,178 for years two through five, respectively. Rent expense for the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 on this lease was $~~23,200~~ $6,348 and $~~20,710~~,$23,200, respectively. Interest was imputed using a discount rate of 20%. The lease does not include renewal options. ~~The future lease payments are as follows.~~

The Company and VGI Citadel LLC entered into an Agreement to Terminate Lease for its corporate offices which called for the termination of the lease with VGI Citadel LLC, a related party, effective December 20, 2022.

In ~~August 2021,~~February 2022, the Company ~~signed~~assumed a ~~ten-year~~ lease to rent approximately ~~7,000~~3,100 square feet of retail space in ~~Broomfield, Colorado.~~Oklahoma City, Oklahoma as part of the Oklahoma City acquisition. The lease ~~will call~~calls for base rent payments of $~~12,097~~$21 per square foot ($5,483), plus a prorated share of taxes, insurance and ~~operating~~common area maintenance expenses, per month and increasing each year by 3% through the end of the lease term on February 28, 2029. The lease may be extended for two additional 5 year periods. Rent expense for the ~~first year~~three months ended December 31, 2022 on this lease was $28,100. There was no rent expense on this lease during the three months ended December 31, 2021. Interest was imputed using a discount rate of 18%.

In March 2022, the Company assumed a lease to rent approximately 2,650 square feet of retail space in Adams County, Colorado as part of the Adams County acquisition. The lease calls for base rent payments of $15,450, plus a prorated share of operating costs of the building, per month and escalate each year to $~~15,786~~ ~~per month~~$15,913 in the final year ~~10.~~which ends on February 1, 2024. The ~~commencement of~~lease may be extended for one additional 3 year period. Rent expense for the three months ended December 31, 2022 on this lease ~~is contingent upon~~was $50,483. There was no rent expense on this lease during the ~~Company obtaining a license for the retail sale of recreational and medical marijuana. The Company shall pay $3,500~~ ~~per month as consideration to the landlord for keeping the premises available until the contingency is met. The agreement will terminate if the contingency is not met. At~~three months ended December 31, ~~2021, the contingency has not been met. As such, the future minimum rental payments under this lease have not been included in the Company’s right~~2021. Interest was imputed using a discount rate of ~~use asset and liability at December 31, 2021 or the future lease payments schedule above.~~18%.

In September 2021, the Company signed a seven-year lease to rent approximately 3,000 square feet of retail space in Biddeford, Maine. The lease ~~will call~~calls for base rent payments of $~~6,604~~,$6,604, plus taxes and operating expenses, per month for the first year and escalate each year to $~~7,886~~ $7,886 per month in year seven. The lease may be extended for two terms of 5 years each. The commencement of this lease iswas contingent upon the issuance and receipt of a license and city approval. The ~~Company shall pay $4,500~~ ~~per month, plus utilities and operating expenses as consideration to the landlord for keeping the premises available until the contingency is met. The~~ agreement will terminate if the contingency is not met. At December 31, ~~2021,~~2022, the contingency ~~has~~was not ~~been met.~~met and the lease was terminated. As such, the ~~future minimum rental payments under this lease have not been included in~~Company has removed the ~~Company’s~~remaining balance of the right of use asset and liability atfrom the condensed consolidated balance sheet. Rent expense for the three months ended December 31, 2022 and 2021 oron this lease was $22,677 and $6,604, respectively. There was no rent expense on this lease during the ~~future lease payments schedule above.~~three months ended December 31, 2021. Interest was imputed using a discount rate of 18%.

In October 2021, the Company entered into a commercial lease agreement to rent 12,000 square feet located in Denver, Colorado. The lease has a term of five years with escalating monthly base rent beginning at $~~6,354~~$6,354 and escalating each year to $~~7,295~~$7,295 in year five. Commencement of the lease iswas contingent upon the Company receiving an approved retail license within 120 days from October 22, 2021. The agreement ~~will~~was to terminate if the contingency iswas not met. AtAs of December 31, ~~2021,~~2022, the contingency has ~~not~~ been ~~met. As such,~~met and the ~~future minimum rental payments under this lease have not been included in~~Company has recorded the ~~Company’s~~ right of use asset and liability to the condensed consolidated balance sheet at December 31, ~~2021 or~~2022. Rent expense for the three months ended December 31, 2022 on this lease was $20,779. Interest was imputed using a discount rate of 18%.

As of December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, the Company has accrued unpaid payroll taxes and estimated penalties and interest of approximately $~~2,000,000~~$579,000 and $~~2,400,000~~,$1,450,000, respectively, and is included in accrued ~~expenses~~payroll and payroll taxes in the accompanying condensed consolidated balance sheets. During the three months ended December 31, 2022, the Company received approximately $953,000 of Employee Retention Credits ("ERCs") that were used to reduce the unpaid payroll tax liability. In addition, as a result of the ERCs, the Company reduced its accrued payroll tax liability in the amount of approximately $316,000 related to the reduction of estimated penalties and interest. The ERCs were recorded to payroll and employee related expenses and the reduction of the estimated penalties and interest was recorded to other operating expenses on the condensed consolidated statement of operations. At December 31, 2022, an asset for the overpayment of payroll taxes was recorded to other assets on the condensed consolidated balance sheet in the amount of approximately $150,000.

There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company.

As discussed in Note 5,6, the Company completed the purchase of 44 acres of land from a related party for $~~3.0~~$3.0 million plus expenses. The land-owner is one of the original members of BSSD and a current employee of the Company.

As discussed in Note 6,7, the Company has entered into various loan agreements with Viridis or its related entities. ~~Two members~~A member of Viridis ~~serve~~serves on the Company’s board of ~~directors and one of these members also serves as the Company’s Chief Executive Officer.~~directors.

As discussed in Note 6,7, the Company has a loan agreement with Stockbridge Enterprises. Stockbridge Enterprises holds more than 5% of the Company’s common stock.

As discussed in Note 8,7, the Company has a convertible loan agreement with a member of the Company’s board of directors.

As discussed in Note 7, as part of the OCG transaction in March 2021, the Company assumed the debt that OCG, Inc. owed to its officers. One of these officers is a director and officer of the Company. This officer’s note had a maturity date of April 1, 2024 and an interest rate of 10% per annum. Principal and interest payments were due monthly with a balloon payment of all outstanding principal and interest due at maturity. On November 2, 2022, the outstanding amount owed on this note of $289,579 was converted at $0.25 per share into 1,158,318 shares of the Company’s common stock.

As discussed in Note 9, the Company had a lease agreement with VGI Capital LLC. ~~Two members~~One member of VGI Capital LLC ~~serve~~serves on the Company’s board of ~~directors and one of these members also serves as the Company’s Chief Executive Officer.~~directors.

During the three months ended December 31, ~~2021~~2022 and ~~2020,~~2021, the Company purchased cultivation supplies from a related party in the amount of $~~12,993~~$0 and $$12,993, respectively. This related party is owned by the parent of a stockholder that holds more than 5% of the Company’s common stock.

During the three months ended December 31, 2022 and 2021, the Company incurred amounts due to a related party for expenses that the related party paid on the Company’s behalf. These expenses included property taxes, utilities, legal expenses and interest on farm purchases. The amounts incurred during the three months ended December 31, 2022 and 2021 were $0 and $9,404, respectively. This related party is owned by the father of a stockholder that holds more than 5% of the Company’s common stock.

Included in our accounts payable at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 is approximately $~~158,000~~,$172,000, and $~~138,000~~,$243,000, respectively in amounts due to related parties.

During the year ended September 30, 2022, as a result of a shift in the Company’s business plan, the Company approved a plan to sell its newly constructed Nevada facility and the related cannabis licenses. The Company controls these cannabis licenses through the Asset and Equity Purchase and Contribution Agreement dated February 14, 2020. This sale is expected to occur in the next 12 months. The assets held for sale are recorded at fair value less cost to sell. Fair value was determined based on the value included in the current letter of intent. The following assets and liability are included under “Corporate” in Note 13.

The following table summarizes the Company’s warrant activity for the three months ended December 31, ~~2021:~~2022:

Common Shares Issuable Upon Exercise of Warrants Weighted Average Exercise Price Weighted Average Contractual Term in Years Aggregate Intrinsic Value
Balance of warrants at September 30, 2021 46,095,000 2.08 3.9 14,243,000

Warrants granted 1,739,744 2.81 3.0 —

Balance of warrants at December 31, 2021 47,834,744 $ 2.10 $ 3.7 $ 5,932,122

~~The Company estimates the fair value of warrants issued using the Black-Scholes option-pricing model.~~ The following range of assumptions were used to estimate the fair value of warrants issued during the three months ended December 31, ~~2021. No warrants were issued, exercised or forfeited during~~2022, using the ~~three months ended December 31, 2020.~~Black-Scholes option-pricing model.

On June 21, 2019, ~~our~~the Company’s shareholders voted to approve the 2019 Equity Incentive Plan (the “2019 Plan”). Pursuant to the 2019 Plan, the maximum aggregate number of Shares available under the Plan through awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the adoption of the plan by 2 percent of the then-outstanding shares, or (b) 10,000,000 shares. ~~We have4,141,021~~ ~~shares available for issuance under the 2019 Plan.~~ The maximum contractual term of the award is 10 years. The vesting period for options outstanding at December 31, ~~2021~~2022 ranges from ~~6 months~~vesting immediately to ~~four~~three years.

The following table summarizes the Company’s stock option activity for the three months ended December 31, ~~2021:~~2022:

The ~~Company estimates~~following range of assumptions were used to estimate the fair value of stock options granted ~~using the Black-Scholes option-pricing model. The following range of assumptions were used~~ during the three months ended December 31, ~~2021. No options were granted, exercised or forfeited during~~2022, using the ~~three months ended December 31, 2020.~~Black-Scholes option-pricing model.

During the three months ended December 31, ~~2021~~2022 and ~~2020,~~2021, the Company recognized compensation expense of $~~507,294~~$1,053,190 and $~~304,672~~,$507,294, respectively. At December 31, ~~2021,~~2022, there was $~~2,798,762~~$2,499,183 of total unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average vesting period of ~~1.4 years.~~approximately 1 year.

The Company has identified two segments: the cultivation, production and sale of cannabis products (Cultivation) and the sales of Unity Rd. franchises to dispensaries (Franchising). The following ~~table~~tables presents segment information at and for the three months ended December 31, 2021. Segment information for the three months ended December 31, 2020 has not been presented as the Company did not acquire the Franchising segment until the closing of the acquisition of OCG, Inc. effective March 19,2022 and 2021.

InOn January ~~2022,~~20, 2023, the Company ~~executed on~~and Stockbridge Enterprises, a ~~short-term financing arrangement.~~related party, entered into the third amendment of the outstanding promissory note. The ~~net proceeds~~amendment calls for monthly principal and interest payments of ~~$2.45 million were used to repay the~~$25,000 with a final balloon payment of all outstanding principal and interest of note payable (l) in Note 6 - Debt above in the amount of approximately $1.84 million. The remaining approximately $610,000 of proceeds will be used for general working capital purposes. Payments of $66,468 are$102,156 due ~~weekly until $3.35 million is repaid. This results in an effective interest rate of approximately 34%.~~at maturity on July 15, 2023.

The Company signed a Co-Management Agreement with a dispensary in Oklahoma for a term of three years. As part of the Co-Management Agreement, the Company purchased substantially all of the assets of the dispensary, excluding cannabis and cannabis related products, and assumed the dispensary’s lease. The purchase price is $130,000, payable at $32,500 on the effective date and $32,500 each 30, 60 and 90 days after the effective date. In addition, the Company will pay $1,667 per month for 35 months. Finally, the Company will pay the seller $65,000 in the Company’s common stock at a 10% discount to the stock’s 10-day volume weighted average.

~~The Company has~~ issued ~~97,840~~785,506 shares of common stock ~~related~~for services, including 227,776 shares, valued at $50,000, issued to an officer of the ~~Co-Management Agreement discussed above and for other services received.~~Company.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended September 30, ~~2021~~2022 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company's Annual Report on Form 10-K for the year ended September 30, ~~2021,~~2022, filed with the Securities and Exchange Commission (the "SEC") on January 13, ~~2022.~~2023.

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the securities Exchange Act of 1934, as amended, (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. The words "anticipated," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "should," "could," "predicts," "potential," "continue," "would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this quarterly report on Form 10-Q. You should carefully consider these risks and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Item 9 Labs ~~produces~~Corp. (OTCQX: INLB) is a vertically integrated cannabis operator and dispensary franchisor delivering premium products from its large-scale cultivation and production facilities in the United States. The award-winning Item 9 Labs brand specializes in best-in-class products and user experience across several cannabis categories. The company also offers a unique dispensary franchise model through the national Unity Rd. retail brand. Easing barriers to entry, the franchise provides an opportunity for both new and existing dispensary owners to leverage the knowledge, resources, and ongoing support needed to thrive in their state compliantly and successfully. Item 9 Labs brings the best industry practices to markets nationwide through distinctive retail experience, cultivation capabilities, and product innovation. The veteran management team combines a diverse skill set with deep experience in the cannabis ~~related~~sector, franchising, and the capital markets to lead a new generation of public cannabis companies that provide transparency, consistency, and well-being. Headquartered in Arizona, the company is currently expanding its operations space by 640,000+ square feet on its 50-acre site, one of the largest properties in Arizona zoned to grow and cultivate flower.

The award-winning Item Nine Labs brand seeks to offer best-in-class products ~~in a rapidly growing market.~~and user experience across several cannabis categories. The ~~Company currently offers over~~product catalogue exceeds seventy-five (75) active cannabis strains and more than one hundred fifty (150) differentiated cannabis vape products as well as premium concentrates and Orion vape technologies. The ~~Company’s product offerings will continue~~highly regarded brand has received twenty five (25) wins and podium placements in Arizona marijuana competitions, including Cannabis Cup, Errl Cup and 710 Degree Cup, for its high-quality, premium flower, concentrates and vape products. Item Nine Labs has delivered over 3 million packaged goods in its history, and over 290,000 units during the quarter ended December 31, 2022.

With its national Unity Rd. retail dispensary franchise brand, the Company believes it offers a unique value proposition through both the sale of Item Nine Labs products and its Unity Rd dispensary franchise model. Easing barriers to ~~grow as they develop~~entry, the franchise approach seeks to provide an opportunity for both new ~~products~~and existing dispensary owners to ~~meet~~leverage the ~~needs~~knowledge, resources, and ongoing support needed to compliantly thrive in their state. With many years of experience in the legal cannabis industry and franchising, Unity Rd.’s standard operating procedures guide franchise partners through every operational function of the ~~end users.~~business. The ~~Company makes its products available to consumers through licensed dispensaries~~dispensary franchise ranked in ~~Arizona. Item 9 Labs’ products are now carried in more than 70 dispensaries throughout~~ the ~~state~~top five (5) out of ~~Arizona.~~

~~The Company believes its past and future success is dependent upon its ongoing ability to understand the needs and desires~~seven hundred (700) submissions for MJBizDaily magazine’s ranking of the ~~consumers,~~top cannabis retail leaders in the nation and ~~the Company develops and offers products that meet those needs.~~

The Company’s objective is to leverage its assets (tangible and intangible) to fuel the growth of its share of the Arizona cannabis market, as well as expand the geographical reach of its products into markets outside of Arizona, with the ultimate goal of providing comfortable cannabis health solutions to a larger populationhas earned high placements in ~~a manner that will create value for the Company’s shareholders.~~

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The extent of the impact of the COVID-19 outbreak on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on its customers and vendors, and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.

~~In March 2021, the Company closed on the acquisition of OCG, Inc., dba~~several trade industry lists. Unity ~~Rd., a cannabis dispensary franchisor. The transaction was structured as a reverse triangular merger, with the effect of OCG, Inc. becoming a wholly owned subsidiary of the Company. Unity Rd.~~Rd has agreements with more than twenty (20) ~~partners for such partners~~entrepreneurial groups to open more than ~~thirty-five (35)~~thirty (30) Unity ~~Rd.~~Rd retail dispensary locations in ~~fourteen (14)~~more than ten (10) states. The majority of the locations are in the licensing process. ~~One such franchise unit has been opened~~The Company makes its best efforts to ~~date,~~obtain these dispensary licenses, though it can make no assurances that the licenses will be awarded. We currently have two franchisees operating in Hartford, South Dakota and Boulder, Colorado. ~~Unity Rd. will assist in providing distribution for Item 9 Labs products to be sold across~~Additionally, the ~~United States and internationally to its franchisees for public resale, while keeping~~Company has two (2) dispensaries ~~locally~~ owned and ~~operated. As Unity Rd.~~operated by its wholly owned dispensaries, ~~expand~~one in ~~its market penetration, Item 9 Labs aims to offer its products~~North Denver, CO, and another in ~~those locations by expanding the distribution footprint of its premium product offerings to new states.~~Oklahoma City, OK.

The Company’s Arizona cannabis operations have expanded in recent years, with the addition of a 2nd nearly 10,000 square foot facility in the 4th quarter of fiscal year 2019, more than doubling the Company’s cultivation and processing space for Arizona. As the Company methodically expanded its operational capacity by more than 100% in fiscal year 2020, it was also able to significantly increase efficiencies within the cultivation and processing operations.

~~The Arizona expansion has continued in fiscal year~~On March 11, 2022, and is expected to continue thereafter. The Company has tripled production since October 1, 2020, while beginning construction on phase 1 of its construction plan to build additional cultivation space. Phase 1 plans total over 60,000 square feet of additional cultivation and processing space, and the planned remaining five phases would add over 560,000 square feet of cultivation and processing space. By the conclusion of their master site development, the Company anticipates a total of more than 640,000 square feet of cultivation and processing space; there is no assurance the Company can complete these construction projects as planned.

Item 9 Labs Corp. has continued its expansion plans into other states as well as the Company acquired (pending regulatory approval) cultivation and processing licenses in Nye County, Nevada which will be paired with their Nevada facility. In fiscal 2019, the Company broke ground on their 20,000 square foot cultivation and processing facility in Nevada. The facility is now approximately 70% complete. Construction recommenced, after a pause due to Covid-19, in August 2021. The Company aims to commence operations in Nevada in fiscal year 2022.

~~On October 6, 2021,~~ the Company entered into an Asset Purchase Agreement ~~(“APA”) to acquire an existing dispensary license and storefront from Nebrina Adams County~~with The Herbal Cure LLC, a Colorado limited liability company, ~~(“Seller”) in Adams County, CO.~~pursuant to which the Company is purchasing certain assets. Effective upon the completion of the sale, which has not occurred as of the date of this filing, the licenses, contracts and certain personal property to operate a licensed medicinal and recreational cannabis dispensary will be delivered to the Company. The total purchase price is ~~two million dollars ($2,000,000),~~$5,750,000, as to which ~~one million dollars ($1,000,000) will~~$250,000 is to be paid ~~to an escrow account~~ upon ~~conditional approvals~~execution of the ~~change of ownership from state and local licensing authorities concerning the transfer of ownership. At~~Asset Purchase Agreement, $3,700,000 payable at closing, ~~that amount will~~$700,000 shall be ~~released~~financed by seller pursuant to ~~the Seller along with an 18-month promissory note in the principal amount of $200,000~~a Secured Promissory Note and the ~~balance~~remainder of the purchase prices shall be paid in shares of the Company’s common stock on the closing date. The Secured Promissory Note shall accrue interest at 5% per annum and have a term of 18 months, commencing on the closing date, payable in ~~300,000~~even monthly installments until paid in full. The shares of ~~Company~~the Company’s common ~~stock. For additional terms~~stock to be issued shall be in such an amount as is the quotient of $1,100,000 divided by the product of the ~~APA, please see~~10-day volume weighted average price of the ~~Company’s filing on Form 8-K filed with~~shares as of the ~~Securities~~closing date and ~~Exchange Commission on October 7, 2021.~~85%. The Company ~~intends to obtain financing to consummate this transaction. There~~ can beprovide no assurance that ~~the Company can consummate this transaction. The existing dispensary license has never been operational.~~

~~If completed, this~~it will be ~~the first corporate-owned shop under its cannabis dispensary franchise brand, Unity Rd., and is anticipated to open~~successful in early fiscal year 2022. Currently, the Company is awaiting regulatory approval by Colorado's Marijuana Enforcement Division (“MED”). This APA is part of an overarching acquisition strategy that is intended to accelerate national expansion by creating turnkey investment opportunities for Unity Rd. franchisees. The Company plans to convert acquired dispensaries into Unity Rd. shops, operate them internally and sell them to an existing or future franchise partner. This offers an expedited solution for entrepreneurs seeking immediate entry into cannabis. The Company is targeting numerous similar transactions in the next 12 months to gain a deeper market penetration in select markets. Subsequently and/or concurrently, the Company plans to introduce thefinalizing this acquisition.

On May 18, 2022, Item 9 Labs ~~suite~~Corp., a Delaware corporation (“Company”), and OCG Management Ontario, Inc., a corporation formed under the laws of ~~products~~the Province of Ontario (“Purchaser”) and a wholly owned subsidiary of the Company incorporated solely for the purpose of completing the transaction, entered into a Share Purchase Agreement (the “Agreement”) with Steven Fry, Najla Guthrie, Darryl Allen, Louis Laskovski, each an individual residing in the Province of Ontario, and 2628146 Ontario Ltd., a corporation formed under the laws of the Province of Ontario, and 11949896 Canada Inc., a corporation formed under the federal laws of Canada (together, the “Shareholders”), pursuant to which Purchaser is purchasing all (but not less than all) of the issued and outstanding shares in the capital of Wild Card Cannabis Incorporated, a corporation formed under the laws of the Province of Ontario, (“Shares”) free and clear of all Liens from the Shareholders. The total purchase price for the Shares is $12,800,000 (the “Purchase Price”), as adjusted, plus the Earnout Payment, if any (collectively, the “Purchase Price”) payable as follows: (i) The Company has delivered the Exclusivity Deposit in the amount of $156,902 to the ~~same markets through~~Escrow Agent on March 4, 2022; (ii) At the ~~acquisition~~Closing, Purchaser shall pay to Shareholders the Estimated Purchase Price of ~~cultivation~~$12,800,000, as adjusted, in immediately available funds; (iii) $4,100,000, as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the First Earnout Period (the date that is 12 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the First Earnout Period is greater than or equal to the Target Net Revenue for the First Earnout Period; and ~~production licenses~~(iv) $4,100,000, as adjusted, payable by the delivery of the Company’s common stock, the number of which will be calculated on the basis of a deemed price per common share equal to the 10-Day VWAP of the trading price of the Company’s common stock on the stock exchange upon which the Company’s common stock is listed, with the last day of the Second Earnout Period (the date that is 24 months following the Closing Date) as the measurement date less a 15% discount, if actual Net Revenue is respect of the Second Earnout Period is greater than or ~~through joint ventures with qualified local, licensed operators.~~equal to the Target Net Revenue for the Second Earnout Period.

	Three months ended December 31,												Three months ended December 31,
	2021			2020			$ Change			% Change			2022			2021			$ Change			% Change
Revenues, net	$	6,186,011		$	3,039,564		$	3,146,447			104	%	$	5,003,879		$	6,186,011		$	(1,182,132	)		-19	%
Cost of revenues		3,787,245			1,608,131			2,179,114			136	%		2,382,006			3,787,245			(1,405,239	)		-37	%
Gross profit		2,398,766			1,431,433			967,333			68	%		2,621,873			2,398,766			223,107			9	%
Operating expenses
Professional fees and outside services		657,445			293,955			363,490			124	%		855,660			657,445			198,215			30	%
Payroll and employee related expenses		2,150,706			1,103,304			1,047,402			95	%		2,189,824			2,150,706			39,118			2	%
Sales and marketing		439,436			43,181			396,255			918	%		287,949			439,436			(151,487	)		-34	%
Depreciation and amortization		439,135			142,545			296,590			208	%		379,356			439,135			(59,779	)		-14	%
Other operating expenses		846,668			214,537			632,131			295	%		494,549			846,668			(352,119	)		-42	%
Total operating expenses		4,533,390			1,797,522			2,735,868			152	%		4,207,338			4,533,390			(326,052	)		-7	%
Loss from operations		(2,134,624	)		(366,089	)		(1,768,535	)		483	%		(1,585,465	)		(2,134,624	)		549,159			-26	%
Other expense, net		(1,210,390	)		(708,367	)		(502,023	)		71	%		(1,658,368	)		(1,210,390	)		(447,978	)		37	%
Net loss, before income tax provision (benefit)		(3,345,014	)		(1,074,456	)		(2,270,558	)		211	%		(3,243,833	)		(3,345,014	)		101,181			-3	%
Income tax provision (benefit)		—			—			—			0	%		3,740			—			3,740			0	%
Net loss	$	(3,345,014	)	$	(1,074,456	)	$	(2,270,558	)		211	%		(3,247,573	)		(3,345,014	)		97,441			-3	%
Less: Net loss attributable to non-controlling interests														10,111			—			10,111			100	%
Net loss attributable to Item 9 Labs Corp.													$	(3,257,684	)	$	(3,345,014	)	$	87,330			-3	%

The ~~increase~~decrease in revenue was primarily due to a change in certain processes and procedures in the Company’s lab during the year ended September 30, 2021. That is, during fiscal year 2021, the Company purchased equipment to automate certain manual processes. The purchase of this equipment made certain processes, such as the filling of cartridges, more efficient, which allowed for increased output. In order to support this increased output, the Company purchases certain inventory materials from third party vendors that it had previously produced itself. This allows the Company to avoid interruptions in production due to a lack of material. Further, during fiscal year 2021, the Company added and reorganized post-production space to more efficiently package its products for sale. This allows the Company to deliver its products to the dispensaries more timely. The demand for the Company’s products is greater than the supply it is able to produce and the changes in processes and procedures in the Company’s lab allowed the Company to increase production more than 100% during the three months ended December 31, ~~2021~~2022 was primarily due to the effects of the Arizona cannabis market stabilizing, causing price compression, as well as the Company’s addition of product lines with lower unit sales prices. The impact of the changing market conditions in Arizona was countered by a significant increase in the number of units sold during the quarter compared to the same ~~period of~~quarter in the ~~prior fiscal~~previous year. ~~Management anticipates revenues to continue to grow as the revenue trends are positive month over month.~~

Cost of revenues consist primarily of labor, materials, supplies and utilities. Cost of revenues as a percentage of revenues was 48% for the three months ended December 31, 2022 compared to 61% for the three months ended December 31, ~~2021 compared to 53%~~2021. This is primarily the result of decreases in the unit costs the Company pays for ~~the same period ended December 31, 2020. The Company was able to increase operational efficiency throughout fiscal year 2021. However, the cost of the purchased inventory~~ materials ~~discussed above and increases~~resulting from additional competition in ~~other costs, such as product testing, primarily negated these efficiency gains.~~material suppliers. Management will remain focused on reducing costs through bulk purchasing, implementing additional efficiencies in production and making additional investments in property and equipment. The Company believes that it will ~~continue reducing~~reduce the overall cost of revenues and cost of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.

The ~~decrease~~increase in gross profit as a percentage of revenue for the three months ended December 31, 2022 was due to ~~increases~~decreases in cost of revenue ~~offset by increases~~being greater than the decreases in ~~purchased inventory materials~~revenue. As the Company experienced decreases in its unit sales price due to increased competition, so too did the Company’s suppliers, though the decreased costs have proven to be greater than the decreased unit sales prices. As a result, and ~~other costs.~~given the production efficiencies achieved in previous quarters, the Company has been able to increase gross profit on decreased revenues. With the Company’s continued efforts to increase capacity and focus on efficiencies and reducing costs, management expects gross profit to ~~grow~~increase going forward.

Professional fees and outside services increased ~~primarily due to~~for the ~~amortization of prepaid consulting agreements that were entered into subsequent~~three months ended December 31, 2022 compared to the three months ended December 31, ~~2020 and additional expenses incurred for corporate advisory services, and investor and public relations services. The increase in payroll expenses was~~2021 primarily due to the ~~scheduled amortization of stock-based compensation expense~~amount accrued for ~~stock options granted subsequent~~consulting services received related to the Company’s employee retention credits and legal fees incurred on the pending Sessions acquisition. The increase in consulting services was offset by a decrease in stockholder administration services.

Payroll expenses were consistent when comparing the three months ended December 31, ~~2020. Further, payroll expenses increased due to an increase in employee headcount during fiscal year 2021~~2022 and the three months ended December 31, 2021. Payroll and employee related expenses increased as a result of an accrual for expenses incurred related to our change in Chief Executive Officer and an increase in stock compensation expense. These additional expenses were offset by the Employee Retention Credits ("ERCs") received during the current quarter.

Sales and marketing expenses ~~increased~~decreased due to ~~increased~~a decrease of promotional items and a general decrease in spending on third party marketing vendors during the quarter ended December 31, 2022.

The decrease in depreciation and ~~branding initiatives~~amortization is due primarily to a decrease in amortization expense as a result of the intangible asset impairment recorded during the year ended September 30, 2022.

Other operating expenses decreased primarily due to the reversal of penalties and interest on previously unpaid payroll taxes as a result of receiving the ERCs during the three months ended December 31, 2021. The increase in depreciation and amortization is due to the scheduled amortization of intangible assets acquired in the OCG Inc. acquisition in March 2021. Other operating expenses increased primarily due to increases in insurance expenses, travel related expenses and additional IT support for the increase in employees. 2022.

Total operating expenses as a percentage of gross profit ~~increased~~decreased from ~~126%~~189% for the three months ended December 31, ~~2020~~2021 to ~~189%~~160% for the three ~~month periods~~months ended December 31, ~~2021.~~2022. Management believes this ratio will decrease for ~~the Cultivation segment~~profit center segments going forward as the expectation is that revenues will ~~continue to~~ grow at a higher rate than operating ~~expenses, however, management believes that operating expenses will outpace revenues for the Franchising segment as the Franchising segment continues to perform on its growth initiatives.~~expenses.

Other expenses consist primarily of interest expense of ~~$1,210,390 and $708,367~~$1,661,853 for the three months ended December 31, ~~2021~~2022 and ~~2020, respectively.~~$1,210,390 for the three months ended December 31, 2021. The increase in interest expense was primarily the result of the ~~continued~~ interest expense and amortization of discounts on the debt ~~discounts for debt outstanding at December 31, 2020 and~~financing the ~~additional~~Nevada construction. The interest and discount amortization ofexpense related to the Nevada construction debt ~~discounts for debt incurred subsequent to December 31, 2020. This increase in interest expense~~ was ~~offset by debt and amortization of debt discounts that were~~ capitalized tointo construction in progress during the quarter ended December 31, 2021. As the Nevada expansion is substantially complete, the related interest and discount amortization are recorded to interest expense for the ~~Company’s capital projects.~~three months ended December 31, 2022.

Management uses the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation expense, acquisition-related costs, employee retention credits and other adjustments, or “Adjusted EBITDA,” to evaluate the Company’s performance. Adjusted EBITDA is a non-GAAP measure that is also frequently used by analysts, investors and other interested parties to evaluate the market value of companies considered to be in similar businesses. The Company suggests that Adjusted EBITDA be viewed in conjunction with its reported financial results or other financial information prepared in accordance with accounting principles generally accepted in the United States, or “US GAAP.”

The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three months ended December 31, ~~2021~~2022 and ~~2020:~~2021:

The Company’s primary need for liquidity is to fund working capital requirements of its business, capital expenditures, acquisitions, debt service, and for general corporate purposes. The Company’s primary source of liquidity is funds generated from revenues, financing activities and from private placements. The Company’s ability to fund its operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on its future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond the Company’s control.

Sales and Marketing. Historically, the Company has generated the majority of its revenues by providing ~~its~~the products it produces to dispensaries throughout the state of Arizona. The ~~Company's~~Company’s revenues have increased significantly since its inception in May 2017. Management will continue its plans to increase revenues in the Arizona market by providing superior products. Additionally, as capital resources become available, the Company plans to expand into additional markets outside of ~~Arizona, with construction of a cultivation and processing facility nearing completion in Nevada.~~Arizona. The Company believes that it will continue reducing the overall ~~cost~~costs of revenues and ~~cost~~costs of revenues will increase at a lower rate than revenues in future periods, which ~~will~~is expected to lead to increased profit margins.

If the Company is unable to generate additional sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations, and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

As of December 31, ~~2021,~~2022, the Company had ~~$160,711~~$21,781 of cash and cash equivalents and negative working capital of ($~~7,351,332)~~43,728,770) (current assets minus current liabilities), compared with ~~$1,454,460~~$85,637 of cash and cash equivalents and negative working capital of ($~~4,393,385)~~37,032,478) as of September 30, ~~2021.~~2022. The decrease of ~~$2,957,947~~$6,696,292 in the Company’s working capital ~~was~~is primarily due to increases in the amount of the Company’s debt maturing within the next 12 months. The decrease is also due to decreases in ~~cash and inventory. Additionally,~~ the Company’s ~~working capital decreased due to~~inventory and prepaid balances and increases in ~~accounts payable and accrued expenses.~~the Company’s other operating liabilities. The ~~$1,293,749~~$63,856 decrease in cash and cash equivalents was primarily due to the ~~purchases~~net cash used in operating activities offset by proceeds from the issuance of ~~property, equipment and construction in progress related to the Company’s capital projects.~~debt. The Company is an early-stage growth company. It is generating cash from sales and is investing its capital reserves in current operations and new acquisitions that are expected to generate additional earnings in the long term. The Company expects that its cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet its capital requirements and operational needs for the next 12 months, although no assurance can be given that private and/or public financing can be obtained on terms acceptable to the Company, or at all.

The following table summarizes the sources and uses of cash for each of the periods presented:

During the three months ended December 31, 2022, operating activities used $1,334,644 of cash and cash equivalents, primarily resulting from a net loss of $3,247,573 which was offset by net cash provided by operating assets and liabilities of $833,984. There was significant non-cash activity that contributed to the net loss totaling $1,078,945 including depreciation and amortization of $443,107, amortization of debt discount of $504,501, and stock-based compensation of $1,053,190. These non-cash expenses were offset by the non-cash employee retention credits of $952,805.

During the three months ended December 31, 2021, operating activities used $267,694 of cash and cash equivalent, primarily resulting from a net loss of $3,345,041 which was offset by net cash provided by operating assets and liabilities of $1,137,981. There was significant non-cash activity that contributed to the net loss totaling $1,939,339 including depreciation and amortization of $441,764, amortization of debt discount of $990,281, and stock based compensation of $507,294.

During the three months ended December 31, ~~2020, operating~~2022, investing activities used ~~$1,932,533~~$6,825 of cash ~~primarily resulting from a net loss~~and cash equivalents, consisting of ~~$1,074,456 which was extended by net cash used~~$6,825 in ~~operating assets~~purchases of property, equipment and liabilities of $1,603,964. There was significant non-cash activity that contributed to the net loss totaling $745,887 including depreciation and amortization of $158,681, amortization of debt discount of $119,298, and compensation paidconstruction in ~~the form of stock of $467,908.~~ progress.

During the three months ended December 31, 2021, investing activities used $1,439,155 of cash and cash equivalents, consisting primarily of $2,492,445 in purchases of property, equipment and construction in progress, offset by $1,053,290 of cash received from the escrow deposit accounts.

During the three months ended December 31, ~~2020, investing~~2022, financing activities ~~used $1,190,875~~provided $1,277,613, consisting of ~~cash, consisting primarily~~$1,597,500 in proceeds from the issuance of ~~$499,452 in purchase~~debt and offset by $319,887 of ~~property and equipment and $696,293 of deposits paid on an acquisition.~~debt payments made.

During the three months ended December 31, 2021, financing activities provided $413,100, consisting of $1,500,000 in proceeds from the issuance of debt and offset by $1,068,150 in debt payments made.

~~During the three months ended December 31, 2020, financing activities provided $4,652,308, consisting of $5,791,225 in proceeds from the issuance of stock offset by $1,138,917 in debt payments made.~~

Given that our cash needs are strongly driven by our growth requirements, we also intend to maintain a cash reserve for other risk contingencies that may arise.

We intend to meet our cash requirements for the next 12 months through the use of the cash we have on hand and through business operations, future equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. We ~~have filed an offering document on Form 1-A with the Securities and Exchange Commission in order to sell units comprising of one share of common stock and one warrant. We~~ are also in ~~discussion~~discussions with various potential capital partners to provide additional debt capital for accretive acquisitions. We do not have any other arrangements in place to complete any private placement financings of debt and equity. There is no assurance that we will be successful in ~~completing the offering on Form 1-A, or in~~ finding a capital partner to provide additional debt capital or any other such financings on terms that will be acceptable to us.

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. Critical accounting policies and estimates in these condensed consolidated financial statements are those related to revenue recognition, valuation of options, warrants and debt discounts, carrying value of intangible assets subject to amortization, infinite life intangible assets and goodwill, stock-based compensation, and income taxes. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. For a discussion of our critical accounting policies, refer to Part I, item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended September 30, ~~2021.~~2022. Management believes that there have been no material changes in our critical accounting policies during the three months ended December 31, ~~2021.~~2022.

See Note 1 to our condensed consolidated financial statements, included in Part I, Item 1, Financial Information for this quarterly report on Form 10-Q.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, ~~2021.~~2022.

A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Management identified the following material weaknesses during its assessment of internal controls over financial reporting, which are primarily due to the size of the Company and available resources:

There have been no changes in our internal control over financial reporting subsequent to the fiscal year ended September 30, ~~2021,~~2022, which were identified in connection with our management's evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Disclosure Controls and Internal Controls

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.

The Company issued ~~142,365~~1,164,032 shares of common stock for the conversion of debt, 1,045,000 shares of common stock related to the issuance of new debt ~~16,666~~and 142,273 shares of ~~shares~~common stock were issued for services ~~received and 9,896 related to the exercise of stock options~~ during the three months ended December 31, ~~2021.~~2022.

Subsequent to December 31, ~~2021,~~2022, the Company issued ~~97,840~~785,506 shares of common stock ~~related to the Co-Management Agreement and~~ for ~~other services received.~~services.

The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:

*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			Page
Part I - Financial Information

Item 1.	Financial Statements			F-1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19		23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24		29
Item 4.	Controls and Procedures	25		29

Part II - Other Information

Item 1.	Legal Proceedings	26		30
Item 1A.	Risk Factors	26		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26		30
Item 3.	Defaults Upon Senior Securities	26		30
Item 4.	Mine Safety Disclosures	26		30
Item 5.	Other Information	26		30
Item 6.	Exhibits	27

~~Signatures~~			28

~~Certifications~~31

Signatures				31

Certifications

INDEX		F-1
Condensed Consolidated Balance Sheets as of December 31, ~~2021~~2022 (Unaudited) and September 30, ~~2021~~2022		F-2
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended December 31, ~~2021~~2022 and ~~2020~~2021		F-3
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 31, ~~2021~~2022 and ~~2020~~2021		F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, ~~2021~~2022 and ~~2020~~2021		F-5
Notes to Condensed Consolidated Financial Statements (Unaudited)		F-6


	Three months ended December 31,
	2022		2021
Cultivation segment
Flower	$	603,092	$	1,077,211
Vape products		3,746,970		4,249,350
Concentrates and other cannabis products		419,928		775,591
Accessories		41,099		39,066
		4,811,089		6,141,218
Franchising segment
Franchising revenue		101,852		30,418

Corporate
Dispensary sales revenue		90,938		—
Other		—		14,375
		90,938		14,375
	$	5,003,879	$	6,186,011

	2021		2020
Potentially dilutive common share equivalents
Options		5,206,251		3,211,709
Warrants		47,834,744		16,500,000
Convertible notes		2,350,969		2,526,969
Potentially dilutive shares outstanding		55,391,964		22,238,678

	2022		2021
Potentially dilutive common share equivalents
Options		9,115,941		5,206,251
Warrants		49,370,537		47,834,744
Convertible notes		15,796,004		2,350,969
Potentially dilutive shares outstanding		74,282,482		55,391,964

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
Emerging growth company	☐


~~ITEM 9 LABS CORP. AND SUBSIDIARY~~ UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~


ITEM 9 LABS CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED DECEMBER 31, 2022 AND 2021
~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY~~
~~THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020~~

	(i) Upon mutual execution and delivery of the Asset Purchase Agreement, the Company shall convey to the Seller a down payment in the amount of $250,000;

	(ii) At the Closing, the Company shall pay to Seller $3,700,000 in immediately available funds;

	(iii) $700,000 shall be financed by the Seller and paid pursuant to the terms and conditions of the Secured Promissory Note (the "Herbal Cure Note"), which interest shall accrue at a rate of 5% per annum, for a term of 18 months commencing on the Closing Date, and payable in even monthly installments until paid in full; and

	(iv) the Company shall pay the remainder of the purchase price in shares of its common stock on the Closing Date, in such amount of Shares as is the quotient of $1,100,000 divided by the product of the 10 day volume weighted average price of the shares as of the Closing Date, and 85%.

	Three months ended
	December 31, 2022
Revenues, net	$	31,016
Cost of revenue		17,165
Gross profit		13,851
Income tax expense		3,740
Net income	$	10,111

	Effective Date		Maturity Date	Annual Interest Rate			Balance at December 31, 2021			Balance at September 30, 2021		Conversion Price
C-2	3/23/2020		9/23/2020	12	%		1,100,000			1,100,000		1.00
C-3	8/15/2011		8/15/2012	8	%		20,000			20,000		0.50
C-5	3/19/2021		9/19/2021	10	%		—			80,000		2.50
C-7	9/29/2021		9/29/2022	10	%		250,000			250,000		1.67
C-8	9/29/2021		9/29/2022	10	%		500,000			500,000		1.67
C-9	10/1/2021		9/29/2022	10	%		750,000			—		1.67
C-10	10/29/2021		4/29/2022	15	%		750,000			—		1.50
							3,370,000			1,950,000
		Less: unamortized discounts					(1,381,960	)		(672,606	)
						$	1,988,040		$	1,277,394

			Maturity	Annual Interest			Balance at			Balance at	Conversion
	Effective Date		Date	Rate			December 31, 2022			September 30, 2022	Price
C-2	3/23/2020		9/23/2020	15	%	$	1,100,000		$	1,100,000	See C-2
C-3	8/15/2011		8/15/2012	8	%		—			20,000	$0.50
C-7	9/29/2021		1/1/2023	10	%		275,000			275,000	0.35
C-8	9/29/2021		1/1/2023	10	%		555,000			550,000	0.35
C-9	10/1/2021		1/1/2023	10	%		820,000			825,000	0.35
C-10	10/29/2021		3/31/2023	15	%		750,000			750,000	1.50
C-11	2/21/2022		8/31/2022	24	%		230,000			230,000	1.10
C-12	10/24/2022		10/24/2024	15	%		250,000			—	0.31
C-13	12/13/2022		12/13/2024	15	%		50,000			—	0.25
C-14	12/13/2022		12/13/2024	15	%		50,000			—	0.25
							4,080,000			3,750,000
		Less: unamortized discounts					(23,502	)		—
						$	4,056,498		$	3,750,000

Year ended
December 31,		Amount
	2023	$	3,730,000
	2024		350,000
			4,080,000
	Unamortized discount		(23,502	)
			4,056,498
	Less: current portion		(3,730,000	)
		$	326,498

	Common Shares Issuable Upon Exercise of Warrants			Weighted Average Exercise Price		Weighted Average Contractual Term in Years		Aggregate Intrinsic Value
Balance of warrants at September 30, 2022		49,870,537		$	2.05		3.7	$	315,000.00

Warrants granted		2,300,000			0.50		2.0
Forfeited/Cancelled		(2,800,000	)		2.57		3.4

Balance of warrants at December 31, 2022		49,370,537		$	1.95		3.6	$	72,000

	Three months ended ~~December 31,~~
	~~2021~~December 31, 2022
Expected stock price volatility		92~~% -~~ ~~130~~%
~~Risk-free interest rate~~		~~0.10% -~~ ~~0.30~~%
~~Expected term (years)~~		~~1.0~~ - ~~2.0~~
~~Expected dividend yield~~		0127%
Risk-free interest rate		4%
Expected term (years)		2.0
Expected dividend yield		0%
Black-scholes value		$~~0.34~~ ~~- $0.89~~	$0.23

	Common Shares Issuable Upon Exercise of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value (1)
Balance of Options at September 30, 2022		8,594,805		$	1.08		8.3	$	33,162.00

Options granted		567,673			0.30		8.1		—
Forfeited/Cancelled		(46,537	)		1.88		—		—

Balance of Options at December 31, 2022		9,115,941		$	1.03		8.0	$	10,204

Exercisable at December 31, 2022		5,151,565		$	1.16		7.2	$	8,253
Unvested at December 31, 2022		3,964,376		$	0.86

	Number of Options		Weighted Average Grant Date Fair Value
Unvested at December 31, 2022	3,964,376	$	0.82
Granted during the three months ended December 31, 2022	567,673	$	0.34
Forfeited during the three months ended December 31, 2022	46,537	$	1.86

	Three months ended ~~December 31,~~
	~~2021~~December 31, 2022
Expected stock price volatility		~~161~~	151% - ~~164~~157%
Risk-free interest rate		.93.7% - ~~1.1~~4.3%
Expected term (years)		~~5.0~~	2.5 - ~~5.5~~5.0
Expected dividend yield		0%
Black-scholes value		$~~1.48~~0.24 - $~~3.01~~0.37

	Cultivation		Franchising			Corporate			Total
Revenues from external customers	$	6,141,217	$	30,418		$	14,376		$	6,186,011
Operating income (loss)		1,569,295		(959,139	)		(2,744,780	)		(2,134,624	)
Interest expense		196		22,810			1,187,384			1,210,390
Depreciation and amortization		31,265		300,739			107,131			439,135

Additions to property, equipment and construction in progress		—		—			8,399,584			8,399,584
Property, equipment and construction in progress, net		658,276		77,630			18,470,158			19,206,064
Total assets (after intercompany eliminations)		7,905,440		68,151,658			40,963,918			117,021,016

	•	lack of properly controlled segregation of duties
	•	lack of risk assessment procedures on internal control to detect financial reporting risks in a timely manner; and
	•	lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives.

Exhibit
Number		Description of Exhibit
3.01a	~~3.01a~~		Articles of Incorporation dated June 15, 2010		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
3.01b	~~3.01b~~		Certificate of Amendment to Articles of Incorporation dated October 22, 2012		Filed with the SEC on November 13, 2012 as part of our Current Report on Form 8-K
3.01c	~~3.01c~~		Certificate of Amendment to Articles of Incorporation dated March 15, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01d	~~3.01d~~		Certificate of Amendment to Articles of Incorporation dated March 19, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01e	~~3.01e~~		Certificate of Amendment to Articles of Incorporation dated April 3, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.01f	~~3.01f~~		Certificate of Amendment to Articles of Incorporation dated October 9, 2018		Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G
3.02	~~3.02~~	Bylaws	~~Bylaws~~		Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
31.01	~~4.1~~		~~2019 Equity Incentive Plan~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
~~10.03~~		~~Share Exchange Agreement between Crown Dynamics Corp. and Airware Dated March 20, 2012~~		~~Filed with the SEC on March 26, 2012 as part of our current report on Form 8-K.~~
~~10.04~~		~~Agreement and Plan of Exchange between Item 9 Labs Corp. fka Airware and BSSD Group, LLC dated March 20, 2018~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
~~10.05~~		~~Purchase Agreement between Sidewinder Dairy, Inc. and the Company dated April 20, 2018~~		~~Filed with the SEC on August 16, 2019 as an exhibit to our Form 10-Q~~
~~10.6~~		~~Asset Purchase Agreement between Item 9 Labs Corp. and AZ DP Consulting, LLC dated November 26, 2018~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
~~10.7~~		~~Loan and Revenue Participation Agreement between Item 9 Labs Corp. and Viridis Group I9 Capital LLC dated September 13, 2018~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
~~10.8~~		~~Severance Agreement between Airware Labs Corp and Jeffrey Rassas, effective July 16, 2013~~		~~Filed with the SEC on July 19, 2013 as part of our Current Report on Form 8-K.~~
~~10.11~~		~~Agreement and Plan of Merger between Item 9 Labs Corp, I9 Acquisition Sub, Inc., and OCG Inc.~~		~~Filed with the SEC on December 14, 2020 as part of our Current Report on Form 8-K.~~
~~10.12~~		~~AZ Construction Loan and Security Agreement with Pelorus Fund REIT LLC~~		~~Filed with the SEC on August 31, 2021 as part of our Current Report on Form 8-K.~~
~~10.13~~		~~NV Construction Loan and Security Agreement with Pelorus Fund REIT LLC~~		~~Filed with the SEC on August 31, 2021 as part of our Current Report on Form 8-K.~~
~~14.1~~		~~Code of Ethics~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
~~31.01~~		Certification of Principal Executive Officer Pursuant to Rule 13a-14		Filed herewith.
31.02	~~31.02~~		Certification of Principal Financial Officer Pursuant to Rule 13a-14		Filed herewith.
32.01	~~32.01~~		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith.
32.02	~~32.02~~		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith.
~~99.1~~		~~Audit Committee Charter~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
~~99.2~~		~~Compensation Committee Charter~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
~~99.3~~		~~Nominations and Governance Committee Charter~~		~~Filed with the SEC on June 27, 2019 as an exhibit to our Registration Statement on Form 10-12G~~
101.INS*		Inline XBRL Instance Document		Filed herewith.
101.SCH*		Inline XBRL Taxonomy Extension Schema Document		Filed herewith.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document		Filed herewith.
101.LAB*		Inline XBRL Taxonomy Extension Labels Linkbase Document		Filed herewith.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document		Filed herewith.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document		Filed herewith.
104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

	Item 9 Labs Corp.

Date: February 14, ~~2022~~2023	By:	/s/ ~~Andrew Bowden~~Michael Weinberger
	Name: Title:	~~Andrew Bowden~~Michael Weinberger Chief Executive Officer (Principal Executive Officer)