UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-54730

ITEM 9 LABS CORP.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

96-0665018

(I.R.S. Employer Identification No.)

2727 North 3rd Street, Suite 201 Phoenix, Arizona 85004

(Address of principal executive offices and zip code)

1-833-867-6337

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with 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 ~~May 16,~~August 15, 2022, there were ~~96,184,557~~96,264,406 shares of the issuer's common stock, $0.0001 par value per share, outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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.

ITEM 9 LABS CORP.

FORM 10-Q

~~DECEMBER 31, 2021~~JUNE 30, 2022

INDEX

			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	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31

Part II - Other Information		33

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34

Signatures		35

Certifications

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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

F-1

ITEM 9 LABS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, September 30,
2022 2021
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 105,128 $ 1,454,460
Accounts receivable, net 1,177,003 1,448,280
Inventory 4,819,619 6,391,351
Prepaid expenses and other current assets 782,556 802,558
Total current assets 6,884,306 10,096,649

Property and equipment, net 24,009,739 10,877,848
Right of use asset 730,516 156,938
Construction escrow deposits 10,096,928 17,744,913
Deposits 98,701 600,000
Other assets 1,229,940 608,874
Intangible assets, net 19,590,433 18,659,095
Goodwill 58,233,386 58,064,816
Total Assets $ 120,873,949 $ 116,809,133

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,522,921 $ 3,759,818
Accrued payroll and payroll taxes 2,646,036 2,678,694
Accrued interest 1,792,925 1,391,766
Accrued expenses 1,241,683 1,169,776
Deferred revenue, current portion 219,992 119,992
Notes payable, current portion, net of discounts 21,136,912 4,536,002
Income tax payable 3,324 —
Operating lease liability, current portion 219,773 56,592
Convertible notes payable, net of discounts 2,815,880 1,277,394
Total current liabilities 35,599,446 14,990,034

Deferred revenue, net of current portion 345,855 655,851
Operating lease liability, net of current portion 518,520 104,406
Notes payables, net of current portion and discounts 1,645,043 14,957,399
Total liabilities 38,108,864 30,707,690

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 108,269,428 and 107,074,417 shares issued and 95,969,428 and 94,774,417 shares outstanding at March 31, 2022 and September 30, 2021, respectively 10,827 10,707
Additional paid-in capital 137,280,385 133,414,830
Accumulated deficit (41,097,186 ) (33,874,094 )
Treasury stock (13,450,000 ) (13,450,000 )

Total Item 9 Labs Corp. Stockholders' Equity 82,744,026 86,101,443
Non-controlling interest 21,059 —

Total Stockholders' Equity 82,765,085 86,101,443

Total Liabilities and Stockholders' Equity $ 120,873,949 $ 116,809,133

		June 30,			Se`ptember 30,
		2022			2021
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	441,662		$	1,454,460
Accounts receivable, net		591,504			1,448,280
Inventory		4,130,779			6,391,351
Prepaid expenses and other current assets		527,655			802,558
Total current assets		5,691,600			10,096,649

Property and equipment, net		26,307,212			10,877,848
Right of use asset		1,001,192			156,938
Construction escrow deposits		8,586,463			17,744,913
Deposits		86,604			600,000
Other assets		1,398,720			608,874
Intangible assets, net		19,222,666			18,659,095
Goodwill		58,233,386			58,064,816
Total Assets	$	120,527,843		$	116,809,133

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	5,819,455		$	3,759,818
Accrued payroll and payroll taxes		1,846,614			2,678,694
Accrued interest		2,011,369			1,391,766
Accrued expenses		1,514,448			1,169,776
Deferred revenue, current portion		214,994			119,992
Notes payable, current portion, net of discounts		24,532,509			4,536,002
Income tax payable		7,948			—
Operating lease liability, current portion		256,471			56,592
Convertible notes payable, net of discounts		3,266,179			1,277,394
Total current liabilities		39,469,987			14,990,034

Deferred revenue, net of current portion		345,855			655,851
Operating lease liability, net of current portion		756,604			104,406
Notes payables, net of current portion and discounts		1,448,860			14,957,399
Total liabilities		42,021,306			30,707,690

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 108,562,706 and 107,074,417 shares issued and 96,262,706 and 94,774,417 shares outstanding at June 30, 2022 and September 30, 2021, respectively		10,856			10,707
Additional paid-in capital		138,499,394			133,414,830
Accumulated deficit		(46,567,663	)		(33,874,094	)
Treasury stock		(13,450,000	)		(13,450,000	)

Total Item 9 Labs Corp. Stockholders' Equity		78,492,587			86,101,443
Non-controlling interest		13,950			—

Total Stockholders' Equity		78,506,537			86,101,443

Total Liabilities and Stockholders' Equity	$	120,527,843		$	116,809,133

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

F-2

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended For the three months ended For the six months ended For the six months ended
March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021
Revenues, net $ 6,638,186 $ 6,110,631 $ 12,824,197 $ 9,150,195
Cost of revenues 3,960,948 3,121,045 7,748,193 4,729,176
Gross profit 2,677,238 2,989,586 5,076,004 4,421,019

Operating expenses
Professional fees and outside services 556,721 613,758 1,214,166 907,713
Payroll and employee related expenses 3,055,244 1,318,842 5,205,950 2,422,146
Sales and marketing 613,902 84,165 1,053,338 127,346
Depreciation and amortization 442,477 105,897 881,612 248,442
Other operating expenses 786,167 349,517 1,632,835 564,054
Provision for (recovery of) bad debt (5,000 ) —   (5,000 ) —
Total expenses 5,449,511 2,472,179 9,982,901 4,269,701

Income (loss) from operations (2,772,273 ) 517,407 (4,906,897 ) 151,318

Other income (expense)
Interest expense (1,097,373 ) (468,387 ) (2,307,763 ) (1,176,754 )
Other income 318 —   318 —
Total other income (expense), net (1,097,055 ) (468,387 ) (2,307,445 ) (1,176,754 )

Net income (loss), before income tax provision (benefit) (3,869,328 ) 49,020 (7,214,342 ) (1,025,436 )

Income tax provision (benefit) 3,324 —   3,324 —

Net income (loss) (3,872,652 ) 49,020 (7,217,666 ) (1,025,436 )

Less: Net income attributable to non-controlling interest 5,426 —   5,426 —

Net income (loss) attributable to Item 9 Labs Corp. $ (3,878,078 ) $ 49,020 $ (7,223,092 ) $ (1,025,436 )

Basic net income (loss) per common share $ (0.04 ) $ 0.00 $ (0.08 ) $ (0.02 )

Basic weighted average common shares outstanding 95,271,726 65,880,141 95,088,960 62,143,521

Diluted net income (loss) per common share $ (0.04 ) $ 0.00 $ (0.08 ) $ (0.02 )

Diluted weighted average common shares outstanding 95,271,726 84,938,235 95,088,960 62,143,521

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

~~F-3~~

~~ITEM 9 LABS CORP. AND SUBSIDIARIES~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY~~

~~THREE AND SIX MONTHS ENDED MARCH 31, 2022 AND 2021~~

Item 9 Labs Corp. Equity
Additional Non-
Common Stock Paid-in Treasury Stock Accumulated Controlling
Shares Amount Capital Shares Amount (Deficit) Interest Total
Balance at September 30, 2020 68,336,113 $ 6,834 $ 44,426,737 (12,300,000 ) $ (13,450,000 ) $ (22,968,322 ) $ —   $ 8,015,249
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

Stock issued for cash, net 8,433,437 843 7,167,740 —   —   —   —   7,168,583
Stock issued for acquisition 19,080,000 1,908 64,998,092 —   —   —   —   65,000,000
Warrants issued for acquisition —   —   51,081,066 —   —   —   —   51,081,066
Stock to be issued for convertible notes 1,335,000 134 (134 ) —   —   —   —   —
Warrants issued with convertible notes —   —   926,198 —   —   —   —   926,198
Beneficial conversion features —   —   428,802 —   —   —   —   428,802
Stock based compensation —   —   304,672 —   —   —   —   304,672
Net income —   —   —   —   —   49,020 —   49,020
Balance at March 31, 2021 104,109,521 $ 10,411 $ 175,591,614 (12,300,000 ) $ (13,450,000 ) $ (23,993,758 ) $ —   $ 138,158,267

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
Stock issued for debt inducement 142,365 14 128,348 —   —   —   —   128,362
Warrants issued with debt —   —   574,239 —   —   —   —   574,239
Beneficial conversion feature 16,666 2 25,830 —   —   —   —   25,832
Stock based compensation —   —   507,294 —   —   —   —   507,294
Stock issued on exercise of options 9,896 1 (1 ) —   —   —   —   —
Net loss —   —   —   —   —   (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

Stock issued for cash, net 278,000 28 288,813 —   —   —   —   288,841
Stock issued for acquisition 69,892 7 64,993 —   —   —   —   65,000
Stock issued for licenses 300,000 30 335,970 —   —   —   —   336,000
Stock issued for debt inducement 25,000 2 24,998 —   —   —   —   25,000
Beneficial conversion feature —   —   25,000 —   —   —   —   25,000
Issuance of shares for services 335,159 34 328,466 —   —   —   —   328,500
Stock based compensation —   —   1,091,560 —   —   —   —   1,091,560
Stock issued on exercise of options 18,033 2 (2 ) —   —   —   —   —
Non-controlling interest —   —   —   —   —   —   15,633 15,633
Net income (loss) —   —   —   —   —   (3,878,078 ) 5,426 (3,872,652 )
Balance at March 31, 2022 108,269,428 $ 10,827 $ 137,280,385 (12,300,000 ) $ (13,450,000 ) $ (41,097,186 ) $ 21,059 $ 82,765,085

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

~~F-4~~

~~ITEM 9 LABS CORP. AND SUBSIDIARIES~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

For the six months ended For the six months ended
March 31, 2022 March 31, 2021
Operating Activities:
Net loss $ (7,217,666 ) $ (1,025,436 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 146,078 64,570
Amortization of intangible assets 735,534 183,872
Amortization of right of use asset 29,964 27,977
Amortization of debt discounts 1,728,325 272,359
Common stock issued for services 271,925 163,236
Stock based compensation expense 1,598,854 609,344
Recovery of bad debt (5,000 ) —
Loss on disposal of fixed assets 10,841 —
Changes in operating assets and liabilities:
Accounts receivable 271,277 (2,213,229 )
Inventory 1,587,365 (3,622,372 )
Prepaid expenses and other current assets (234,057 ) (1,024,680 )
Accounts payable 1,810,603 1,107,669
Accrued payroll (32,658 ) 308,893
Income tax payable 3,324 —
Accrued interest 324,397 442,693
Accrued expenses (320,350 ) 253,474
Deferred revenue (209,996 ) —
Operating lease liability (26,247 ) (27,977 )
Net Cash Provided by (Used in) Operating Activities 373,812 (4,479,607 )

Investing Activities:
Deposit on acquisition —   (1,685,368 )
Cash paid for acquisitions (70,724 ) —
Purchases of property, equipment and construction in progress (3,235,125 ) (739,560 )
Cash received for note receivable 5,000 5,000
Cash received from construction escrow accounts 794,807 —
Cash acquired in acquisition 6,143 94,596
Cash paid to acquisition escrow accounts (381,932 ) —
Capitalized license fees —   (2,790 )
Purchase of license (1,130,872 ) —
Net Cash Used in Investing Activities (4,012,703 ) (2,328,122 )

Financing Activities:
Proceeds from the sale of common stock 288,841 12,959,808
Payment of debt discount (35,750 ) —
Proceeds from the issuance of debt 3,980,762 1,355,000
Payment of debt (1,944,294 ) (3,283,879 )
Net Cash Provided by Financing Activities 2,289,559 11,030,929

Net Increase (Decrease) in Cash (1,349,332 ) 4,223,200

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

Cash and cash equivalents - End of Period $ 105,128 $ 4,307,877

Supplemental disclosure of cash flow information:
Interest paid in cash $ 1,990,720 $ 461,702
Income taxes paid in cash $ —   $ —

Supplemental disclosure of non-cash investing and financing activities:
Stock issued for acquisitions $ 65,000 $ 65,000,000
Stock issued for acquisition of a license $ 336,000 $ —
Accrued interest transferred to debt $ 1,762 $ 160,590
Warrants issued for debt and acquisition $ 574,239 $ 52,007,264
Stock issued for debt $ 203,194 $ —
Non-controlling interest $ 15,633 $ —
Stock issuance costs paid in stock $ 89,645 $ —
Fixed assets purchased with debt $ —   $ 50,914
Debt issued for acquisition of a license $ 200,000 $ —
Debt proceeds used to pay debt discounts $ 80,000 $ —
Land purchased with escrow funds and deposit $ 3,000,000 $ —
Stock issued to pay accounts payable and prepay expenses $ 292,500 $ —
Operating lease right of use asset and liability $ 603,542 $ —
Beneficial conversion feature on convertible debt $ 495,047 $ 428,802
Construction in progress paid with escrow funds $ 4,937,018 $ —
Accrued debt discount fees $ 75,000 $ —
Debt discount amortization capitalized to construction in progress $ 1,763,399 $ —
Accrued liabilities capitalized in construction in progress $ 272,981 $ —

	For the three months ended			For the three months ended			For the nine months ended			For the nine months ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Revenues, net	$	4,931,322		$	6,693,061		$	17,755,519		$	15,843,256
Cost of revenues		3,341,367			3,802,447			11,089,560			8,531,623
Gross profit		1,589,955			2,890,614			6,665,959			7,311,633

Operating expenses
Professional fees and outside services		993,452			442,483			2,207,618			1,350,196
Payroll and employee related expenses		2,683,722			1,592,673			7,889,672			4,014,819
Sales and marketing		207,213			262,473			1,260,551			389,819
Depreciation and amortization		439,052			112,159			1,320,664			360,601
Other operating expenses		1,114,323			728,100			2,747,158			1,292,154
Provision for (recovery of) bad debt		—			—			(5,000	)		—
Total expenses		5,437,762			3,137,888			15,420,663			7,407,589

Loss from operations		(3,847,807	)		(247,274	)		(8,754,704	)		(95,956	)

Other income (expense)
Interest expense		(1,625,155	)		(629,265	)		(3,932,918	)		(1,806,019	)
Other income		—			42,634			318			42,634
Total other income (expense), net		(1,625,155	)		(586,631	)		(3,932,600	)		(1,763,385	)

Net loss, before income tax provision (benefit)		(5,472,962	)		(833,905	)		(12,687,304	)		(1,859,341	)

Income tax provision (benefit)		4,624			—			7,948			—

Net loss		(5,477,586	)		(833,905	)		(12,695,252	)		(1,859,341	)
Less: Net loss attributable to non-controlling interest		(7,109	)		—			(1,683	)		—

Net loss attributable to Item 9 Labs Corp.	$	(5,470,477	)	$	(833,905	)	$	(12,693,569	)	$	(1,859,341	)

Basic net income (loss) per common share	$	(0.06	)	$	(0.01	)	$	(0.13	)	$	(0.03	)

Basic weighted average common shares outstanding		96,162,616			92,209,521			95,446,846			72,115,022

Diluted net income (loss) per common share		(0.06	)		(0.01	)		(0.13	)		(0.03	)

Diluted weighted average common shares outstanding		96,162,616			92,209,521			95,446,846			72,115,022

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

F-3

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE AND NINE MONTHS ENDED JUNE 30, 2022 AND 2021


	Item 9 Labs Corp. Equity
					Additional												Non-
	Common Stock				Paid-in			Treasury Stock						Accumulated			Controlling
	Shares		Amount		Capital			Shares			Amount			(Deficit)			Interest			Total
Balance at September 30, 2020		68,336,113	$	6,834	$	44,426,737			(12,300,000	)	$	(13,450,000	)	$	(22,968,322	)	$	—		$	8,015,249

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

Stock issued for cash, net		8,433,437		843		7,167,740			—			—			—			—			7,168,583
Stock issued for acquisition		19,080,000		1,908		64,998,092			—			—			—			—			65,000,000
Warrants issued for acquisition		—		—		51,081,066			—			—			—			—			51,081,066
Stock to be issued for convertible notes		1,335,000		134		(134	)		—			—			—			—			—
Warrants issued with convertible notes		—		—		926,198			—			—			—			—			926,198
Beneficial conversion features		—		—		428,802			—			—			—			—			428,802
Stock based compensation		—		—		304,672			—			—			—			—			304,672
Net income		—		—		—			—			—			49,020			—			49,020
Balance at March 31, 2021		104,109,521		10,411		175,591,614			(12,300,000	)		(13,450,000	)		(23,993,758	)		—			138,158,267

Stock issued for cash, net		400,000		40		339,960			—			—			—			—			340,000
Adjustment to acquisition price, warrants		—		—		(2,359,063	)		—			—			—			—			(2,359,063	)
Stock based compensation		—		—		304,672			—			—			—			—			304,672
Net loss		—		—		—			—			—			(833,905	)		—			(833,905	)
Balance at June 30, 2021		104,509,521	$	10,451	$	173,877,183			(12,300,000	)	$	(13,450,000	)	$	(24,827,663	)	$	—		$	135,609,971

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
Stock issued for debt inducement		142,365		14		128,348			—			—			—			—			128,362
Warrants issued with debt		—		—		574,239			—			—			—			—			574,239
Beneficial conversion feature		—		—		470,047			—			—			—			—			470,047
Issuance of shares for services		16,666		2		25,830			—			—			—			—			25,832
Stock based compensation		—		—		507,294			—			—			—			—			507,294
Stock issued on exercise of options		9,896		1		(1	)		—			—			—			—			—
Net loss		—		—		—			—			—			(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

Stock issued for cash, net		278,000		28		288,813			—			—			—			—			288,841
Stock issued for acquisition		69,892		7		64,993			—			—			—			—			65,000
Stock issued for licenses		300,000		30		335,970			—			—			—			—			336,000
Stock issued for debt inducement		25,000		2		24,998			—			—			—			—			25,000
Beneficial conversion feature		—		—		25,000			—			—			—			—			25,000
Issuance of shares for services		335,159		34		328,466			—			—			—			—			328,500
Stock based compensation		—		—		1,091,560			—			—			—			—			1,091,560
Stock issued on exercise of options		18,033		2		(2	)		—			—			—			—			—
Non-controlling interest		—		—		—			—			—			—			15,633			15,633
Net income (loss)		—		—		—			—			—			(3,878,078	)		5,426			(3,872,652	)
Balance at March 31, 2022		108,269,428		10,827		137,280,385			(12,300,000	)		(13,450,000	)		(41,097,186	)		21,059			82,765,085

Stock issued for cash, net		263,313		26		254,311			—			—			—			—			254,337
Issuance of shares for services		29,965		3		30,017			—			—			—			—			30,020
Stock based compensation		—		—		934,681			—			— ��			—			—			934,681
Net loss		—		—		—			—			—			(5,470,477	)		(7,109	)		(5,477,586	)
Balance at June 30, 2022		108,562,706		10,856		138,499,394			(12,300,000	)		(13,450,000	)		(46,567,663	)		13,950			78,506,537

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

F-4

ITEM 9 LABS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the nine months ended			For the nine months ended
	June 30, 2022			June 30, 2021
Operating Activities:
Net loss	$	(12,695,252	)	$	(1,859,341	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		217,363			100,535
Amortization of intangible assets		1,103,301			260,066
Amortization of right of use asset		89,844			39,818
Amortization of debt discounts		2,311,783			565,021
Common stock issued for services		498,983			163,236
Stock based compensation expense		2,533,535			914,016
Recovery of bad debt		(5,000	)		—
Loss on disposal of fixed assets		10,841			—
Changes in operating assets and liabilities:
Accounts receivable		856,776			(1,703,092	)
Inventory		2,276,205			(6,348,573	)
Prepaid expenses and other assets		(339,994	)		(192,292	)
Deposits		(86,604	)		—
Accounts payable		2,107,137			524,088
Accrued payroll and payroll taxes		(832,080	)		(114,703	)
Income tax payable		7,948			—
Accrued interest		542,841			643,068
Accrued expenses		(316,760	)		147,868
Deferred revenue		(214,994	)		22,844
Operating lease liability		(82,021	)		(39,818	)
Net Cash Used in Operating Activities		(2,016,148	)		(6,877,259	)

Investing Activities:
Deposit on acquisition		—			(1,685,368	)
Cash paid for acquisition		(140,726	)		—
Purchases of property, equipment and construction in progress		(2,918,584	)		(2,263,388	)
Cash received for note receivable		5,000			5,000
Cash received from construction escrow accounts		816,227			—
Cash acquired in acquisition		6,143			94,596
Cash paid to acquisition escrow accounts		(406,932	)		—
Capitalized license fees		—			(2,790	)
Purchase of license		(1,130,872	)		—
Net Cash Used in Investing Activities		(3,769,744	)		(3,851,950	)

Financing Activities:
Proceeds from the sale of common stock		555,911			13,298,965
Costs for sale of common stock		(12,733	)		—
Payment of debt discount		(50,750	)		—
Proceeds from the issuance of debt		7,282,763			1,355,000
Payment of debt		(3,002,097	)		(3,712,541	)
Net Cash Provided by Financing Activities		4,773,094			10,941,424

Net Increase (Decrease) in Cash		(1,012,798	)		212,215

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

Cash and cash equivalents - End of Period	$	441,662		$	296,892

Supplemental disclosure of cash flow information:
Interest paid in cash	$	3,855,724		$	597,930
Income taxes paid in cash	$	—		$	—

Supplemental disclosure of non-cash investing and financing activities:
Stock issued for acquisitions	$	65,000		$	65,000,000
Stock issued for acquisition of a license	$	336,000		$	—
Accrued interest transferred to debt	$	1,762		$	160,590
Warrants issued for debt and acquisition	$	574,239		$	49,648,201
Stock issued for debt	$	223,214		$	—
Non-controlling interest	$	15,633		$	—
Stock issuance costs paid in stock	$	89,645		$	—
Fixed assets purchased with debt	$	—		$	50,914
Debt issued for acquisition of a license	$	200,000		$	—
Debt proceeds used to pay debt discounts	$	80,000		$	—
Land purchased with escrow funds and deposit	$	3,000,000		$	—
Stock issued to pay accounts payable and prepay expenses	$	292,500		$	—
Operating lease right of use asset and liability	$	934,098		$	—
Beneficial conversion feature on convertible debt	$	495,047		$	428,802
Construction in progress paid with escrow funds	$	6,426,063		$	—
Accrued debt discount fees	$	75,000		$	—
Debt discount amortization capitalized to construction in progress	$	2,620,476		$	—
Accrued liabilities capitalized in construction in progress	$	612,158		$	—
Amortized debt discount capitalized in construction in progress	$	2,620,476		$	—

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

F-5

ITEM 9 LABS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Description of Business

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~~production 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~~sale of 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, 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 (30) Unity Rd retail dispensary locations in twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating in 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.

Principles of Consolidation

The accompanying condensed consolidated financial statements of the Company as of ~~March 31,~~June 30, 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 audited financial statements filed with the SEC on our Form 10-K on January 13, 2022. 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 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 ~~March 31,~~June 30, 2022 are not necessarily indicative of the results to be expected for the year ending September 30, 2022.

The condensed consolidated financial statements of the Company include the accounts of the Company, and its wholly-owned 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.

~~F-6~~

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 periods’ net income, net loss or accumulated deficit.

F-6

Accounting Estimates

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 th~~ose~~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

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 ~~March 31,~~June 30, 2022 and September 30, 2021.

Licenses

Cannabis licenses vary in term for each jurisdiction. The Company capitalizes all costs associated with the acquisition of cannabis licenses in the year the license is obtained. Subsequent measurement is determined by the length of the term of the license. The Company acquired licenses during the ~~three~~nine months ended ~~March 31,~~June 30, 2022 that have indefinite useful lives, subject to annual renewals. Costs associated with maintaining licenses (annual fees) are expensed as incurred. The anticipated maintenance fees are not expected to be material to the condensed consolidated financial statements. Licenses are included on the balance sheet under the heading Intangible assets, net at ~~March 31,~~June 30, 2022 and September 30, 2021.

Revenue Recognition

Cultivation revenue

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 of the Company's 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 and nine months ended ~~March 31,~~June 30, 2022 and 2021, all of the Company's cultivation 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. The fees paid for operating under the contract are expensed to cost of revenues.

~~F-7~~

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, rights of return or warranties.

F-7

Franchising revenue

Through OCG, Inc., 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 is recognized into revenue on the condensed consolidated statement of operations when (or as) the performance obligations included in the agreements are satisfied. Deferred revenue had a balance of $~~565,847~~560,849 and $775,843 at ~~March 31,~~June 30, 2022 and September 30, 2021, respectively, and is included in deferred revenue on the condensed consolidated balance sheets. Revenue recognized during the three months ended ~~March 31,~~June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $~~204,998~~4,998 and $0, respectively. Revenue recognized during the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021 that was included in deferred revenue at September 30, 2021 and 2020 was $~~209,996~~214,994 and $0, respectively.

Net ~~Income (Loss)~~Loss Per Share

Basic net ~~income (loss)~~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 ~~income (loss)~~net loss per share reflects the potential dilution of securities that could share in the losses of an entity. Diluted income (loss) per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method and using the if-converted method for outstanding convertible debt. Under the treasury stock method, the Company will calculate the number of shares issuable under the terms of its options and warrants based on the average market price of Company common stock during the period, and include that number in the total diluted shares figure for the period. Under the if-converted method, the Company will calculate the shares issuable under the terms of its convertible debt instruments. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. ~~A reconciliation of basic and diluted income (loss) per share is as follows:~~

Three months ended
March 31,

Six months ended
March 31,
2022 2021 2022 2021
Numerator:
Net income (loss) attributable to Item 9 Labs Corp. $ (3,878,078 ) $ 49,020 $ (7,223,092 ) $ (1,025,436 )

Denominator:
Weighted average common shares outstanding 95,271,726 65,880,141 95,088,960 62,143,521
Dilutive common share equivalents
Options —   2,141,528 —   —
Warrants —   14,161,326 —   —
Convertible notes —   2,755,240 —   —
Weighted average diluted shares outstanding 95,271,726 84,938,235 95,088,960 62,143,521

Income (loss) per share
Basic $ (0.04 ) $ 0.00 $ (0.08 ) $ (0.02 )
Diluted $ (0.04 ) $ 0.00 $ (0.08 ) $ (0.02 )

~~F-8~~

The following table summarizes the securities outstanding at ~~March 31,~~June 30, 2022 and 2021 that were excluded from the diluted net loss per share calculation for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 and ~~the six months ended March 31,~~ 2021 because the effect of including these potential shares was antidilutive due to the Company’s net loss.

	2022		2021		2022		2021
Potentially dilutive common share equivalents
Options		6,237,693		3,211,709		6,223,462		3,211,709
Warrants		47,938,030		16,500,000		48,069,687		41,415,000
Convertible notes		2,661,571		2,526,969		3,510,792		2,707,238
Potentially dilutive shares outstanding		56,837,294		22,238,678		57,803,941		47,333,947

F-8

Warrants, Conversion Options and Debt Discounts

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 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 ~~March 31,~~June 30, 2022 and September 30, 2021, none of the conversion options embedded in the Company’s debt were required to be bifurcated.

Segment Reporting

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. The Company allocates its resources and assesses the performance of its sales activities based on the services performed by its subsidiaries. For the three and ~~six~~nine months ended ~~March 31,~~June 30, 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”).

Business Combination

The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.

F-9

Recently Issued Accounting Pronouncements

Pending Adoption

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, 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. 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 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.

Note 2 - Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the 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 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 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 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 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 products to dispensaries throughout the state of Arizona. The 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. The Company believes that it will ~~continue reducing~~reduce the overall costs of revenues and costs of revenues will increase at a lower rate than revenues in future periods, which will lead to increased profit margins.

~~F-10~~

Financing. To date, the Company has financed its operations primarily with loans from 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 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.

F-10

Note 3 – Inventory

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

	March 31,		September 30,		June 30,		September 30,
	2022		2021		2022		2021
Raw materials and work in process	$	2,811,583	$	4,291,095	$	1,817,094	$	4,291,095
Finished goods		1,404,820		1,052,375		1,596,924		1,052,375
Packaging and other		603,216		1,047,881		716,761		1,047,881
	$	4,819,619	$	6,391,351	$	4,130,779	$	6,391,351

Note 4 – Acquisitions

Oklahoma City dispensary acquisition

In January 2022, 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 a dispensary, excluding cannabis and cannabis related products and licenses, and assumed the dispensary’s lease. The purchase price was ~~$130,000,~~$130,000, payable at ~~$32,500~~$32,500 on the effective date and ~~$32,500~~$32,500 each 30, 60 and 90 days after the effective date. ~~The accrued purchase price balance is $119,276 at March 31, 2022 and is included in accrued expenses on the condensed consolidated balance sheet.~~ In addition, the Company will pay ~~$1,667~~$1,667 per month for 35 months. Finally, the Company paid the seller ~~$65,000~~$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 69,892 shares of common stock related to the Co-Management Agreement. The accrued purchase price balance is $49,274 at June 30, 2022 and is included in accrued expenses on the condensed consolidated balance sheet.

As of ~~March 31,~~June 30, 2022, the consideration paid or accrued for this acquisition was ~~determined~~ as follows:

Cash	$	190,000
Common stock		65,000
	$	255,000

F-11

The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired as of the transaction date:

Tangible assets acquired

Cash	$	6,143
Fixed assets		80,287
Tangible net assets acquired		86,430
Goodwill		168,570

Consideration paid	$	255,000

Adams County acquisition

On October 6, 2021, the Company entered into an Asset Purchase Agreement with Nebrina Adams County LLC to purchase certain assets, which include licenses, a lease and certain personal property to operate a licensed recreational cannabis dispensary (the “Adams County Acquisition”). The purchase price is ~~$1,651,789~~$1,651,789 comprised of ~~$1.0~~$1.0 million of cash, a ~~$200,000~~$200,000 note, and 300,000 shares of the Company’s common stock, valued at ~~$1.12~~$1.12 per share. The note has an interest rate of 5% per annum and a term of 18 months and payable in six installments on the last day of each three-month period following the Closing Date. The Adams County Acquisition closed on March 2, 2022. The acquisition is not considered a business combination under ASC 805, Business Combinations, as a substantive process was not acquired. Substantially all of the consideration paid was allocated to the licenses purchased.

As of ~~March 31,~~June 30, 2022, the consideration paid in this asset acquisition was ~~determined~~ as follows:

Cash	$	1,000,000
Debt		200,000
Common stock		336,000
Direct costs of acquisition		130,872
	$	1,666,872

The Herbal Cure pending acquisition

On March 11, 2022, the Company entered into an Asset Purchase Agreement with The Herbal Cure LLC (“Seller”), pursuant to which, the Company is purchasing certain assets from the Seller. The total purchase price for the assets to be acquired is ~~$5,750,000,~~$5,750,000, payable as follows:

(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;~~$250,000;

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

(iii) ~~$700,000~~$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%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~~$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%.

~~During March~~At June 30, 2022, ~~$225,000 of~~ the ~~$250,000~~$250,000 down payment was paid and is included in Other Assets on the condensed consolidated balance ~~sheet as of March 31, 2022.~~sheet. At ~~March 31,~~June 30, 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 and ~~six~~nine months ended June 30, 2022. The Company can provide no assurance that it will be successful in finalizing this acquisition.

Sessions pending 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 Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD) (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 ~~31,~~4, 2022.

(ii) At the Closing, Purchaser shall pay to Shareholders the Estimated Purchase Price of Twelve Million Eight Hundred Thousand Dollars ($12,800,000.00 USD), as adjusted, in immediately available funds;

(iii) Four Million One Hundred Thousand Dollars ($4,100,000.00), 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) Four Million One Hundred Thousand Dollars ($4,100,000.00), 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 June 30, 2022, the $156,902 Exclusivity Deposit has been paid and is included in Other Assets on the condensed consolidated balance sheet. At June 30, 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 and nine months ended June 30, 2022. The Company can provide no assurance that it will be successful in finalizing this acquisition.

F-12

Note 5 – Variable Interest Entity

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 (see Note 4). 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 ~~March 31,~~June 30, 2022.

March 31,
Assets 2022
Current assets
Inventory $ 24,383
Total assets $ 24,383

Liabilities
Current liabilities
Income tax payable $ 3,324
Total liabilities $ 3,324

	June 30,
Assets	2022
Current assets
Inventory	$	27,773
Total assets	$	27,773

Liabilities
Current liabilities
Income tax payable	$	7,948
Total liabilities	$	7,948

The following table presents the operations (after intercompany eliminations) of the entity that is a VIE and consolidated by the Company for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022.

	Three and six months ended March 31,		Three months ended June 30,		Nine months ended June 30,
	2022		2022		2022
Revenues, net	$	33,337	$	40,245	$	73,582
Cost of revenue		23,017		21,111		44,128
Gross profit		10,320		19,134		29,454
Income tax expense		3,324		4,624		7,948
Net income	$	6,996	$	14,510	$	21,506

F-13

Note 6 – Goodwill and Intangible Assets

Goodwill and identifiable intangible assets, including licenses, consist of the following as of ~~March 31,~~June 30, 2022 and September 30, 2021:

	Gross Carrying		Accumulated		Accumulated				Gross Carrying		Accumulated		Accumulated
	Amount		Amortization		Impairment		Net		Amount		Amortization		Impairment		Net
March 31, 2022
June 30, 2022
Finite lived intangible assets:
Trade names and trademarks	$	8,570,848	$	925,900	$	—	$	7,644,948	$	8,570,848	$	1,140,172	$	—	$	7,430,676
Customer relationships		290,000		290,000		—		—		290,000		290,000		—		—
Websites and other intellectual property		2,470,000		1,078,476		955,223		436,301		2,470,000		1,144,470		955,223		370,307
Franchise and consulting agreements		3,970,000		831,669		—		3,138,331		3,970,000		919,170		—		3,050,830
Total finite lived intangible assets		15,300,848		3,126,045		955,223		11,219,580		15,300,848		3,493,812		955,223		10,851,813
Indefinite lived intangible assets:
Licenses		8,370,853		—		—		8,370,853		8,370,853		—		—		8,370,853
Total intangible assets	$	23,671,701	$	3,126,045	$	955,223	$	19,590,433	$	23,671,701	$	3,493,812	$	955,223	$	19,222,666

	Gross Carrying		Accumulated		Accumulated
		Amount		Amortization		Impairment		Net
September 30, 2021
Finite lived intangible assets:
Trade names and trademarks	$	8,570,848	$	497,356	$	—	$	8,073,492
Customer relationships		290,000		290,000		—		—
Websites and other intellectual property		2,470,000		946,488		955,223		568,289
Franchise and consulting agreements		3,970,000		656,667		—		3,313,333
Total finite lived intangible assets		15,300,848		2,390,511		955,223		11,955,114
Indefinite lived intangible assets:
Licenses		6,703,981		—		—		6,703,981
Total intangible assets	$	22,004,829	$	2,390,511	$	955,223	$	18,659,095

							Gross Carrying
					Gross Carrying		Amount
					Amount		Goodwill
	Gross Carrying Amount Goodwill		Gross Carrying Amount Goodwill Impairment		Goodwill		Impairment
Changes in goodwill and indefinite lived intangibles:
Balance at September 30, 2021	$	62,868,420	$	4,803,604	$	62,868,420	$	4,803,604
Additional goodwill related to Oklahoma City dispensary acquisition		168,570		—		168,570		—
Balance at March 31, 2022	$	63,036,990	$	4,803,604
Balance at June 30, 2022					$	63,036,990	$	4,803,604

As of ~~March 31,~~June 30, 2022, the cultivation and processing licenses from the state of Nevada, included above, have not been transferred to the Company as the transfer is awaiting regulatory approval.

During the three months ended June 30, 2022, the Company has noted indicators of the possible impairment of its goodwill and intangible assets. The Company will analyze these indicators during the fourth quarter of the year ended September 30, 2022 and determine if any impairment has occurred. Given the carrying value of the Company’s goodwill and intangible assets at June 30, 2022, the occurrence of an impairment may be material to the Company’s financial position and results of operations.

F-14

Note 7 - Property and Equipment, Net

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

	March 31,			September 30,			June 30,			September 30,
	2022			2021			2022			2021
Cultivation and manufacturing equipment	$	525,422		$	506,271		$	551,045		$	506,271
Computer equipment and software		266,427			266,427			266,427			266,427
Leasehold improvements		49,667			—			49,667			—
Buildings and improvements		2,811,340			2,785,781			2,811,340			2,785,781
		3,652,856			3,558,479			3,678,479			3,558,479
Accumulated Depreciation		(624,767	)		(479,320	)		(696,052	)		(479,320	)
		3,028,089			3,079,159			2,982,427			3,079,159
Land		3,455,563			380,584			3,455,563			380,584
Construction on progress		17,526,087			7,418,105			19,869,222			7,418,105
Property and Equipment, Net	$	24,009,739		$	10,877,848		$	26,307,212		$	10,877,848

During the ~~six~~nine months ended ~~March 31,~~June 30, 2022, 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 and ~~six~~nine months ended ~~March 31,~~June 30, 2022, including the construction of the Nevada facility and the expansion of the Arizona 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 ~~March 31,~~June 30, 2022 and 2021 was ~~$74,710~~$71,285 and ~~$32,086,~~$35,965, respectively. Depreciation expense for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021 was ~~$146,078~~$217,363 and ~~$64,570,~~$100,535, respectively.

Note 8 -– Debt

Effective Date Maturity Date Annual Interest Rate
Balance at March 31,
2022

Balance at September 30,
2021
Conversion 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 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
C-11 2/21/2022 8/31/2022 24 % 250,000 —   1.10
3,620,000 1,950,000
Less: unamortized discounts (804,120 ) (672,606 )
$ 2,815,880 $ 1,277,394

	Convertible Notes

	Effective		Maturity	Annual Interest			Balance at			Balance at		Conversion
	Date		Date	Rate			June 30, 2022			September 30, 2021		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			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
C-11	2/21/2022		8/31/2022	24	%		250,000			—		1.10
							3,620,000			1,950,000
		Less: unamortized discounts					(353,821	)		(672,606	)
						$	3,266,179		$	1,277,394

(C-2) Convertible Viridis Note

On March 23, 2020, the Company borrowed proceeds from a related party, Viridis I9 Capital LLC (“Viridis”), in the amount of $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 ~~March 31,~~June 30, 2022 the Viridis note was in default. The Viridis note remains in default as of this filing, though the parties are negotiating a long-term arrangement.

F-15

(C-9) Convertible Tysadco Note

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 common stock. The note included warrants to purchase a total of 825,000 shares of the Company’s common stock for $3 per share, with a 4 year term. Further, the Company issued 67,365 shares of common stock, valued at $112,500 as an inducement to the lenders to enter into the note agreements. 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. 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, is amortized to interest expense over the term of the debt. The one-time interest charge was accrued at ~~March 31,~~June 30, 2022.

(C-10) Convertible Gaines Note

On October 29, 2021, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The notes included warrants to purchase a total of 750,000 shares of the Company’s 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 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 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. The resulting discount of $561,272, which also included debt issuance costs of $44,582, is amortized to interest expense over the term of the debt. This convertible note is currently due on demand and interest is paid monthly.

(C-11) Convertible Goldstein Note

On February 21, 2022, the Company entered into a convertible note agreement. The outstanding and unpaid principal and accrued interest is convertible, in whole, into shares of the Company’s common stock. The Company issued 25,000 shares of common stock, valued at $25,000 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 $50,000 is amortized to interest expense over the term of the debt.

The future minimum payments of the Company’s convertible debt obligations as of ~~March 31,~~June 30, 2022 are as follows. The unamortized discount will be amortized through September 2022.

Year ended	Year ended				Year ended
March 31,		Amount
June 30,					June 30,	Amount
	2023	$	3,620,000		2023	$	3,620,000
			3,620,000				3,620,000
	Less: unamortized discount		(804,120	)	Less: unamortized discount		(353,821	)
		$	2,815,880			$	3,266,179

F-16

~~Notes Payable~~

	Notes Payable

	Effective		Maturity	Annual Interest			Balance at			Balance at
	Date		Date	Rate			June 30, 2022			September 30, 2021			Secured by
f	5/1/2020		11/1/2023		10	%		1,386,370			1,386,370		2nd DOT AZ property
h	5/1/2020		5/1/2023		15	%		283,666			283,666		N/A
i	2/14/2020		10/14/2022		2	%		—			312,500		Secured by licenses
l	8/18/2021		1/25/2023		36	%		1,713,707			2,162,590		Future revenues
n	12/20/2020		12/20/2021		9	%		—			13,148		Secured by vehicles
o	3/19/2021		4/1/2024		10	%		670,932			816,582		N/A
p	2/1/2021		6/30/2022		15	%		270,590			520,590		N/A
q	8/6/2021		2/6/2023		16	%		13,500,000			13,500,000		1st AZ property and other personal property
r	8/6/2021		2/6/2023		16	%		5,500,000			5,500,000		1st NV property and other personal property
s	9/30/2021		12/31/2021		18	%		500,000			500,000		Restricted common stock
t	3/19/2021		7/19/2022		18	%		250,000			500,000		N/A
u	2/22/2022		2/28/2023		36	%		547,806			—		Future revenues
v	2/22/2022		2/28/2023		36	%		176,453			—		Future revenues
w	3/4/2022		On demand		15	%		3,652,000			—
x	3/10/2022		5/10/2022		20	%		250,000			—		N/A
y	3/2/2022		8/1/2023		5	%		166,667			—		N/A
								28,868,191			25,495,446
		Less: unamortized discounts						(2,886,822	)		(6,002,045	)
							$	25,981,369		$	19,493,401

Effective Date Maturity Date
Annual Interest Rate

Balance at March 31,
2022

Balance at September 30,
2021
Secured by
f 5/1/2020 11/1/2023 10 % 1,386,370 1,386,370 2nd DOT AZ property
h 5/1/2020 5/1/2023 15 % 283,666 283,666 N/A
i 2/14/2020 10/14/2022 2 % —   312,500 Secured by licenses
l 8/18/2021 8/18/2022 36 % 2,205,266 2,162,590 Future revenues
n 12/20/2020 12/20/2021 9 % —   13,148 Secured by vehicles
o 3/19/2021 4/1/2024 10 % 734,970 816,582 N/A
p 2/1/2021 6/30/2022 10 % 370,590 520,590 N/A
q 8/6/2021 2/6/2023 16 % 13,500,000 13,500,000 1st AZ property and other personal property
r 8/6/2021 2/6/2023 16 % 5,500,000 5,500,000 1st NV property and other personal property
s 9/30/2021 12/31/2021 18 % 500,000 500,000 Restricted common stock
t 3/19/2021 7/19/2022 18 % 425,000 500,000 N/A
u 2/22/2022 2/28/2023 36 % 688,472 —   Future revenues
v 2/22/2022 2/28/2023 36 % 229,658 —   Future revenues
w 3/4/2022 On demand 15 % 350,000 —
x 3/10/2022 5/10/2022 20 % 250,000 —   N/A
y 3/2/2022 8/1/2023 5 % 200,000 —   N/A
26,623,992 25,495,446
Less: unamortized discounts (3,842,037 ) (6,002,045 )
$ 22,781,955 $ 19,493,401

(f) Viridis AZ

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 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^ndposition. 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 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 and a term of 5 years. Accrued interest in the amount of $186,370 was added to the principal balance of the note, making the total principal $1,386,370. Interest only payments of $11,553 shall be paid monthly until November 1, 2020 at which time monthly principal and interest payments of $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 the note and all unpaid principal and interest, accrued at the default interest rate 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 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 debt during the year ended September 30, 2021.

F-17

(h) Viridis (unsecured)

The Company's subsidiary, BSSD Group, LLC borrowed $269,000 from Viridis, a related party, in December 2019. This note bears annualized interest at 15%. On May 1, 2020, under a troubled debt restructuring, the Company renegotiated the $269,000 note payable. Accrued interest in the amount of $14,666 was added to the principal balance of the note, making the total principal $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 and a term of 5 years. Payments of principal and interest in the amount of $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 the note and all unpaid principal and interest, accrued at the default interest rate of 18% per annum, will be added to the balloon payment at maturity.

(l) Upwise Capital

In August 2021, the Company executed on a short-term financing arrangement. The proceeds of $2.5 million are being utilized to further expand the production capabilities of the operations in Arizona and to complete the Nevada facility. Payments of $64,762 are due weekly until $3.264 million is repaid. This results in an effective interest rate of approximately 36%.

On January 26, 2022, the Company executed a second short-term financing arrangement. The proceeds of $2.5 million were used to repay the first short-term financing arrangement, discussed above, in the amount of approximately $1.839 million, and the remainder of the proceeds was used for working capital purposes. Payments of $66,468 are due weekly until $3.35 million has been repaid. This results in an effective interest rate of 36%. The repayment of the first short-term financing was accounted for as an extinguishment. As such, all previously unamortized discount in the amount of $46,588 and imputed interest in the amount of $483,840 was capitalized to construction in progress during January 2022. Fees paid for the second short-term financing arrangement in the amount of $91,000 have been recorded as a discount and will be amortized to interest expense over the term of the arrangement. See Note 14.

(o) OCG Officers Debt

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 notes is currently in default. The Company and the lender are currently negotiating an amendment.~~

(p) Stockbridge Amended Debt

In February 2021, the Company and Stockbridge Enterprises, a related party, under a trouble debt restructuring, agreed to restructure and settle its outstanding notes. The total outstanding balance of $1,660,590, including accrued interest, were to be repaid under a new promissory note, calling for a down payment of $300,000 (paid at time of signing), $120,000 monthly payments for 11 months with the remaining balance of $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% per annum until January 25, 2022. Principal payments in the amount of $50,000 are 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, 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. The resulting discount of $58,352 was fully amortized to interest expense during the six months ended March 31, 2022.

Effective March 31, 2022, the debt was amended to extend the maturity date to June 30, 2022, interest payments are due on April 1, May 1 and June 1, 2022. Principal payments in the amount of $50,000 are due on April 15, May 15 and June 15, 2022 and a final balloon payment of outstanding principal and interest in the amount of $223,972 is due on June 30, 2022. This note is currently due on demand and interest is paid monthly.

(s) Viridis $500,000

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 on the outstanding unpaid payroll tax liability. The debt is collateralized by restricted common stock in the amount of twice the balance of the debt. It is anticipated that the note will include warrants to purchase a total of 500,000 shares of the Company’s common stock for $0.60 per share, with a five-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 a payment forbearance for the note and all unpaid principal and interest, accrued at the default interest rate of 18% per annum beginning January 1, 2022, will be paid at maturity, which has been postponed to a date that has not yet been determined.

F-18

(t) Chessler note

Prior to the acquisition, OCG entered into a settlement agreement with itits former landlord, which included a note agreement for $500,000. During March 2022, this note agreement was modified to extend the maturity date to July 19, 2022 and add an interest rate of 18% per annum. The modified note also calls for principal payments of $75,000 on the effective date of the note, $75,000 on April 10, 2022, $100,000 on May 22, 2022 and $250,000 at maturity, plus accrued and unpaid interest. The principal balance of this note plus accrued and unpaid interest was paid subsequent to June 30, 2022.

(u) Lendspark

In February 2022, the Company executed on a short-term financing arrangement for proceeds of $750,000. Payments of $20,400 are due weekly until approximately $1.02 million is repaid. This results in an effective interest rate of approximately 36%. ~~Administrative fees~~Fees in the amount of ~~$22,500~~$48,765 have been recorded as a discount and ~~will be~~are being amortized to interest expense over the term of the arrangement. See Note 14.

(v) Upwise Capital 2

In February 2022, the Company executed on a third short-term financing arrangement with Upwise Capital for proceeds of $250,000. Payments of $6,746 are due weekly until $340,000 is repaid. This results in an effective interest rate of approximately 36%. ~~Origination fees~~Fees in the amount of ~~$7,500~~$16,255 have been recorded as a discount and ~~will be~~are being amortized to interest expense over the term of the arrangement. See Note 14.

(w) Viridis working capital ~~loan~~loans

~~In March~~During the nine months ended June 30, 2022, the Company received aseveral short-term working capital ~~loan~~loans from Viridis, a related party, in the amount of ~~$400,000.~~$3,702,000. The terms of ~~this loan~~these short term loans are still being determined, however, an interest rate of 15% has been estimated.

(x) Non-convertible Gaines Note

On March 10, 2022, the Company entered into a short-term promissory note for $250,000. The short-term promissory note is due and payable in monthly payments of interest only, with all principal and any accrued and unpaid interest due at maturity. This convertible note is currently due on demand and interest is paid monthly.

(y) Nebrina Adams County Note

Effective with the close of the Adams County acquisition (see Note 4), 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.

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

Year ended	Year ended				Year ended
March 31,		Amount
June 30,					June 30,	Amount
	2023	$	25,321,267		2023	$	27,563,901
	2024		2,227,019		2024		1,862,175
	2025		—		2025		—
			27,548,286				29,426,076
	Less: unamortized discount		(3,842,037	)	Less: unamortized discount		(2,886,822	)
	Less: imputed interest		(924,294	)	Less: imputed interest		(557,885	)
			22,781,955				25,981,369
	Less: current portion		(21,136,912	)	Less: current portion		(24,532,509	)
		$	1,645,043			$	1,448,860

F-19

A summary of interest expense for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021 is as follows.


	Three months ended March 31,					Six months ended March 31					Three months ended June 30,					Nine months ended June 30, 2022
	2022			2021		2022			2021		2022			2021		2022			2021
Amortization of debt discounts	$	1,626,013		$	122,038	$	3,491,724		$	248,302	$	1,440,535		$	316,320	$	4,932,259		$	564,622
Stated interest paid or accrued		1,361,523			346,349		2,565,455			915,793		1,508,210			301,933		4,073,665			1,217,726
Finance charges and other interest		2,178			—		2,995			12,659		22,021			11,012		25,016			23,671
		2,989,714			468,387		6,060,174			1,176,754		2,970,766			629,265		9,030,940			1,806,019
Less: interest capitalized to construction in progress		(1,892,341	)		—		(3,752,411	)		—		(1,345,611	)		—		(5,098,022	)		—
	$	1,097,373		$	468,387	$	2,307,763		$	1,176,754	$	1,625,155		$	629,265	$	3,932,918		$	1,806,019

Note 9 - Concentrations

For the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, substantially all 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. One of our license holder’s customers that the Company’s products are distributed to accounts for 33% of our cultivation revenue for the nine months ended June 30, 2022. Should our products no longer be distributed to this customer of our license holder, it would have a material adverse effect on our operations.

Note 10 - Commitments and Contingencies

The production and possession of 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 $6,478for 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, and $7,178for years two through five, respectively. Rent expense for the three months ended ~~March 31,~~June 30, 2022 and 2021 on this lease was $~~20,957~~20,782 and $~~20,127~~20,617, respectively. Rent expense for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021 on this lease was $~~44,157~~64,939 and $~~40,837~~61,454, respectively. Interest was imputed using a discount rate of 20%. The lease does not include renewal options.

In February 2022, the Company assumed a lease to rent approximately 3,100 square feet of retail space in Oklahoma City, Oklahoma as part of the Oklahoma City acquisition disclosed in Note 4. The lease calls for base rent payments of $21 per square foot ($~~5,483)~~5,483), plus a prorated share of taxes, insurance and 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 three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 ~~and 2021~~ on this lease was ~~$14,277~~$22,129 and ~~$0,~~$36,406, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 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 disclosed in Note 4. The lease calls for base rent payments of ~~$15,450,~~$15,450, plus a prorated share of operating costs of the building, per month and escalate each year to ~~$15,913~~$15,913 in the final year which ends on February 1, 2024. The lease may be extended for one additional 3 year period. Rent expense for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 ~~and 2021~~ on this lease was ~~$16,048~~$52,822 and ~~$0,~~$68,870, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.

~~F-20~~

~~The future lease payments are as follows.~~

Year ended
March 31, Amount
2023 $ 337,663
2024 330,987
2025 86,615
2026 74,425
2027 76,658
Thereafter 153,136
1,059,484
Less: imputed interest (321,191 )
738,293
Less: current portion: (219,773 )
$ 518,520

~~In August 2021, the Company signed a ten-year lease to rent approximately 7,000 square feet of retail space in Broomfield, Colorado. The lease will call for base rent payments of $12,097, plus a prorated share of taxes and operating expenses, per month for the first year and escalate each year to $15,786~~ ~~per month in year 10. The commencement of this lease is contingent upon 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 contingency was not met and the agreement has ended.~~

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, plus taxes and operating expenses, per month for the first year and escalate each year to $7,886 per month in year seven. The lease may be extended for two terms of 5 years each. The commencement of this lease is 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 ~~March 31,~~June 30, 2022, the contingency has not been ~~met.~~met, however, control over the use of the leased premises has been received by the Company. As such, 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 ~~at March 31,~~to the condensed consolidated balance sheet. Rent expense for the three and nine months ended June 30, 2022 oron this lease was $21,781 and $48,197, respectively. There was no rent expense on this lease during the three and nine months ended June 30, 2021. Interest was imputed using a discount rate of 18%.

F-20

The future lease payments ~~schedule above.~~are as follows.

Year ended
June 30,		Amount
	2023	$	420,720
	2024		359,998
	2025		158,342
	2026		163,093
	2027		167,985
	Thereafter		266,399
			1,536,537
	Less: imputed interest		(523,462	)
			1,013,075
	Less: current portion:		(256,471	)
		$	756,604

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 and escalating each year to $7,295 in year five. Commencement of the lease is contingent upon the Company receiving an approved retail license within 120 days from October 22, 2021. The agreement will terminate if the contingency is not met. As of ~~March 31,~~June 30, 2022, the contingency has not been met and the Company is currently considering its options in regards to this agreement. The future minimum rental payments under this lease have not been included in the Company’s right of use asset and liability at ~~March 31,~~June 30, 2022 or the future lease payments schedule above.

As of ~~March 31,~~June 30, 2022 and September 30, 2021, the Company has accrued unpaid payroll taxes and estimated penalties and interest of approximately $~~1,900,000~~1,350,000 and $2,400,000, respectively, and is included in accrued ~~expenses~~payroll and payroll taxes in the accompanying condensed consolidated balance sheets. The Company is making monthly payments of $94,278, beginning March 1, 2022, to pay this liability. Further, during the three months ended June 30, 2022, the Company received approximately $294,000 of Employee Retention Credits ("ERCs") that were used to reduce the unpaid payroll taxes liability. The ERCs were recorded to payroll and employee related expenses on the condensed consolidated statement of operations.

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.

Note 11 - Related Party Transactions

As discussed in Note 7, the Company completed the purchase of 44 acres of land from a related party for $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 8, the Company has entered into various loan agreements with Viridis or its related entities. Two members of Viridis serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.

As discussed in Note 8, the Company has a loan agreement with Stockbridge Enterprises. Stockbridge Enterprises holds more than 5% of the Company’s common stock.

F-21

As discussed in Note 10, the Company has a lease agreement with VGI Capital LLC. Two members of VGI Capital LLC serve on the Company’s board of directors and one of these members also serves as the Company’s Chief Executive Officer.

During the three months ended ~~March 31,~~June 30, 2022 and 2021, the Company purchased cultivation supplies from a related party in the amount of $~~18,715~~0 and $~~15,440~~13,868, respectively. During the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, the Company purchased cultivation supplies from a related party in the amount of $31,708 and $~~25,529~~39,397, respectively. This related party is owned by the ~~father~~parent of a stockholder that holds more than 5% of the Company’s common stock.

Included in our accounts payable at ~~March 31,~~June 30, 2022 and September 30, 2021 is approximately $~~236,000~~231,000, and $138,000, respectively in amounts due to related parties.

Note 12 - Stockholders' Equity

Unit Offering

~~During~~Prior to the three months ended ~~March 31,~~June 30, 2022, the Company began offering up to 28,000,000 units of the Company for $1.40 per Unit on a “best-efforts/no minimum” basis pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. Each Unit is comprised of one share of common stock and one-half of one warrant to purchase a share of common stock. Only whole warrants are exercisable. Each whole warrant entitles the holder to purchase one share of common stock for $2.00 per share, subject to certain adjustments, from the date of issuance until the second anniversary of the date of issuance and is redeemable by the Company under certain conditions. Effective May 4, 2022, the Company repriced the offering to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company has incurred approximately ~~$800,000~~$922,000 in fees related to this offering. These fees are included in Other assets on the condensed consolidated balance sheet at ~~March 31,~~June 30, 2022 and will be netted against the proceeds received in the offering.

Warrants

The following table summarizes the Company’s warrant activity for the ~~six~~nine months ended ~~March 31,~~June 30, 2022:

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

Warrants granted		1,843,030		2.76		2.9		57,660		1,974,687		2.68		2.8		—
Exercised										—		—		—		—
Forfeited/Cancelled										—		—		—		—

Balance of warrants at March 31, 2022		47,938,030	$	2.10	$	3.7	$	10,467,660
Balance of warrants at June 30, 2022										48,069,687	$	2.10	$	3.7	$	1,375,000

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock as of ~~March 31,~~June 30, 2022, for those awards that have an exercise price currently below the closing price as of ~~March 31,~~June 30, 2022. Awards with an exercise price above the closing prices as of ~~March 31,~~June 30, 2022 are considered to have no intrinsic value.

The following range of assumptions were used to estimate the fair value of warrants issued during the ~~six~~nine months ended ~~March 31,~~June 30, 2022, using the Black-Scholes option-pricing model, excluding the ~~103,286~~234,943 whole warrants issued as part of the Company’s unit offering.

	~~Six~~Nine months ended ~~March 31,~~
	June 30, 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		0%
Black-scholes value		$0.34- $0.89

F-22

Stock Options

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. The maximum contractual term of the award is 10 years. The vesting period for options outstanding at ~~March 31,~~June 30, 2022 ranges from ~~3 months~~vesting immediately to three years.

The following table summarizes the Company’s stock option activity for the ~~six~~nine months ended ~~March 31,~~June 30, 2022:

	Common Shares Issuable Upon Exercise of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value (1)		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, 2021		5,217,315			1.23		8.9		2,633,375		5,217,315			1.23		8.9		2,633,375

Options granted		1,153,444			1.55		6.9		26,800		1,161,582			1.55		6.7		15,800
Exercised		(41,104	)		0.87		8.3		19,730		(41,104	)		0.87		8.3		19,730
Forfeited/Cancelled		(91,962	)		0.94		—		—		(114,331	)		0.94		—		—

Balance of Options at March 31, 2022		6,237,693		$	1.29		8.1	$	1,815,182
Balance of Options at June 30, 2022											6,223,462		$	1.29		7.9	$	67,175

Exercisable at March 31, 2022		2,373,123		$	1.34		7.7	$	952,342
Unvested at March 31, 2022		3,864,570		$	1.26
Exercisable at June 30, 2022											2,456,774		$	1.33		7.3	$	33,588
Unvested at June 30, 2022											3,766,688		$	1.27

Number of Options Weighted Average Grant Date Fair Value
Unvested at March 31, 2022 3,864,570 $ 1.20
Granted during the six months ended March 31, 2022 1,153,444 $ 1.37
Vested during the six months ended March 31, 2022 264,866 $ 1.73
Forfeited during the six months ended March 31, 2022 91,962 $ 2.16

	Number of Options		Weighted Average Grant Date Fair Value
Unvested at June 30, 2022		3,766,688	$	1.21
Granted during the nine months ended June 30, 2022		1,161,582	$	1.37
Vested during the nine months ended June 30, 2022		358,004	$	1.49
Forfeited during the nine months ended June 30, 2022		114,331	$	1.91

(1)

The following range of assumptions were used to estimate the fair value of stock options granted during the ~~six~~nine months ended ~~March 31,~~June 30, 2022, using the Black-Scholes option-pricing model.

	~~Six~~Nine months ended ~~March 31,~~
	June 30, 2022
Expected stock price volatility		126% - 176%
Risk-free interest rate		.7% - ~~1.5~~2.6%
Expected term (years)		2.8- 6.5
Expected dividend yield		0%
Black-scholes value		$0.68- $3.01

During the three months ended ~~March 31,~~June 30, 2022 and 2021, the Company recognized compensation expense of $~~1,091,560~~934,681 and $304,672, respectively. During the ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021, the Company recognized compensation expense of $~~1,598,854~~2,533,535 and $~~609,344~~914,016, respectively. At ~~March 31,~~June 30, 2022, there was $~~3,224,992~~2,299,311 of total unrecognized compensation cost. This unrecognized cost is expected to be recognized over the weighted average vesting period of ~~1.2 years.~~ 1 year.

F-23

Note 13 – Segment Information

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 tables presents segment information for the three and ~~six~~nine months ended ~~March 31, 2022. Segment information for the three~~June 30, 2022 and ~~six months ended March 31, 2021 has not been presented as the~~2021. The Company ~~did not acquire~~acquired the Franchising segment ~~until~~at the closing of the acquisition of OCG, Inc. effective March 19, 2021.

Cultivation Franchising Corporate Total
Six months ended March 31, 2022
Revenues from external customers $ 12,499,107 $ 258,498 $ 66,592 $ 12,824,197
Operating income (loss) 3,009,817 (1,703,385 ) (6,213,329 ) (4,906,897 )
Interest expense 157,062 43,216 2,107,485 2,307,763
Depreciation and amortization 62,532 601,525 217,555 881,612
Additions to property, equipment and
construction in progress — 50,797 13,220,286 13,271,083

Three months ended March 31, 2022
Revenues from external customers $ 6,357,890 $ 228,080 $ 52,216 $ 6,638,186
Operating income (loss) 1,440,522 (744,246 ) (3,468,549 ) (2,772,273 )
Interest expense 156,866 20,406 920,101 1,097,373
Depreciation and amortization 31,267 300,786 110,424 442,477

At March 31, 2022
Property, equipment and construction in progress, net 627,009 77,346 23,305,384 24,009,739
Total assets (after intercompany eliminations) 6,804,504 67,876,897 46,192,548 120,873,949

	Cultivation		Franchising			Corporate			Total
Nine months ended June 30, 2022
Revenues from external customers	$	17,360,844	$	280,529		$	114,146		$	17,755,519
Operating income (loss)		3,993,350		(2,705,153	)		(10,042,901	)		(8,754,704	)
Interest expense		460,524		79,993			3,392,401			3,932,918
Depreciation and amortization		90,362		901,675			328,627			1,320,664
Additions to property, equipment and construction in progress		25,623		—			15,631,945			15,657,568

Three months ended June 30, 2022
Revenues from external customers	$	4,861,737	$	22,031		$	47,554		$	4,931,322
Operating income (loss)		983,533		(1,001,768	)		(3,829,572	)		(3,847,807	)
Interest expense		303,462		36,777			1,284,916			1,625,155
Depreciation and amortization		27,830		300,150			111,072			439,052

At June 30, 2022
Property, equipment and construction in progress, net	$	421,757	$	20,899		$	25,864,556		$	26,307,212
Total assets (after intercompany eliminations)		5,102,841		68,217,019			47,207,983			120,527,843

Three and nine months ended June 30, 2021
Revenues from external customers	$	6,585,396	$	78,418		$	29,247		$	6,693,061
Operating income (loss)		2,315,224		(484,351	)		(2,078,147	)		(247,274	)
Interest expense		123,286		112,419			393,560			629,265
Depreciation and amortization		16,530		5,633			89,996			112,159

At June 30, 2021
Property, equipment and construction in progress, net	$	1,526,319	$	34,990		$	7,852,680		$	9,413,989
Total assets (after intercompany eliminations)		12,313,816		118,976,427			18,633,128			149,923,371

Note 14 - Subsequent Events

Subsequent to ~~March 31,~~June 30, 2022 the following events have occurred.

~~Effective May 4,~~The Company’s North Denver dispensary location began operations on July 11, 2022, making it the Company’s first corporate-owned shop in Colorado under the Company’s cannabis dispensary brand, Unity Rd.

The Company ~~repriced the Unit~~has sold 1,700 units under its offering pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings ~~to $1.12 per Unit and the exercise price of the warrant was reduced to $1.75 per share. The Company has sold 215,129 units~~ for total proceeds of ~~$263,104~~$1,904 subsequent to ~~March 31,~~June 30, 2022.

The Company received a short-term ~~loan~~loans in the aggregate amount of ~~$200,000~~$1,370,000 from Viridis, a related party. The terms of ~~this~~these short-term ~~loan~~loans are being determined as of the date of the filing.

On July 20, 2022, the Company entered into short-term financing arrangement with Capybara Capital. The proceeds of $0.5 million were used for working capital purposes. Payments of $18,889 are due weekly until $0.68 million has been repaid. This results in an effective interest rate of 36%.

On July 22, 2022, the Company entered into a short-term financing arrangement with Upwise Capital. The proceeds of $1.954 million were used to repay the second short-term financing arrangement (see (l) in Note 8 above) and the Upwise Capital 2 financing arrangement (see (v) in Note 8 above). Payments of $55,552 are due weekly until $2.598 million has been repaid. This results in an effective interest rate of 33%.

On July 22, 2022, the Company entered into a short-term financing arrangement with Lendspark. The proceeds of $0.65 million were used to repay the previous Lendspark short-term financing (see (u) in Note 8 above) in the amount of $0.591 million, and the remainder of the proceeds, approximately $0.05 million was used for working capital purposes. Payments of $17,680 are due weekly until $0.884 million has been repaid. This results in an effective interest rate of 36%.

F-24

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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, filed with the Securities and Exchange Commission (the "SEC") on January 13, 2022.

Forward-Looking Statements

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.

Overview

Item 9 Labs produces premium cannabis and cannabis related products in a rapidly growing market. The Company currently offers over 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 to grow as they develop new products to meet the needs of the end users. The Company makes its products available to consumers through licensed dispensaries in Arizona. Item 9 Labs’ products are now carried in more than 7080 dispensaries throughout the state of Arizona.

The Company believes its past and future success is dependent upon its ongoing ability to understand the needs and desires of the consumers, 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 population 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 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 has agreements with more than twenty (20) entrepreneurial groups to open more than thirty (30) Unity Rd retail dispensary locations in twelve (12) states. The majority of the locations are in the licensing process. We currently have one franchisee operating ~~in Boulder, Colorado.~~ ~~One such franchise unit has been opened to date,~~ in Boulder, Colorado. Unity Rd. will assist in providing distribution for Item 9 Labs products to be sold across the United States and internationally to its franchisees for public resale, while keeping dispensaries locally owned and operated. As Unity Rd. dispensaries expand in its market penetration, Item 9 Labs aims to offer its products in those locations by expanding the distribution footprint of its premium product offerings to new states.

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 increased efficiencies have been offset in the current period by certain supply shortages and repair and maintenance delays resulting in longer production lead times.

The Arizona expansion has continued in fiscal year 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~~the 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.

The Company estimates that phase 1 of its construction plan will be completed during the third quarter of its fiscal year 2023. The extension of time to complete phase 1 of its construction plan is primarily due to delays in obtaining the necessary construction permits and supply chain shortages of construction materials. Further, given the current level of inflation and the supply chain shortages, the Company estimates that costs will exceed original estimates by 25%-30%. The needed permits were obtained subsequent to June 30, 2022. The Company may experience additional construction delays. The Company can provide no assurance that it will be able to obtain the financing needed to pay the additional construction costs.

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 98% complete. Construction recommenced, after a pause due to Covid-19, in August 2021. The Company aims to commence operations in Nevada in early fiscal year ~~2022.~~ 2023.

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 LLC, a Colorado limited liability company (“Seller”) in Adams County, CO. The total purchase price was $1,536,000, as to which $1,000,000 was paid to an escrow account upon conditional approvals of the change of ownership from state and local licensing authorities concerning the transfer of ownership. At closing, that amount was released to the Seller along with an 18-month promissory note in the principal amount of $200,000 and the balance payable in 300,000 shares of Company common stock, valued at $336,000. ~~For additional terms of the APA, please see the Company’s filing on Form 8-K filed with the Securities and Exchange Commission on October 7, 2021.~~ The Company obtained financing to consummate this transaction. On March 2, 2022, the Company received the necessary regulatory approvals and completed this transaction. The existing dispensary license ~~has~~had never been operational.

~~If completed, this will be~~ This dispensary, known as the Company’s North Denver location, began operations on July 11, 2022, making it the Company’s first corporate-owned shop in Colorado under ~~its~~the Company’s cannabis dispensary brand, Unity Rd.~~, and is anticipated to open in early to the middle of fiscal year 2022.~~

This license acquisition 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 the Item 9 Labs suite of products to the same markets through the acquisition of cultivation and production licenses or through joint ventures with qualified local, licensed operators.

On March 11, 2022, the Company entered into an Asset Purchase Agreement with The Herbal Cure LLC, a Colorado limited liability company, pursuant to which the Company is purchasing certain assets. Effective upon the completion of the sale, which ashas 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 $5,750,000, as to which $250,000 is to be paid upon execution of the Asset Purchase Agreement, $3,700,000 payable at closing, $700,000 shall be financed by seller pursuant to a Secured Promissory Note and the 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 even monthly installments until paid in full. The shares of the Company’s common stock to be issued shall be in such an amount 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%. The Company can provide no assurance that it will be successful in finalizing this acquisition.

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

Results of Operations

	Six months ended March 31,												Nine months ended June 30,
	2022			2021			$ Change			% Change			2022			2021			$ Change			% Change
Revenues, net	$	12,824,197		$	9,150,195		$	3,674,002			40	%	$	17,755,519		$	15,843,256		$	1,912,263			12	%
Cost of revenues		7,748,193			4,729,176			3,019,017			64	%		11,089,560			8,531,623			2,557,937			30	%
Gross profit		5,076,004			4,421,019			654,985			15	%		6,665,959			7,311,633			(645,674	)		-9	%
Operating expenses
Professional fees and outside services		1,214,166			907,713			306,453			34	%		2,207,618			1,350,196			857,422			64	%
Payroll and employee related expenses		5,205,950			2,422,146			2,783,804			115	%		7,889,672			4,014,819			3,874,853			97	%
Sales and marketing		1,053,338			127,346			925,992			727	%		1,260,551			389,819			870,732			223	%
Depreciation and amortization		881,612			248,442			633,170			255	%		1,320,664			360,601			960,063			266	%
Other operating expenses		1,632,835			564,054			1,068,781			189	%		2,747,158			1,292,154			1,455,004			113	%
Provision for bad debt		(5,000	)		—			(5,000	)		100	%		(5,000	)		—			(5,000	)		100	%
Total operating expenses		9,982,901			4,269,701			5,713,200			134	%		15,420,663			7,407,589			8,013,074			108	%
Income (loss) from operations		(4,906,897	)		151,318			(5,058,215	)		-3343	%		(8,754,704	)		(95,956	)		(8,658,748	)		9024	%
Other expense, net		(2,307,445	)		(1,176,754	)		(1,130,691	)		96	%		(3,932,600	)		(1,763,385	)		(2,169,215	)		123	%
Net loss, before income tax provision (benefit)		(7,214,342	)		(1,025,436	)		(6,188,906	)		604	%		(12,687,304	)		(1,859,341	)		(10,827,963	)		582	%
Income tax provision (benefit)		3,324			—			3,324			0	%		7,948			—			7,948			0	%
Net loss		(7,217,666	)		(1,025,436	)		(6,192,230	)		604	%		(12,695,252	)		(1,859,341	)		(10,835,911	)		583	%
Less: Net income attributable to non-controlling interests		5,426			—			5,426			100	%
Less: Net loss attributable to non-controlling interests														(1,683	)		—			(1,683	)		100	%
Net loss attributable to Item 9 Labs Corp.	$	(7,223,092	)	$	(1,025,436	)	$	(6,197,656	)		604	%	$	(12,693,569	)	$	(1,859,341	)	$	(10,834,228	)		583	%

	Three months ended June 30,
	2022			2021			$ Change			% Change
Revenues, net	$	4,931,322		$	6,693,061		$	(1,761,739	)		-26	%
Cost of revenues		3,341,367			3,802,447			(461,080	)		-12	%
Gross profit		1,589,955			2,890,614			(1,300,659	)		-45	%
Operating expenses
Professional fees and outside services		993,452			442,483			550,969			125	%
Payroll and employee related expenses		2,683,722			1,592,673			1,091,049			69	%
Sales and marketing		207,213			262,473			(55,260	)		-21	%
Other operating expenses		1,114,323			728,100			386,223			53	%
Total operating expenses		5,437,762			3,137,888			2,299,874			73	%
Income (loss) from operations		(3,847,807	)		(247,274	)		(3,600,533	)		1456	%
Other expense, net		(1,625,155	)		(586,631	)		(1,038,524	)		177	%
Net income (loss), before income tax provision (benefit)		(5,472,962	)		(833,905	)		(4,639,057	)		556	%
Income tax provision (benefit)		4,624			—			4,624			0	%
Net income (loss)		(5,477,586	)		(833,905	)		(4,643,681	)		557	%
Less: Net loss attributable to non-controlling interests		(7,109	)		—			(7,109	)		100	%
Net loss attributable to Item 9 Labs Corp.	$	(5,470,477	)	$	(833,905	)	$	(4,636,572	)		556	%

Three months ended March 31,
2022 2021 $ Change % Change
Revenues, net $ 6,638,186 $ 6,110,631 $ 527,555 9 %
Cost of revenues 3,960,948 3,121,045 839,903 27 %
Gross profit 2,677,238 2,989,586 (312,348 ) -10 %
Operating expenses
Professional fees and outside services 556,721 613,758 (57,037 ) -9 %
Payroll and employee related expenses 3,055,244 1,318,842 1,736,402 132 %
Sales and marketing 613,902 84,165 529,737 629 %
Other operating expenses 786,167 349,517 436,650 125 %
Provision for (recovery of) bad debt (5,000 ) —   (5,000 ) 100 %
Total operating expenses 5,449,511 2,472,179 2,977,332 120 %
Income (loss) from operations (2,772,273 ) 517,407 (3,289,680 ) -636 %
Other expense, net (1,097,055 ) (468,387 ) (628,668 ) 134 %
Net income (loss), before income tax provision (benefit) (3,869,328 ) 49,020 (3,918,348 ) -7993 %
Income tax provision (benefit) 3,324 —   3,324 0 %
Net income (loss) (3,872,652 ) 49,020 (3,921,672 ) -8000 %
Less: Net income attributable to non-controlling interests 5,426 —   5,426 100 %
Net income (loss) attributable to Item 9 Labs Corp. $ (3,878,078 ) $ 49,020 $ (3,927,098 ) -8011 %

Revenues

The increase in revenue for the nine months ended June 30, 2022 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. These improvements for the nine months ended June 30, 2022 were offset by the following events during the quarter ended June 30, 2022.

The decrease in revenue for the three months ended June 30, 2022 was primarily due to effects of additional competition entering the Company’s market that were not as significant during the same three month period of the prior year. This ~~allows~~additional competition resulted in a decrease in units sold and a decrease in unit sales prices. Further, during the three months ended June 30, 2022, the Company ~~to deliver its~~experienced supply chain issues that caused a decrease in new orders for the Company’s products ~~to the dispensaries more timely. Management anticipates revenues to continue to grow as the revenue trends are positive month over month.~~ and delays in fulfilling existing orders.

Cost of Revenues

Cost of revenues consist primarily of labor, materials, supplies and utilities. Cost of revenues as a percentage of revenues was ~~60%~~68% and ~~61%~~62% for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 compared to ~~51%~~57% and ~~52%~~54% for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021. The Company was able to increase operational efficiency throughout fiscal year 2021. However, the cost of the purchased inventory materials discussed above and increases in other costs, such as product testing, primarily negated these efficiency gains. Further, cost of revenues as a percentage of revenues decreased due to the reduction in unit sales prices during the quarter. 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.

Gross Profit

The decrease in gross profit as a percentage of revenue for the nine months ended June 30, 2022 was due to increases in revenue offset by price reduction as competition rises and by increases in purchased inventory materials and other costs. Further, the decrease in gross profit as a percentage of revenue of the three months ended June 30, 2022 also decreased due to the decrease in the number of units sold as a result of the increased competition and the supply chain issues experienced. With the Company’s continued efforts to increase capacity and focus on efficiencies and reducing costs, management expects gross profit to increase going forward.

Operating Expenses

Professional fees and outside services increased for the ~~six~~nine months ended ~~March 31,~~June 30, 2022 compared to the ~~six~~nine months ended ~~March 31,~~June 30, 2021 primarily due to the amortization of prepaid consulting agreements that were entered into subsequent to ~~March 31,~~June 30, 2021 and additional expenses incurred for corporate advisory services, and investor and public relations services. ~~Professional fees and outside services decreased for~~Further, the ~~three months ended March 31, 2022 compared to the three months ended March 31, 2021 as professional fees were higher than usual~~Company incurred significant legal expenses during the three and nine months ended ~~March 31, 2021 primarily due~~June 30, 2022 related to ~~fees incurred as part~~entering into the Share Purchase Agreement for the purchase of all of the ~~OCG, Inc. acquisition.~~issued and outstanding shares of Wild Card Cannabis, Incorporated, a corporation formed under the laws of the Province of Ontario, Canada.

The increase in payroll expenses was primarily due to the amortization of stock-based compensation expense for stock options granted subsequent to ~~March 31,~~June 30, 2021. Further, payroll expenses increased due to an increase in employee headcount during fiscal year 2021 and the ~~six~~nine months ended ~~March 31,~~June 30, 2022, as a result of increased hiring of ~~employees and~~employees. The increase was offset by approximately $294,000 of Employee Retention Credits ("ERCs") received by the ~~hiring of OCG, Inc. employees as part of the merger.~~Company.

Sales and marketing expenses increased due to increased spending on promotional items and marketing and branding initiatives during the ~~three and six~~nine months ended ~~March 31,~~June 30, 2022. The decrease in sales and marketing expenses decreased slightly for the three months ended June 30, 2022 compared to June 30, 2021 as a result of the decrease in promotional items during the quarter.

The increase in depreciation and amortization is due primarily 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, facility expenses, such as rent expense, travel related expenses, and additional IT support for the increase in employees.

Total operating expenses as a percentage of gross profit increased from ~~83%~~109% and ~~97%~~101% for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021, respectively, to ~~193%~~342% and ~~191%~~231% for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, respectively. Management believes this ratio will decrease for the Cultivation segment 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 and Corporate segments as the Franchising and Corporate segments continue to perform on growth initiatives.

Other Expense, net

Other expenses consist primarily of interest expense of ~~$1,097,373~~$1,625,155 and ~~$2,307,763~~$3,932,918 for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022, respectively, and ~~$468,387~~$629,265 and ~~$1,176,754~~$1,806,019 for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2021, respectively. The increase in interest expense was primarily the result of the continued interest and amortization of debt discounts for debt outstanding at ~~March 31,~~June 30, 2021 and the additional interest and amortization of debt discounts for debt incurred subsequent to ~~March 31,~~June 30, 2021. This increase in interest expense was offset by debt and amortization of debt discounts that were capitalized to construction in progress related to the Company’s capital projects.

Adjusted EBITDA

Management uses the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation expense, acquisition-related costs, 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 income (loss) to Adjusted EBITDA for the three and ~~six~~nine months ended ~~March 31,~~June 30, 2022 and 2021:

	Three months ended March 31,					Six months ended March 31,						Three months ended June 30,						Nine months ended June 30,
	2022			2021		2022			2021			2022			2021			2022			2021
Net income (loss)	$	(3,872,652	)	$	49,020	$	(7,217,666	)	$	(1,025,436	)
Net loss												$	(5,477,586	)	$	(833,905	)	$	(12,695,252	)	$	(1,859,341	)
Depreciation and amortization		442,477			105,897		881,612			248,442			439,052			112,159			1,320,664			360,601
Interest expense		1,097,373			468,387		2,307,763			1,176,754			1,625,155			629,265			3,932,918			1,806,019
Income tax expense		3,324			—		3,324			—			4,624			—			7,948			—
Stock-based expense		1,363,485			304,672		1,870,779			772,580			1,161,739			304,672			3,032,518			1,077,252
Acquisition related costs		23,676			87,060		23,676			266,738			479,904			5,804			499,904			272,541
Adjusted EBITDA	$	(942,317	)	$	1,015,036	$	(2,130,512	)	$	1,439,078		$	(1,767,112	)	$	217,995		$	(3,901,300	)	$	1,657,072

The approximately ~~$1.9~~$5.6 million change from prior year is due to the addition of the franchise business, as well as significant investments in human capital and infrastructure to prepare for anticipated growth.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

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 products to dispensaries throughout the state of Arizona. The 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. The Company believes that it will continue reducing 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.

Financing. To date, the Company has financed its operations primarily with loans from 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 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 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 ~~March 31,~~June 30, 2022, the Company had ~~$105,128~~$441,662 of cash and cash equivalents and negative working capital of ($~~28,715,140)~~33,778,387) (current assets minus current liabilities), compared with $1,454,460 of cash and cash equivalents and negative working capital of ($4,893,385) as of September 30, 2021. The decrease of ~~$23,821,755~~$28,885,002 in the Company’s working capital 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 the Company’s cash, accounts receivable, inventory and prepaid balances and increases in the Company’s accounts payable and other operating liabilities and the current portion of operating lease liabilities. The ~~$1,349,332~~$1,012,798 decrease in cash and cash equivalents was primarily due to the net cash used in operating activities, purchases of property, equipment and construction in progress related to the Company’s capital projects, and the Company’s acquisition of a dispensary license in Colorado. 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.

Cash Flows

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

	Six months ended March 31,												Nine months ended June 30,
	2022			2021			$ Change			% Change			2022			2021			$ Change			% Change
Net cash provided by (used in) operating activities	$	373,812		$	(4,479,607	)	$	4,853,419			-108	%
Net cash used in operating activities													$	(2,016,148	)	$	(6,877,259	)	$	4,861,111			-71	%
Net cash used in investing activities		(4,012,703	)		(2,328,122	)		(1,684,581	)		72	%		(3,769,744	)		(3,851,950	)		82,206			-2	%
Net cash provided by financing activities		2,289,559			11,030,929			(8,741,370	)		-79	%		4,773,094			10,941,424			(6,168,330	)		-56	%
Net increase (decrease) in cash and cash equivalents	$	(1,349,332	)	$	4,223,200		$	(5,572,532	)		-132	%	$	(1,012,798	)	$	212,215		$	(1,225,013	)		-577	%

Operating Activities

During the ~~six~~nine months ended ~~March 31,~~June 30, 2022, operating activities ~~provided $373,812~~used $2,016,148 of cash and cash ~~equivalent,~~equivalents, primarily resulting from a net loss of ~~$7,217,666~~$12,695,252 which was offset by net cash provided by operating assets and liabilities of ~~$3,173,658.~~$3,918,454. There was significant non-cash activity that contributed to the net loss totaling ~~$4,516,521~~$6,760,650 including depreciation and amortization of ~~$911,576,~~$1,410,508, amortization of debt discount of ~~$1,728,325,~~$2,311,783, and stock-based compensation of ~~$1,870,779.~~$3,032,518.

During the ~~six~~nine months ended ~~March 31,~~June 30, 2021, operating activities used ~~$4,479,607~~$6,877,259 of cash, primarily resulting from a net loss of ~~$1,025,436 which~~$1,859,341which was extended by net cash used in operating assets and liabilities of ~~$3,454,171.~~$7,060,610. There was significant non-cash activity that contributed to the net loss totaling ~~$1,321,358~~$2,042,692 including depreciation and amortization of ~~$276,419,~~$400,419, amortization of debt discount of ~~$272,359,~~$565,021, and stock based compensation ~~paid in the form~~ of ~~stock of $772,580.~~$1,077,252. With the increase in revenues, the ~~Company’s~~Company's receivables increased ~~$2,213,229,~~$1,703,092, deferred costs increased ~~$3,622,372~~$6,348,573 and prepaid expenses increased ~~$1,024,680,~~$192,292, offset by an increase in current liabilities of ~~$2,084,752.~~$1,183,347.

Investing Activities

During the ~~six~~nine months ended ~~March 31,~~June 30, 2022, investing activities used ~~$4,012,703~~$3,769,744 of cash and cash equivalents, consisting primarily of ~~$3,235,125~~$2,918,584 in purchases of property, equipment and construction in progress, the purchase of a dispensary license in the amount of $1,130,872, cash payments for acquisitions of $140,726 and cash paid to acquisition escrow accounts of ~~$381,932,~~$406,932, offset by ~~$794,807~~$816,227 of cash received from the escrow deposit accounts.

During the ~~six~~nine months ended ~~March 31,~~June 30, 2021, investing activities used ~~$2,328,122~~$3,851,950 of cash, consisting primarily of ~~$739,560~~$2,263,388 in purchase of property and equipment and $1,685,368 of deposits paid on an acquisition.

Financing Activities

During the ~~six~~nine months ended ~~March 31,~~June 30, 2022, financing activities provided ~~$2,289,559,~~$4,773,094, consisting of ~~$3,980,762~~$7,282,763 in proceeds from the issuance of debt, ~~$288,841~~$555,911 in proceeds from the issuance of stock and offset by ~~$1,944,294 in~~$3,002,097 of debt payments made.

During the ~~six~~nine months ended ~~March 31,~~June 30, 2021, financing activities provided ~~$11,030,929,~~$10,941,424, consisting of ~~$12,959,808~~$13,298,965 in proceeds from the issuance of stock and proceeds from the issuance of convertible debt of $1,355,000 and offset by ~~$3,283,879~~$3,712,541 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-half of one warrant. We are also in 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.

Off-Balance Sheet Arrangements

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.

Critical Accounting Policies

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. Management believes that there have been no material changes in our critical accounting policies during the three months ended ~~March 31,~~June 30, 2022.

Recently Issued Accounting Pronouncements

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.

Contractual Obligations

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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 ~~March 31,~~June 30, 2022.

Identified Material Weaknesses

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:

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.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting subsequent to the fiscal year ended September 30, 2021, 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.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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.

ITEM 1A.

RISK FACTORS

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.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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.

Quarterly Issuances:

The Company issued ~~69,892~~29,965 shares for ~~a business acquisition, 300,000 shares for an asset purchase, 25,000 shares related to the issuance of debt, 335,159 shares issued for~~ services ~~and 18,033 shares related to the exercise of stock options~~ during the three months ended ~~March 31,~~June 30, 2022.

Subsequent Issuances:

Subsequent to ~~March 31,~~June 30, 2022, there have been no issuances of unregistered equity securities.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

N/A.

ITEM 5.

OTHER INFORMATION

N/A.

ITEM 6.

EXHIBITS

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:

Exhibit
Number	Description of Exhibit
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	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	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	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	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	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	Bylaws	Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
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	Certification of Principal Financial Officer Pursuant to Rule 13a-14	Filed herewith.
32.01	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith.
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)

*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.

SIGNATURES

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.

	Item 9 Labs Corp.

Date: ~~May 16,~~August 15, 2022	By:	/s/ Andrew Bowden
	Name: Title:	Andrew Bowden Chief Executive Officer (Principal Executive Officer)

Date: ~~May 16,~~August 15, 2022

By:

/s/ Robert Mikkelsen

Name:

Title:

Robert Mikkelsen

Chief Financial Officer

(Principal Financial Officer)

	For the three months ended			For the three months ended			For the six months ended			For the six months ended
	March 31, 2022			March 31, 2021			March 31, 2022			March 31, 2021
Revenues, net	$	6,638,186		$	6,110,631		$	12,824,197		$	9,150,195
Cost of revenues		3,960,948			3,121,045			7,748,193			4,729,176
Gross profit		2,677,238			2,989,586			5,076,004			4,421,019

Operating expenses
Professional fees and outside services		556,721			613,758			1,214,166			907,713
Payroll and employee related expenses		3,055,244			1,318,842			5,205,950			2,422,146
Sales and marketing		613,902			84,165			1,053,338			127,346
Depreciation and amortization		442,477			105,897			881,612			248,442
Other operating expenses		786,167			349,517			1,632,835			564,054
Provision for (recovery of) bad debt		(5,000	)		—			(5,000	)		—
Total expenses		5,449,511			2,472,179			9,982,901			4,269,701

Income (loss) from operations		(2,772,273	)		517,407			(4,906,897	)		151,318

Other income (expense)
Interest expense		(1,097,373	)		(468,387	)		(2,307,763	)		(1,176,754	)
Other income		318			—			318			—
Total other income (expense), net		(1,097,055	)		(468,387	)		(2,307,445	)		(1,176,754	)

Net income (loss), before income tax provision (benefit)		(3,869,328	)		49,020			(7,214,342	)		(1,025,436	)

Income tax provision (benefit)		3,324			—			3,324			—

Net income (loss)		(3,872,652	)		49,020			(7,217,666	)		(1,025,436	)

Less: Net income attributable to non-controlling interest		5,426			—			5,426			—

Net income (loss) attributable to Item 9 Labs Corp.	$	(3,878,078	)	$	49,020		$	(7,223,092	)	$	(1,025,436	)

Basic net income (loss) per common share	$	(0.04	)	$	0.00		$	(0.08	)	$	(0.02	)

Basic weighted average common shares outstanding		95,271,726			65,880,141			95,088,960			62,143,521

Diluted net income (loss) per common share	$	(0.04	)	$	0.00		$	(0.08	)	$	(0.02	)

Diluted weighted average common shares outstanding		95,271,726			84,938,235			95,088,960			62,143,521


	Three months ended March 31,					Six months ended March 31,
	2022			2021		2022			2021
Numerator:
Net income (loss) attributable to Item 9 Labs Corp.	$	(3,878,078	)	$	49,020	$	(7,223,092	)	$	(1,025,436	)

Denominator:
Weighted average common shares outstanding		95,271,726			65,880,141		95,088,960			62,143,521
Dilutive common share equivalents
Options		—			2,141,528		—			—
Warrants		—			14,161,326		—			—
Convertible notes		—			2,755,240		—			—
Weighted average diluted shares outstanding		95,271,726			84,938,235		95,088,960			62,143,521

Income (loss) per share
Basic	$	(0.04	)	$	0.00	$	(0.08	)	$	(0.02	)
Diluted	$	(0.04	)	$	0.00	$	(0.08	)	$	(0.02	)

	Effective Date		Maturity Date	Annual Interest Rate			Balance at March 31, 2022			Balance at September 30, 2021		Conversion 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			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
C-11	2/21/2022		8/31/2022	24	%		250,000			—		1.10
							3,620,000			1,950,000
		Less: unamortized discounts					(804,120	)		(672,606	)
						$	2,815,880		$	1,277,394

	Number of Options		Weighted Average Grant Date Fair Value
Unvested at March 31, 2022		3,864,570	$	1.20
Granted during the six months ended March 31, 2022		1,153,444	$	1.37
Vested during the six months ended March 31, 2022		264,866	$	1.73
Forfeited during the six months ended March 31, 2022		91,962	$	2.16

Three months ended March 31, 2022
Revenues from external customers	$	6,357,890	$	228,080		$	52,216		$	6,638,186
Operating income (loss)		1,440,522		(744,246	)		(3,468,549	)		(2,772,273	)
Interest expense		156,866		20,406			920,101			1,097,373
Depreciation and amortization		31,267		300,786			110,424			442,477

At March 31, 2022
Property, equipment and construction in progress, net	627,009	77,346	23,305,384	24,009,739
Total assets (after intercompany eliminations)	6,804,504	67,876,897	46,192,548	120,873,949