Document and Entity Information
Document and Entity Information - shares | 6 Months Ended | |
Mar. 31, 2020 | May 12, 2020 | |
Cover [Abstract] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Mar. 31, 2020 | |
Current Fiscal Year End Date | --09-30 | |
Entity File Number | 000-54730 | |
Entity Registrant Name | Item 9 Labs Corp. | |
Entity Central Index Key | 0001500123 | |
Entity Incorporation, State or Country Code | DE | |
Entity Current Reporting Status | Yes | |
Entity Interactive Data Current | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Small Business | true | |
Entity Emerging Growth Company | false | |
Entity Shell Company | false | |
Entity Common Stock, Shares Outstanding | 61,424,905 | |
Document Fiscal Period Focus | Q2 | |
Document Fiscal Year Focus | 2020 |
CONSOLIDATED CONDENSED BALANCE
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) - USD ($) | Mar. 31, 2020 | Sep. 30, 2019 |
Current Assets: | ||
Cash and cash equivalents | $ 304,321 | $ 21,092 |
Restricted cash and cash equivalents | 553,851 | |
Accounts receivable, net of reserves of $22,460 and $0 at March 31, 2020 and September 30, 2019, respectively | 562,715 | 437,026 |
Deferred costs | 2,599,592 | 1,936,534 |
Prepaid expenses and other current assets | 36,117 | 14,409 |
Total current assets | 3,502,745 | 2,962,912 |
Property and equipment, net | 7,157,855 | 7,170,422 |
Right of use asset | 225,013 | |
Investment in Health Defense, LLC | 100,000 | 100,000 |
Deposit on land purchase from related party | 600,000 | 600,000 |
Receivable for sale of Airware assets, net of reserves and unamortized discount of $307,430 | 464,715 | 504,715 |
Notes and interest receivable, net of reserves of $69,000 | 160,000 | 180,000 |
Other intangible assets, net | 8,163,054 | 1,839,875 |
Goodwill | 1,116,396 | 1,116,396 |
Total Assets | 21,489,778 | 14,474,320 |
Current Liabilities: | ||
Accounts payable | 2,104,006 | 1,076,546 |
Accrued payroll | 102,232 | 77,560 |
Accrued compensated absences | 93,749 | 69,424 |
Accrued interest | 1,596,631 | 675,182 |
Accrued expenses | 1,115,281 | 379,972 |
Accrued income tax | 87,476 | 87,476 |
Short term notes payable, net | 2,336,096 | 2,051,714 |
Operating lease liability - short term portion | 67,952 | |
Long term debt, in default | 2,700,000 | 2,700,000 |
Convertible notes payable | 20,000 | 20,000 |
Total current liabilities | 10,223,423 | 7,137,874 |
Operating lease liability | 175,075 | |
Total liabilities | 10,398,498 | 7,137,874 |
Commitments and Contingencies | ||
Stockholders' Equity: | ||
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 63,724,905 issued, 3,250,000 to be issued, 61,424,905 outstanding at March 31, 2020 and 63,643,005 shares issued and outstanding at September 30, 2019 | 6,699 | 6,365 |
Additional paid-in capital | 28,755,810 | 18,148,962 |
Treasury stock | (3,450,000) | |
Accumulated deficit | (14,221,229) | (10,694,939) |
Total Item 9 Labs Corp. stockholders' equity | 11,091,280 | 7,460,388 |
Noncontrolling Interest | (123,942) | |
Total Stockholders' Equity | 11,091,280 | 7,336,446 |
Total Liabilities and Stockholders' Equity | $ 21,489,778 | $ 14,474,320 |
CONSOLIDATED CONDENSED BALANC_2
CONSOLIDATED CONDENSED BALANCE SHEETS (Parenthetical) - USD ($) | Mar. 31, 2020 | Sep. 30, 2019 |
Statement of Financial Position [Abstract] | ||
Reserves on accounts receivable | $ 22,460 | |
Unamortized discount and reserves on receivable for sale of Airware assets | 307,430 | $ 307,430 |
Reserves on notes and interest receivable | $ 69,000 | |
Common stock, par value | $ .0001 | $ .0001 |
Common stock, authorized | 2,000,000,000 | 2,000,000,000 |
Common stock, issued | 63,724,905 | 63,643,005 |
Common stock, outstanding | 61,424,905 | 63,643,005 |
CONSOLIDATED CONDENSED STATEMEN
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Mar. 30, 2020 | Mar. 31, 2019 | Mar. 31, 2020 | Mar. 31, 2019 | |
Income Statement [Abstract] | ||||
Revenues, net | $ 1,862,012 | $ 1,130,270 | $ 3,394,867 | $ 2,085,884 |
Cost of revenues | 1,267,984 | 528,938 | 2,319,519 | 1,005,156 |
Gross profit | 594,028 | 601,332 | 1,075,348 | 1,080,728 |
Operating expenses | ||||
Professional fees and outside services | 291,129 | 295,626 | 486,314 | 553,797 |
Payroll and employee related expenses | 702,320 | 724,761 | 1,531,014 | 1,040,378 |
Sales and marketing | 28,610 | 55,905 | 161,219 | 138,348 |
Other operating expenses | 465,002 | 331,202 | 969,116 | 460,407 |
Provision for bad debt | 22,460 | |||
Total expenses | 1,487,061 | 1,407,494 | 3,170,123 | 2,192,930 |
Loss from operations | (893,033) | (806,162) | (2,094,775) | (1,112,202) |
Other income (expense) | ||||
Interest income | 25,577 | 47,833 | ||
Interest expense | (684,203) | (811) | (1,457,789) | (1,611) |
Total other income (expense), net | (684,203) | 24,766 | (1,457,789) | 46,222 |
Loss from continuing operations, before income tax provision | (1,577,236) | (781,396) | (3,552,564) | (1,065,980) |
Income tax provision | 114,686 | 207,399 | ||
Net loss | (1,577,236) | (896,082) | (3,552,564) | (1,273,379) |
Less: Net loss attributable to noncontrolling interest | (1,136) | (12,307) | (26,274) | (60,785) |
Net loss attributable to parent | $ (1,576,100) | $ (883,775) | $ (3,526,290) | $ (1,212,594) |
Basic and diluted weighted average common shares outstanding | 61,424,905 | 62,263,679 | 62,017,391 | 59,582,402 |
Basic and diluted net loss per common share | $ (0.03) | $ (0.01) | $ (0.06) | $ (0.02) |
CONSOLIDATED CONDENSED STATEM_2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) | 6 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Operating Activities: | ||
Net loss | $ (3,552,564) | $ (1,273,379) |
Adjustments to reconcile net loss to net cash used in operating activities: | ||
Depreciation | 64,220 | 13,200 |
Amortization | 565,620 | 95,700 |
Amortization of debt discount | 346,936 | |
Interest accrued on notes receivable | (19,448) | |
Common stock issued for services | 132,106 | 165,000 |
Stock compensation expense | 75,000 | 125,000 |
Provision for bad debt | 22,460 | |
Interest accretion from notes receivable | (25,401) | |
Changes in operating assets and liabilities: | ||
Accounts receivable | (148,149) | (340,900) |
Deferred costs | (663,058) | (468,268) |
Prepaid expenses | (21,708) | (139,037) |
Accounts payable | 1,051,663 | (12,189) |
Accrued payroll | 24,672 | 35,267 |
Accrued compensated absences | 24,325 | (826) |
Accrued interest | 921,449 | 400 |
Accrued expenses | 735,309 | (53,322) |
Accrued income tax | 207,399 | |
Net Cash Used in Operating Activities | (421,719) | (1,690,804) |
Investing Activities: | ||
Deposit on land purchase from related party | (200,000) | |
Purchases of property and equipment | (51,160) | (896,408) |
Cash paid for acquisitions | (500,000) | (1,500,000) |
Cash received from sale of Airware assets | 40,000 | 115,000 |
Cash received from short-term note receivable | 20,000 | |
Capitalized license fees | (426,743) | |
Net Cash Used in Investing Activities | (917,903) | (2,481,408) |
Financing Activities: | ||
Proceeds from the sale of common stock, net of issuance costs | 5,400,003 | |
Proceeds from the issuance of debt | 3,169,000 | |
Debt payments | (2,100,000) | |
Net Cash Provided by Financing Activities | 1,069,000 | 5,400,003 |
Net (Decrease)/Increase in Cash | (270,622) | 1,227,791 |
Cash and cash equivalents- Beginning of Period | 574,943 | 1,674,266 |
Cash and cash equivalents - End of Period | 304,321 | 2,902,057 |
Supplemental disclosure of cash flow information: | ||
Interest paid in cash | 50,000 | |
Income taxes paid in cash | ||
Supplemental disclosure of non-cash investing and financing activities: | ||
Stock issued/to be issued for acquisitions | 3,507,000 | 7,770,000 |
Interest in Health Defense, LLC received for sale of Airware assets | 100,000 | |
Receivable for sale of Airware assets, net of discount | 929,930 | |
Right of use asset | 268,359 | |
Lease Liability | 268,359 | |
Warrants issued for debt and for acquisition | 3,595,066 | |
Debt issued for acquisition | 1,000,000 | |
Non-Cash Treasury Stock | 150,216 | |
Net assets acquired in acquisition of Arizona DP Consulting, LLC | ||
Intangible assets | 3,350,000 | |
Goodwill | 5,920,000 | |
Total purchase consideration | $ 9,270,000 |
CONSOLIDATED CONDENSED STATEM_3
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - USD ($) | Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated (Deficit) | Noncontrolling Interest | Total |
Beginning balance, shares at Sep. 30, 2018 | 54,766,642 | |||||
Beginning balance, amount at Sep. 30, 2018 | $ 5,477 | $ 3,427,230 | $ (870,243) | $ 2,562,464 | ||
Stock issued for acquisition, shares | 3,000,000 | |||||
Stock issued for acquisition, amount | $ 300 | 7,769,700 | 7,770,000 | |||
Issuance of stock for cash, shares | 3,100,000 | |||||
Issuance of stock for cash, amount | $ 310 | 3,149,690 | 3,150,000 | |||
Exchange of shares for services, shares | 30,000 | |||||
Exchange of shares for services, amount | $ 3 | 123,497 | 123,500 | |||
Net loss | (328,819) | (48,478) | (377,297) | |||
Ending balance, shares at Dec. 31, 2018 | 60,896,642 | |||||
Ending balance, amount at Dec. 31, 2018 | $ 6,090 | 14,470,117 | (1,199,062) | (48,478) | 13,228,667 | |
Beginning balance, shares at Sep. 30, 2018 | 54,766,642 | |||||
Beginning balance, amount at Sep. 30, 2018 | $ 5,477 | 3,427,230 | (870,243) | 2,562,464 | ||
Net loss | (1,273,379) | |||||
Ending balance, shares at Mar. 31, 2019 | 63,098,311 | |||||
Ending balance, amount at Mar. 31, 2019 | $ 6,311 | 16,948,099 | (2,082,837) | (60,785) | 14,810,788 | |
Beginning balance, shares at Dec. 31, 2018 | 60,896,642 | |||||
Beginning balance, amount at Dec. 31, 2018 | $ 6,090 | 14,470,117 | (1,199,062) | (48,478) | 13,228,667 | |
Issuance of stock for cash, shares | 2,166,669 | |||||
Issuance of stock for cash, amount | $ 217 | 2,249,786 | 2,250,003 | |||
Exchange of shares for services, shares | 35,000 | |||||
Exchange of shares for services, amount | $ 4 | 228,196 | 228,200 | |||
Net loss | (883,775) | (12,307) | (896,082) | |||
Ending balance, shares at Mar. 31, 2019 | 63,098,311 | |||||
Ending balance, amount at Mar. 31, 2019 | $ 6,311 | 16,948,099 | (2,082,837) | (60,785) | 14,810,788 | |
Beginning balance, shares at Sep. 30, 2019 | 63,643,005 | |||||
Beginning balance, amount at Sep. 30, 2019 | $ 6,365 | 18,148,962 | (10,694,939) | (123,942) | 7,336,446 | |
Stock issued for acquisition, shares | ||||||
Stock issued for acquisition, amount | ||||||
Treasury stock acquired in settlement agreement, shares | (2,300,000) | |||||
Treasury stock acquired in settlement agreement, amount | 3,450,000 | $ (3,450,000) | ||||
Exchange of shares for services, shares | 55,618 | |||||
Exchange of shares for services, amount | $ 6 | 132,100 | 132,106 | |||
Stock compensation, shares | 26,282 | |||||
Stock compensation, amount | $ 3 | 74,997 | 75,000 | |||
Net loss | (1,950,190) | (25,138) | (1,975,328) | |||
Ending balance, shares at Dec. 31, 2019 | 63,724,905 | (2,300,000) | ||||
Ending balance, amount at Dec. 31, 2019 | $ 6,374 | 21,806,059 | $ (3,450,000) | (12,645,129) | (149,080) | 5,568,224 |
Beginning balance, shares at Sep. 30, 2019 | 63,643,005 | |||||
Beginning balance, amount at Sep. 30, 2019 | $ 6,365 | 18,148,962 | (10,694,939) | (123,942) | 7,336,446 | |
Net loss | (3,552,564) | |||||
Ending balance, shares at Mar. 31, 2020 | 66,974,905 | (2,300,000) | ||||
Ending balance, amount at Mar. 31, 2020 | $ 6,699 | 28,755,810 | $ (3,450,000) | (14,221,229) | 11,091,280 | |
Beginning balance, shares at Dec. 31, 2019 | 63,724,905 | (2,300,000) | ||||
Beginning balance, amount at Dec. 31, 2019 | $ 6,374 | 21,806,059 | $ (3,450,000) | (12,645,129) | (149,080) | 5,568,224 |
Stock issued for acquisition, shares | 3,250,000 | |||||
Stock issued for acquisition, amount | $ 325 | 3,506,675 | 3,507,000 | |||
Noncontrolling interest dissolution from acquisition | (150,216) | 150,216 | ||||
Warrants issued | 257,094 | 257,094 | ||||
Warrants to be issued | 3,336,198 | 3,336,198 | ||||
Net loss | (1,576,100) | (1,136) | (1,577,236) | |||
Ending balance, shares at Mar. 31, 2020 | 66,974,905 | (2,300,000) | ||||
Ending balance, amount at Mar. 31, 2020 | $ 6,699 | $ 28,755,810 | $ (3,450,000) | $ (14,221,229) | $ 11,091,280 |
Description of Business and Sum
Description of Business and Summary of Significant Accounting Policies | 6 Months Ended |
Mar. 31, 2020 | |
Accounting Policies [Abstract] | |
Description of Business and Summary of Significant Accounting Policies | Note 1 – Description of Business and Summary of Significant Accounting Policies Description of Business Item 9 Labs Corp. (“Item 9 Labs” or 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. On October 26, 2012, the Articles of Incorporation were amended to reflect a name change to Airware Labs Corp, and on April 2, 2018, they were amended again to reflect the name change to Item 9 Labs Corp. On October 18, 2018 the Company effected a 1 for 20 reverse stock split of the Company’s common stock. The par value and number of authorized shares were not adjusted as a result of the reverse stock split. The total number of shares outstanding at the time of the split was adjusted from 1,095,332,835 to 54,766,642. All share information in these financial statements has been retroactively adjusted to reflect the effect of the reverse split. On March 20, 2018, the Company closed on an Agreement and Plan of Exchange (the “Agreement”) to acquire all of the membership interests of BSSD Group, LLC (“BSSD”), an Arizona limited liability company formed on May 2, 2017, in exchange for newly issued restricted shares of the Company’s common stock (the “Shares”), which represented approximately 75% of the issued and outstanding shares of the Company’s common stock on a fully-diluted basis. The 40,355,771 Shares were distributed pro-rata to the BSSD members. As part of the Agreement, the Company agreed to increase its authorized shares of common stock to two billion. For accounting purposes the transaction was recorded as a reverse recapitalization, with BSSD as the accounting acquirer. Consequently, the historical pre-merger financial statements of BSSD are now those of the Company. In its determination that BSSD was the accounting acquirer, the Company considered pertinent facts and circumstances, including the following: (i) the BSSD owners received the largest portion of the voting rights of the combined entity; (ii) the management team of the combined entity is primarily comprised of owners or management of BSSD; (iii) the continuing business of the combined entity will be the business of BSSD. Through a licensing agreement, the Company grows medical marijuana and produces cannabis related products at their facility in Pinal County, Arizona on behalf of licensed medical marijuana dispensaries in the state of Arizona. Certain assets of the Company, consisting of five acres of land and a cultivation facility, were contributed by the members of BSSD in May 2017 and were recorded at the historical carrying value (original cost less any related accumulated depreciation) of the members as of the contribution date. On September 12, 2018, the Company executed a $1,500,000 promissory note (see Note 8) which was used to make a capital contribution into Strive Management, LLC, a Nevada limited liability company (“Strive Management”). In exchange for the contribution, the Company received a 20% membership interest in Strive Management. The remaining interests are held by three individuals one of which is the Company’s former Chief Executive Officer. Through a management agreement with Strive Wellness of Nevada, LLC, a related party (the Company’s former CEO is a member of this LLC), Strive Management will facilitate the cultivation, processing and distribution of marijuana in Nevada. Strive Wellness of Nevada, LLC has been allocated cultivation, processing and distribution licenses from the state of Nevada. The Company acquired the remaining membership interests in Strive Management in February 2020 as well as the licenses owned by Strive Wellness of Nevada, LLC. As of March 31, 2020, the licenses have not been transferred to the Company, as the transfer is awaiting regulatory approval. See Note 2. 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 services we provide are currently designated an essential critical infrastructure business under the President’s COVID-19 guidance, the continued operation of which is vital for national public health, safety and national economic security. 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 Item 9 Labs consolidates all variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary and all other entities in which it has a controlling voting interest. 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 periodically makes judgments in determining whether its investees are VIEs and, for each reporting period, the Company assesses whether it is the primary beneficiary of any of its VIEs. As of September 30, 2019, the Company is deemed the primary beneficiary of Strive Management because the entity has insufficient equity to finance its activities without additional subordinated support. The interests in Strive Management held by non-controlling members has been presented on the statement of operations and statement of stockholders’ equity as non-controlling interest. See Note 2. The consolidated condensed financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities in which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated condensed financial statements of the Company as of March 31, 2020 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 the information and notes necessary for a presentation of financial position and results of operations in accordance with GAAP and should be read in conjunction with our September 30, 2019 audited financial statements filed with the SEC on our Form 10-K filed January 14, 2020. 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, 2019 condensed balance sheet data from audited financial statements, however, we did not include all disclosures required by GAAP. The results for the interim period are not necessarily indicative of the results to be expected for the year ending September 30, 2020. Accounting Estimates The preparation of financial statements in conformity with Accounting Principles Generally Accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, deferred costs, accruals and contingencies, carrying value of goodwill and intangible assets, collectability of notes receivable, 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. Cash and Cash Equivalents and Restricted Cash Cash represents cash on hand, demand deposits placed with banks and other financial institutions and all highly liquid instruments purchased with a remaining maturity of three months or less as of the purchase date of such investments. The Company maintains cash on deposit, which, can exceed federally insured limits. The Company has not experienced any losses on such accounts nor believes it is exposed to any significant credit risk on cash. Restricted cash represents funds held by a bank pending resolution of a dispute with a former officer of the Company. The dispute was resolved during the three months ended March 31, 2020 and the cash is no longer restricted. Accounts Receivable Accounts receivable are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations of the year in which those differences are determined, with an offsetting entry to a valuation allowance for accounts receivable. Deferred Costs Deferred costs consist of the costs directly related to the production and cultivation of marijuana crops. Deferred costs are relieved to cost of services as products are delivered to dispensaries. Property and Equipment Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period incurred. The estimated useful lives of property and equipment are: · Cultivation and manufacturing equipment 2-7 years · Buildings 30 years Notes and Other Receivables, net Notes and other receivables are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations of the period in which those differences are determined, with an offsetting entry to a valuation allowance for receivables. Management assesses all receivables individually and in total, considering historical credit losses as well as existing economic conditions to determine the likelihood of future credit losses. The Company stops accruing interest on interest bearing receivables when the receivable is in default. There was a total valuation allowance as of March 31, 2020 and September 30, 2019 of $376,430. Impairment of Long-Lived Assets We analyze long-lived assets, including property and equipment and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and estimated period of useful life at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amount of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets, which is generally calculated using discounted cash flows. Intangible Assets Subject to Amortization Intangible assets include trade name, customer relationships, website, a noncompete agreement and intellectual property obtained through a business acquisition (see Note 2). Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired. Intangible assets with finite lives are amortized over their estimated useful life and reported net of accumulated amortization, separately from goodwill. Amortization is calculated on the straight-line basis using the following estimated useful lives: · Trade names 10 years · Customer relationships 2 years · Noncompete agreement 4 months (settlement agreement) · Websites and other intellectual property 5 years Generally, the Company utilizes the relief from royalty method to value trade name, the with or without method for valuing the customer relationships, and the discounted cash flow method for valuing website and intellectual property. Goodwill and Intangible Assets Not Subject to Amortization Goodwill represents the excess of the purchase price paid for the acquisition of a business over the fair value of the net tangible and intangible assets acquired. Indefinite life intangible assets represent licenses purchased for cultivation, processing and distribution of cannabis. Goodwill and indefinite life intangibles are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The goodwill included in these consolidated condensed financial statements represents the amount of consideration paid above the amount of the individually identifiable assets acquired. In assessing potential impairment, management first considers qualitative factors to determine if an impairment of goodwill or indefinite life intangibles existed. Upon the determination of a likely impairment, management assesses the recorded goodwill or indefinite life intangibles balance with the fair value of the business or assets acquired. In addition to the annual impairment test, we are required to regularly assess whether a triggering event has occurred which would require interim testing. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on our operations. Currently, we have determined that a triggering event has not occurred that would require an interim impairment test to be performed. However, we refer you to our comment in the first section of this Note 1 as it relates to the impact of COVID-19 and certain economic uncertainties. Income Taxes The Company accounts for income taxes under FASB ASC 740, Income Taxes The Company files income tax returns in the U.S. federal jurisdiction, and the State of Arizona. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. Generally all periods beginning on or after January 1, 2015 are open to examination by taxing authorities. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain. Revenue Recognition On October 1, 2017, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and all the related amendments. 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 and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than previously required under GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. All of the Company’s revenue is associated with a customer contract that represents an obligation to perform services that are delivered at a single point in time. Any costs incurred prior to the period in which the services are performed to completion are deferred and recognized as cost of revenues in the period in which the performance obligations are completed. For the three and six months ended March 31, 2020, approximately 96% and 95%, respectively of the Company’s revenue was generated from performance obligations completed in the state of Arizona and for the three months ended March 31, 2019, all revenues were generated for performance obligations completed in the state of Arizona. The Company recognizes revenue as services are rendered. Services are considered complete 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. Under the performance contract, the Company acts as an agent for the dispensary, does not own the marijuana, cannot exchange the marijuana, prepares invoices for the dispensary and all employees that are in contact with marijuana are dispensary agents of the dispensary with which we have our contract. Given these facts and circumstances, it is the Company’s policy to record the revenue related to the contract net of the amount retained by the dispensary. Per the dispensary contract, the Company was paid 85% of the wholesale market price of the marijuana for the services rendered for the three and six months ended March 31, 2019. The contract was amended in December 2019 and beginning January 2020, the Company was paid 100% of the wholesale market price of the marijuana for the services rendered. The contract called for monthly payments in the amount of $80,000 for the three months ending March 31, 2020. Beginning April 1, 2020, the Company entered into a three year agreement with another dispensary, which calls for monthly payments of $40,000. 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 or variable consideration. Fair Value of Financial Instruments The carrying value of the Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short term to maturity. The Company’s receivable resulting from the sale of Airware, notes receivable and notes payable were discounted to its estimated fair value. ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows: Level 1: Quoted prices in active markets for identical assets or liabilities; Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability. Net Loss Per Share Basic loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. At March 31, 2020 and September 30, 2019 there were 11,132,700 and 656,112 shares underlying convertible notes payable, warrants and options, that were anti-dilutive, respectively. Stock-Based Compensation The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation – Stock Compensation”, The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future. Warrants and Debt Discounts The Company bifurcates the value of warrants issued with debt. This bifurcation results in the establishment of 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 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 following assumptions were used to estimate the warrants issued during the quarter ended March 31, 2020: Expected stock price volatility 186.00% Expected dividend yield 0.00% Risk-free interest rate 2.97% Option life 1.5-2.5 years Recently Issued Accounting Pronouncements Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. We adopted ASU 2016-02 effective October 1, 2019.The most significant change was related to the recognition of a right-of-use asset and lease liability on our consolidated condensed balance sheet for our real estate operating lease. The impact on our results of operations and cash flows is not material. See Note 10. In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805). The update clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets of businesses. The Company adopted ASU 2017-01 on January 1, 2020 which impacted how the acquisition from February 2020 (Note 2) has been reported. In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260). The update changes the classification analysis of certain equity-linked financial instruments (or embedded features) which contain down round features. The Company adopted ASU 2017-11 on January 1, 2020 which impacted how warrants relating to debt was recorded. Pending Adoption In June 2016, the FASB issued ASU 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 us 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 consolidated condensed financial statements. 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. |
Business Combination_Acquisitio
Business Combination/Acquisitions | 6 Months Ended |
Mar. 31, 2020 | |
Business Combinations [Abstract] | |
Business Combination/Acquisitions | Note 2 –Business Combination/Acquisitions On November 26, 2018, the Company’s wholly owned subsidiary AZ DP Holdings, LLC (“AZDP”) performed an acquisition of the majority of the assets of Arizona DP Consulting, LLC (“AZDPC”), a consulting firm specializing in obtaining marijuana dispensary permits and developing cannabis related business plans. The purchase price was $9,270,000, $1,500,000 in cash and 3,000,000 shares of restricted common stock having an aggregate value of $7,770,000 or $2.59 per share based on the market price of the Company’s shares at the time the asset purchase agreement was executed. There were no significant costs relating to the acquisition. Pursuant to the agreement, Sara Gullickson transitioned from President to CEO under a 3 year employment agreement and became a member of the board of directors of the Company. Additionally, AZDP agreed to hire the employees of AZDPC and lease its existing office space which required $3,200 of monthly rent through May 2019, which was subsequently extended through August 2019. The primary reason for the acquisition was to utilize the assets held by AZDPC to assist in the expansion of the Company. In accordance with ASC 805, Business Combinations Identifiable intangible assets and goodwill consist of the following as of March 31, 2020: Balance at Balance at October 1, 2019 Additions Amortization March 31, 2020 Trade names $ 161,848 $ 144,120 $ (6,000 ) $ 299,968 Customer relationships 181,250 — (72,500 ) 108,750 Licenses — 6,744,679 — 6,744,679 Websites and other intellectual property 1,144,277 — (134,620 ) 1,009,657 Noncompete agreement 352,500 — (352,500 ) — Total other intangible assets 1,839,875 6,888,799 (565,620 ) 8,163,054 Goodwill 1,116,396 — — 1,116,396 Total $ 2,956,271 $ 6,888,799 $ (565,620 ) $ 9,279,450 On November 15, 2019, Ms. Sara Gullickson voluntarily resigned as Chief Executive Officer and member of the Board of Directors of Item 9 Labs Corp. The resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies, or practices. Ms. Gullickson and the Company have mutually agreed to amend the terms of the employment agreement and non-competition agreement between Ms. Gullickson and the Company dated November 26, 2018 pursuant to which (i) the non-competition period shall be reduced from three (3) years to four (4) months; (ii) Ms. Gullickson shall receive her full salary and health benefits for four (4) months from the resignation date (a significantly reduced period of time); and (iii) Ms. Gullickson shall cancel and return to treasury an aggregate amount 2,300,000 restricted shares of Company Common Stock which were acquired by Gullickson pursuant to that certain Asset Purchase Agreement dated November 26, 2018 by and between Arizona DP Consulting LLC, an Arizona limited liability company, as seller, and Gullickson as the sole member of the seller on the one hand, and the Company and AZ DP Holdings, LLC, a Nevada limited liability company as buyer, on the other hand. The returning of the stock was accounted for as a capital contribution and treasury stock transaction. As such, there was no impact on total equity. In exchange for the aforementioned terms, the Company and Gullickson agreed to a release of claims against each other, among other things. The agreement contains representations and warranties customary for agreements of this type. Nevada In February 2020, the Company executed an agreement with the other members of Strive Management, LLC to purchase the remaining 80% of Strive Management, LLC (“Strive”), as well as the Nevada licenses its members held in another entity. The Company agreed to pay $500,000 in cash, $1,000,000 in an unsecured note payable, 3,250,000 shares of the Company’s restricted common stock and issue 2,000,000 warrants exercisable into the Company’s common stock. The warrants are to be issued upon the earlier of September 30, 2020 or three months following the date on which each provisional certificate becomes a final certificate. The warrants have a three year term, exercise price of $1.13 and include down round provisions. In order to close the transaction, the Company borrowed $500,000 from Stockbridge Enterprises, a related party. The Company is to repay the loan by April 15, 2020. Subsequent to March 31, 2020, this loan has not been repaid and is in default. Though the Company acquired the remaining portion of Strive, Strive was not considered a business under ASC 805, Business Combinations, as it did not have a substantive process. As such, the Company is reporting the transaction as an asset acquisition. As of March 31, 2020 $6,744,679 has been recorded to licenses relating to the transaction. |
Property and Equipment, Net
Property and Equipment, Net | 6 Months Ended |
Mar. 31, 2020 | |
Property, Plant and Equipment [Abstract] | |
Property and Equipment, Net | Note 3 - Property and Equipment, Net The following represents a summary of our property and equipment as of March 31, 2020 and September 30, 2019: March 31, September 30, 2020 2019 Cultivation and manufacturing equipment $ 169,069 $ 154,059 Construction in progress 4,096,577 4,060,297 Land and building 3,095,646 3,093,549 7,361,292 7,307,905 Accumulated Depreciation (203,437 ) (137,483 ) $ 7,157,855 $ 7,170,422 Depreciation expense for the six months ended March 31, 2020 and 2019 was $64,220 and $13,200, respectively. |
Sale of Airware Assets and Inve
Sale of Airware Assets and Investment in Health Defense LLC | 6 Months Ended |
Mar. 31, 2020 | |
Business Combinations [Abstract] | |
Sale of Airware Assets and Investment in Health Defense LLC | Note 4 – Sale of Airware Assets and Investment in Health Defense LLC On May 3, 2018, the Company entered into an intellectual property sales agreement with Health Defense LLC. Pursuant to the terms of the agreement, the Company sold all of the assets related to the former business of the Company, nasal dilator sales. In consideration for entering into the agreement, the Company is to receive: (i) $300,000 in cash at execution, (ii) $700,000 in cash within one year of execution and (iii) an additional $300,000 by December 31, 2019. As additional consideration, the Company was given a 10% ownership interest in Health Defense LLC. This ownership is valued at $100,000 and is reflected on the consolidated condensed balance sheets as Investment in Health Defense at March 31, 2020 and September 30, 2019. As of March 31, 2020, management determined that the receivable described above should be classified as long-term on the consolidated condensed balance sheets as the payments have not been made as scheduled. Additionally, management has recorded an allowance on the receivable of $307,430 at March 31, 2020 and September 30, 2019. |
Notes Receivable
Notes Receivable | 6 Months Ended |
Mar. 31, 2020 | |
Receivables [Abstract] | |
Notes Receivable | Note 5 – Notes Receivable On May 11, 2018, the Company entered into a Promissory Note Agreement with a borrower in the principal amount of $150,000. This is a one year note with 20% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into a unit offering of the borrower at a 15% discount. The note is personally guaranteed by the borrower. This note is in default and is on non-accrual status. The Company is currently negotiating an amendment to the note. On May 15, 2018, the Company entered into a Promissory Note Agreement with a borrower in the principal amount of $60,000. This is a one year note with 15% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into an interest in a strategic partnership of ownership and operations of a certain dispensary license. The note is personally guaranteed by the borrower. This note is in default and is on non-accrual status. At March 31, 2020, the principal and interest has been fully reserved in the amount of $69,000. At March 31, 2020 and September 30, 2019, the Company has accrued $39,000 of interest receivable related to these notes which is included in notes and interest receivables on the accompanying consolidated condensed balance sheets. |
Short Term Note Payable
Short Term Note Payable | 6 Months Ended |
Mar. 31, 2020 | |
Short Term Note Payable | |
Short Term Note Payable | Note 6 – Short Term Notes Payable Aeneas Venture Partners 3, LLC Note On August 28, 2019, Item 9 Properties, LLC, a Nevada limited liability company, and BSSD Group, LLC, an Arizona limited liability company, each wholly owned subsidiaries of Item 9 Labs Corp. collectively, entered into a Loan Agreement of up to $2.5 million (the “Loan Agreement”) with Aeneas Venture Partners 3, LLC, an Arizona limited liability company (the “Lender”). Pursuant to the Loan Agreement, the Company may make multiple borrowings under the Loan Agreement in the total aggregate principal amount of up to $2.5 million (the “Loan”) for the purpose of completing development and construction on certain real property located in Pahrump, Nevada owned by the Company. The Loan is a multiple advance credit facility. The Company drew $2,000,000 on August 28, 2019 and an additional $200,000 on November 26, 2019. Interest in the amount of 15% of the total amount borrowed (based on total draws) under the Loan will be paid in addition to principal at the maturity date. The Loan has a term of sixty days from funding of the Loan and may be extended for additional sixty days subject to the satisfaction of certain conditions including ten days’ notice and an extension loan fee of 15% of the aggregate total of advances under the Loan. The Loan is secured by a first priority interest in the Company’s real property located in Coolidge, Arizona, including improvements and personal property thereon (the “Property”) and includes an unconditional guarantee by Item 9 Labs Corp. The 5-acre property has 20,000 square feet of buildings, housing the cultivation and processing operations. On March 23, 2020, the Company paid $2,000,000 on the note and reached a settlement to bring the note current. The settlement calls for monthly interest payments of $22,000 and the principal balance of the note is due within one year. There is a prepayment penalty equal to all interest payments due through October 1, 2020 if the note is paid in full prior to that date. Stockbridge/Viridis Note In connection with the $2,000,000 payment on the note described above, on March 23, 2020 the Company borrowed debt proceeds from two related parties, Stockbridge Enterprises and Viridis I9 Capital LLC. The agreements for these borrowed proceeds have not been finalized, though the notes have been recorded based on an expected outcome of the negotiations. The $2,200,000 borrowing is expected to be unsecured, have a term of six months, and accrue interest at a rate of 10% per year. All principal and interest are due on the maturity date. The debt is expected to include a provision for the issuance of 10,000,000 warrants exercisable into the Company’s common stock. The exercise price on the warrants is expected to be $.75 and have a term of 5 years. The debt and warrants were recorded at their relative fair values. The resulting discount will be amortized to interest expense over the term of the debt. The balance of the debt, discount, amortized discount and accrued interest is as follows at March 31, 2020. Debt $2,200,000 Discount 1,726,099 Amortization 75,048 Accrued interest 4,822 Stockbridge Note The Company entered into an additional note with Stockbridge Enterprises, a related party in February 2020. The $500,000 borrowing had a term of 60 days and bears interest at 6% per year. All principal and interest are due on the maturity date. The note includes a provision for the issuance of 500,000 warrants exercisable into the Company’s common stock. The warrants have an exercise price of $.75 and a term of 5 years. The note contains provisions to reduce the exercise price each month if the note is in default. Though not in default as of March 31, 2020, the note went into default in April 2020. The warrant value was determined using a $.05 exercise price as it is management’s estimate that the note will be repaid after July 1, 2020, the date the exercise price on the warrants reduces to $.05. The resulting discount will be amortized to interest expense over the term of the note. The balance of the note, discount, amortized discount and accrued interest is as follows at March 31, 2020. Notes payable $400,000 Discount 257,094 Amortization 257,094 Accrued interest 4,493 |
Unsecured Convertible Note Paya
Unsecured Convertible Note Payable | 6 Months Ended |
Mar. 31, 2020 | |
Debt Disclosure [Abstract] | |
Unsecured Convertible Note Payable | Note 7 – Unsecured Convertible Note Payable In the reverse recapitalization disclosed in Note 1, the Company assumed one unsecured convertible note payable with principal balance totaling $20,000 which was due in August 2012, carries an interest rate of 8% and is convertible including accrued interest to common stock at $.50 per share, which would be approximately 63,000 shares as of March 31, 2020 and September 30, 2019. As of March 31, 2020 and September 30, 2019, this unsecured convertible note payable is considered in default and has been presented as a current liability on the consolidated condensed balance sheets. |
Long Term Debt
Long Term Debt | 6 Months Ended |
Mar. 31, 2020 | |
Debt Disclosure [Abstract] | |
Long Term Debt | Note 8 – Long Term Debt On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”) in which Viridis has agreed to loan the Company up to $2.7 million for the expansion of the Company’s Arizona and Nevada properties (see Note 12). As of September 30, 2018, the Company received $1,500,000 of proceeds from Viridis in the form of a promissory note. The $1,500,000 proceeds were utilized to acquire a 20% ownership in Strive Management, LLC as described in Notes 1 and 9, and is collateralized with a Deed of Trust on the Company’s approximately 5 acre property and construction in progress. In exchange for the loan, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive 5% of the Company’s gross revenues from the Nevada operations until the loan is repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. Payments on the loan will commence 90 days after the Nevada operation begins earning revenue. Parties acknowledge that the Company was expected to own only 51% of the Nevada operations and therefore Viridis’ revenue participation is limited to the Company’s interest. On February 14, 2020, the Company acquired the remaining 80% membership interest in Strive Management, LLC. Therefore, the revenue participation payments will be based on 100% of the revenues of the Company’s Nevada operations. The operations in Nevada have not yet begun as of the date of this filing. On August 26, 2019, the loan was amended to include 6% annualized interest in exchange for Viridis subordinating its debt to another lender. Interest of $389,440 has been accrued as of March 31, 2020. The additional $1,200,000 of proceeds drawn during the year ended September 30, 2019 were utilized to construct an additional 10,000 square foot cultivation and processing facility in Arizona that became operational in June 2019. The loan was originally collateralized with a Deed of Trust on the Company’s 5 acre parcel in Coolidge, AZ and its two 10,000 square foot buildings. In August 2019, Viridis agreed to subordinate its first priority Deed of Trust and move into a 2 nd Both notes are in default as of March 31, 2020, though are currently being renegotiated to remove the default. As such, the notes are presented as current liabilities on the consolidated condensed balance sheets. The notes are with a related party, Viridis. The former CEO of Viridis is the CEO and a board member of Item 9 Labs Corp. The Company’s subsidiary, BSSD Group, LLC borrowed $269,000 from Viridis Group during the six months ended March 31, 2020. This note bears annualized interest at 15%. Interest of $11,304 has been accrued on this note as of March 31, 2020. The remaining terms of the note are still being negotiated. Strive Note In connection with the license acquisition described in Note 2, the Company entered into a note payable with the sellers in February 2020. The $1,000,000 note has a term of two years starting September 30, 2020 and bears interest at 2% per year. A principal payment in the amount of $500,000 is due on the earlier of October 10, 2020 or three months following the date on which each provisional certificate becomes a final certificate. Due to the low stated interest rate on the note, management imputed additional interest on the note. The balance of the note, discount, amortized discount and accrued interest is as follows at March 31, 2020: Note payable $ 1,000,000 Discount 151,561 Amortization 11,315 Accrued interest — Future amortization of the note and related discount is as follows at March 31, 2020: Fiscal Year Accrued Interest Discount Amortization Payment Remaining 2020 $ — $ 61,629 $ — 2021 8,151 50,945 (755,658 ) 2022 3,164 27,671 (255,658 ) |
Variable Interest Entity
Variable Interest Entity | 6 Months Ended |
Mar. 31, 2020 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Variable Interest Entity | Note 9 – Variable Interest Entity As of September 30, 2019, the Company determined that it held a variable interest in Strive Management due to the Company being its sole source of capital. Further, the Company had agreed to raise $4,000,000 on Strive Management’s behalf through promissory note agreements that the Company will guarantee. No funds have been raised as of the date of these consolidated condensed financial statements. If the funds are not raised, the additional 31% interest due to the Company upon operational approval from the State of Nevada as discussed in Note 1 would have been subject to reclamation by the other members of Strive Management. The Company has been determined to be the primary beneficiary of Strive Management as the Company has the power to direct the activities that significantly impact Strive Management’s economic performance and the obligation to absorb losses. Strive Management’s financial statements as of March 31, 2020 and for the six months ending March 31, 2020 and 2019 have been consolidated with the Company. As discussed in Note 2, the Company completed the purchase of the remaining ownership interests of Strive Management LLC in February 2020. |
Leases
Leases | 6 Months Ended |
Mar. 31, 2020 | |
Notes to Financial Statements | |
Leases | Note 10 – Leases The Company leases its corporate office from an entity controlled by the CEO of the Company, under an operating lease. The lease is for a term of 5 years beginning September 1, 2019. The following is a schedule by year of future minimum payments required under the lease together with their present value as of March 31, 2020: Future Minimum Payments 2020 $ 58,478 2021 80,013 2022 82,114 2023 84,215 2024 78,963 383,783 less imputed interest (140,756 ) $ 243,027 As of the inception of the lease, the lease liability and right of use asset was recorded at $268,359, the amount of the present value of all lease payments. To calculate the lease liability and right of use asset, the Company used a 20% discount rate, the approximate interest rate the Company would borrow at. Amortization in the amount of $43,346 has been recorded against the right of use asset, leaving a balance of $230,927 as of March 31, 2020. Payments in the amount of $25,332 has been recorded against the lease liability, leaving a balance of $243,027 as of March 31, 2020. |
Concentrations
Concentrations | 6 Months Ended |
Mar. 31, 2020 | |
Risks and Uncertainties [Abstract] | |
Concentrations | Note 11 - Concentrations For the three months ended March 31, 2020 and 2019, respectively, 96% and 100% of the Company’s revenue were generated from a single customer. |
Commitments and Contingencies
Commitments and Contingencies | 6 Months Ended |
Mar. 31, 2020 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Note 12 - Commitments and Contingencies The production and possession of marijuana is prohibited by the United States of America, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. If the federal government decides to enforce the Controlled Substances Act, it could have a material adverse effect on our business. However, the Company does not currently believe the federal prohibition of these activities will negatively impact the business. As such, the Company has not elected to record a related accrual contingency. The Company is in default on convertible notes payable totaling $20,000 (see Note 7). The Company has attempted to communicate with the note holder to request extension or conversion, but has been unsuccessful in doing so. The full balance on this note is included in current liabilities. On April 20, 2018, the Company entered into an agreement for the purchase of approximately 44 acres of land from an affiliate of a founding member of BSSD. The purchase price of the property is $3,000,000, payable as follows; (i) $200,000 deposited with escrow agent as an initial earnest money deposit, (ii) on or before February 1, 2019, the Company will deposit an additional $800,000 into escrow as additional earnest money deposit and (iii) the balance of the purchase price shall be paid via a promissory note. The earnest money amounts are non-refundable. The Company has negotiated an amendment to this agreement that will spread the $800,000 payment over the course of 4 months. As of the date of these financial statements, $600,000 has been deposited in escrow which has been classified as a long-term asset on the consolidated condensed balance sheet as of March 31, 2020 and September 30, 2019. On June 26, 2018, the Company entered into a contractor agreement with Chase Herschman pursuant to which he will provide services in exchange for $120,000 annually, payable each month; up to $420,000 in common stock options which shall vest upon the occurrence of certain benchmarks as described in the contractor agreement and a commission of 1% of the gross profits of the Nevada Operations of the Company. The term of the agreement is a period of three years. On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”). Viridis agreed to make secured loans of up to $2.7 million to the Company which is represented by two separate notes, one for the construction and enhancement of the Company’s Arizona property and one for the Company’s proposed ventures in Nevada. In exchange for the loans, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive 5% of the Company’s gross revenues from each of the Company’s Arizona and Nevada operations, respectively, until the loan is repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. Under the terms of the Loan and Revenue Participation Agreement, upon a change in control of the Company, Viridis will be entitled to receive 200% of the principal amount of the loans to the Company computed after considering previous revenue participation payments through the date of change of control and 1% of the aggregate sales price or consideration received in the change in control transaction. As of March 31, 2020, the Company received the $1,500,000 and invested the funds in Strive Management (see Notes 2, 8 and 9). The remaining $1,200,000 has been provided by Viridis directly to contractors of the Arizona property from an account owned and controlled by Viridis. The Company recorded the $1,200,000 as debt at March 31, 2020 and September 30, 2019. On July 1, 2019, the Company entered into a three year agreement with a concert venue to be the name sponsor for the venue. In exchange, the Company issued 45,457 shares of restricted common stock valued at $200,000 ($4.40/share) and is to pay $5,000 monthly for the first 12 months and $60,000 in July 2020 and 2021. The Company entered into a 60 month lease with VGI Citadel LLC to rent office space for its corporate headquarters which began on September 1, 2019. The lease payments total $6,478 monthly for the first twelve months, include all utilities and an estimated amount for common area maintenance and real estate taxes. The monthly lease rate increases to $6,653, $6,828, $7,003, and $7,178 for years two through five, respectively. |
Related Party Transactions
Related Party Transactions | 6 Months Ended |
Mar. 31, 2020 | |
Related Party Transactions [Abstract] | |
Related Party Transactions | Note 13– Related Party Transactions As discussed in Note 1, on March 20, 2018, the Company issued 40,355,771 shares of common stock to the members of BSSD for their membership interests. As discussed in Note 12, the Company has entered into an agreement as of April 20, 2018 for the purchase of land. The land owner is one of the original members of BSSD and a current employee of the Company. As discussed in Note 14, on May 8, 2018, the Company issued 22,500 options for the purchase of common stock to three board members. As discussed in Notes 8 and 12, the Company has entered into a Loan and Revenue Participation Agreement and Promissory Note with Viridis. The member of Viridis was elected to the Company’s board of directors on December 21, 2018 and is currently the Company’s CEO. As discussed in Note 8, BSSD Group, LLC, a wholly owned subsidiary of the Company entered into a loan agreement with Viridis. As discussed in Note 2, the Company issued 3,000,000 of restricted common stock as part of the asset purchase agreement dated November 26, 2018. As part of November 15, 2019 settlement agreement, Gullickson returned 2,300,000 share of stock to the Company. During the three months ended December 31, 2018, the Company issued 3,000,000 shares of restricted common stock to Viridis I9 Capital LLC, an LLC in which, Andrew Bowden, director and CEO of the Company is a member. The sales price was $1.00 per share with net proceeds of $3,000,000. The Company has a construction management agreement with the Viridis Group to oversee the Nevada construction project totaling $20,000 monthly. The Company owes Viridis $60,000 for these services as of March 31, 2020 and September 30, 2019. As discussed in Note 6, the Company has notes payable to Viridis I9 Capital LLC and Stockbridge Enterprises in the amount of $2,200,000. As discussed in Note 6, the Company has a note payable to Stockbridge Enterprises in the amount of $400,000. As discussed in Note 12, the Company has a lease agreement with VGI Capital LLC. A member of VGI Capital was elected to the Company’s board of directors on December 21, 2018 and is currently the Company’s CEO. Included in our accounts payable at March 31, 2020 and September 30, 2019 is approximately $120,000 and $160,000, respectively in amounts due to related parties. |
Stockholders' Equity
Stockholders' Equity | 6 Months Ended |
Mar. 31, 2020 | |
Equity [Abstract] | |
Stockholders' Equity | Note 14 - Stockholders’ Equity Common Stock During the six months ended March 31, 2019, the Company raised $5,400,003 via private placements. The selling price for 5,000,000 shares was $1 per share and the selling price for 266,669 was $1.50 per share for a total of 5,266,669 shares of common stock issued. As discussed in Note 2, during the six months ended March 31, 2019, the Company issued 3,000,000 shares of restricted common stock, valued at $7,770,000 as consideration for the acquisition of the majority of the assets in AZ DP Consulting, LLC. In the six months ended March 31, 2019, in the normal course of business, the Company issued 65,000 shares of restricted common stock, valued at $351,700 as consideration for various consulting contracts. In the six months ended March 31, 2020, in the normal course of business, the Company issued 55,618 shares of restricted common stock, valued at $132,106 as consideration for various contracts, including venue sponsorships, marketing, and investor relations. In the six months ended March 31, 2020, the Company issued 26,282 shares of restricted common stock to employees, valued at $75,000. Warrants As of March 31, 2020, there are 12,775,000 warrants for purchase of the Company’s common stock outstanding. 12,500,000 warrants were issued during the six months ended March 31, 2020. Warrants outstanding as of March 31, 2020 are as follows: Common Shares Issuable Upon Exercise of Warrants Exercise Price of Warrants Date Issued Expiration Date Warrants issued by predecessor 175,000 $ 2.00 3/31/2015 8/31/2020 Warrants issued by predecessor 100,000 $ 1.00 7/28/2016 7/28/2021 Warrants issued related to asset acquisition 2,000,000 $ 1.13 9/30/2020 * 9/30/2023 Warrants issued related to debt financing 500,000 $ 0.05 2/14/2020 2/14/2025 Warrants issued related to debt financing 5,000,000 $ 0.75 3/23/2020 3/23/2025 Warrants issued related to debt financing 5,000,000 $ 0.75 3/23/2020 3/23/2025 Balance of Warrants at March 31, 2020 12,775,000 Vested 10,775,000 * - date is in the future as the Company is obligated to issue the warrants on September 30, 2020. These warrants are reflected in the warrants to be issued in the Unaudited Consolidated Condensed Statements of Stockholders’ Equity. Stock Options On May 8, 2018, the Company granted 22,500 stock options to board members. The options are exercisable at $2.40 per share with a ten year term. The options will vest equally over three years unless there is a change of control of the Company at which time any unvested options vest immediately. As of March 31, 2020 and September 30, 2019, there are 294,991 stock options outstanding. The Company determines the fair value of stock options issued on the date of grant using the Black-Scholes option-pricing model. There was no options activity during the six months ended March 31, 2020 and 2019. |
Merger
Merger | 6 Months Ended |
Mar. 31, 2020 | |
Notes to Financial Statements | |
Merger | Note 15 – Merger On February 27, 2020, Item 9 Labs Corp., a Delaware corporation (“Company”), and an unnamed wholly owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Agreement”) with OCG Inc., a Colorado corporation (“ Target Party Parties Merger Consideration On the terms and subject to the conditions set forth in the Agreement, upon the completion of the Merger, the Target Shareholders shall become stockholders of the Company through the receipt of an aggregate 30,000,000 restricted shares of the Common Stock of the Company (“Merger Consideration”). Upon closing of the Merger, and subject to the terms and conditions of the Agreement, the Merger Sub shall be merged with and into the Target (the Target following the Merger is sometimes referred to in this Agreement as the “ Surviving Corporation Governance of the Combined Company Upon closing of the Merger, Target may nominate, and the Company agrees to appoint, two persons designated by Target to the Company ’ Conditions to the Merger The parties’ obligation to consummate and (v) certain other customary conditions relating to the parties’ representations and warranties in the Agreement and the performance of their respective obligations. The consummation of the Merger is subject to a financing contingency that the Company must raise approximately $2,000,000. The Company has made customary representations and warranties in the Agreement. The Agreement also contains customary covenants and agreements, including covenants and agreements relating to the conduct of the Company’s business between the date of the signing of the Agreement and the closing of the transactions contemplated under the Agreement. The Merger is conditioned on the accuracy and correctness of the representations and warranties made by the other party on the date of the Agreement and on the Closing Date (as defined in the Agreement) or, if applicable, an earlier date (subject to certain “materiality” and “material adverse effect” qualifications set forth in the Agreement with respect to such representations and warranties) and the performance by the other party in all material respects of its obligations under the Merger Agreement. Under the Agreement, each of the Company and Target have agreed to use commercially reasonable efforts to consummate the Merger, including using best efforts to obtain all required regulatory approvals. |
Subsequent Events
Subsequent Events | 6 Months Ended |
Mar. 31, 2020 | |
Subsequent Events [Abstract] | |
Subsequent Events | Note 16 - Subsequent Events There are no significant subsequent events to disclose at this time. |
Going Concern
Going Concern | 6 Months Ended |
Mar. 31, 2020 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Going Concern | Note 17 – Going Concern The accompanying consolidated condensed financial statements have been prepared in conformity with GAAP, which contemplate 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 consolidated condensed 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. As a result, the Company’s independent registered public accounting firm included an emphasis-of-matter paragraph with respect to the consolidated financial statements for the year ended September 30, 2019, expressing uncertainty regarding the Company’s assumption that it will 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 underway in Nevada. 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 grow significantly, 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 significant 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 consolidated condensed 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. |
Description of Business and S_2
Description of Business and Summary of Significant Accounting Policies (Policies) | 6 Months Ended |
Mar. 31, 2020 | |
Accounting Policies [Abstract] | |
Description of Business | Description of Business Item 9 Labs Corp. (“Item 9 Labs” or 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. On October 26, 2012, the Articles of Incorporation were amended to reflect a name change to Airware Labs Corp, and on April 2, 2018, they were amended again to reflect the name change to Item 9 Labs Corp. On October 18, 2018 the Company effected a 1 for 20 reverse stock split of the Company’s common stock. The par value and number of authorized shares were not adjusted as a result of the reverse stock split. The total number of shares outstanding at the time of the split was adjusted from 1,095,332,835 to 54,766,642. All share information in these financial statements has been retroactively adjusted to reflect the effect of the reverse split. On March 20, 2018, the Company closed on an Agreement and Plan of Exchange (the “Agreement”) to acquire all of the membership interests of BSSD Group, LLC (“BSSD”), an Arizona limited liability company formed on May 2, 2017, in exchange for newly issued restricted shares of the Company’s common stock (the “Shares”), which represented approximately 75% of the issued and outstanding shares of the Company’s common stock on a fully-diluted basis. The 40,355,771 Shares were distributed pro-rata to the BSSD members. As part of the Agreement, the Company agreed to increase its authorized shares of common stock to two billion. For accounting purposes the transaction was recorded as a reverse recapitalization, with BSSD as the accounting acquirer. Consequently, the historical pre-merger financial statements of BSSD are now those of the Company. In its determination that BSSD was the accounting acquirer, the Company considered pertinent facts and circumstances, including the following: (i) the BSSD owners received the largest portion of the voting rights of the combined entity; (ii) the management team of the combined entity is primarily comprised of owners or management of BSSD; (iii) the continuing business of the combined entity will be the business of BSSD. Through a licensing agreement, the Company grows medical marijuana and produces cannabis related products at their facility in Pinal County, Arizona on behalf of licensed medical marijuana dispensaries in the state of Arizona. Certain assets of the Company, consisting of five acres of land and a cultivation facility, were contributed by the members of BSSD in May 2017 and were recorded at the historical carrying value (original cost less any related accumulated depreciation) of the members as of the contribution date. On September 12, 2018, the Company executed a $1,500,000 promissory note (see Note 8) which was used to make a capital contribution into Strive Management, LLC, a Nevada limited liability company (“Strive Management”). In exchange for the contribution, the Company received a 20% membership interest in Strive Management. The remaining interests are held by three individuals one of which is the Company’s former Chief Executive Officer. Through a management agreement with Strive Wellness of Nevada, LLC, a related party (the Company’s former CEO is a member of this LLC), Strive Management will facilitate the cultivation, processing and distribution of marijuana in Nevada. Strive Wellness of Nevada, LLC has been allocated cultivation, processing and distribution licenses from the state of Nevada. The Company acquired the remaining membership interests in Strive Management in February 2020 as well as the licenses owned by Strive Wellness of Nevada, LLC. As of March 31, 2020, the licenses have not been transferred to the Company, as the transfer is awaiting regulatory approval. See Note 2. 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 services we provide are currently designated an essential critical infrastructure business under the President’s COVID-19 guidance, the continued operation of which is vital for national public health, safety and national economic security. 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 | Principles of Consolidation Item 9 Labs consolidates all variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary and all other entities in which it has a controlling voting interest. 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 periodically makes judgments in determining whether its investees are VIEs and, for each reporting period, the Company assesses whether it is the primary beneficiary of any of its VIEs. As of September 30, 2019, the Company is deemed the primary beneficiary of Strive Management because the entity has insufficient equity to finance its activities without additional subordinated support. The interests in Strive Management held by non-controlling members has been presented on the statement of operations and statement of stockholders’ equity as non-controlling interest. See Note 2. The consolidated condensed financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities in which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated condensed financial statements of the Company as of March 31, 2020 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 the information and notes necessary for a presentation of financial position and results of operations in accordance with GAAP and should be read in conjunction with our September 30, 2019 audited financial statements filed with the SEC on our Form 10-K filed January 14, 2020. 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, 2019 condensed balance sheet data from audited financial statements, however, we did not include all disclosures required by GAAP. The results for the interim period are not necessarily indicative of the results to be expected for the year ending September 30, 2020. |
Accounting Estimates | Accounting Estimates The preparation of financial statements in conformity with Accounting Principles Generally Accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include but are not limited to accounting for depreciation and amortization, current and deferred income taxes, deferred costs, accruals and contingencies, carrying value of goodwill and intangible assets, collectability of notes receivable, 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. |
Cash and Cash Equivalents and Restricted Cash | Cash and Cash Equivalents and Restricted Cash Cash represents cash on hand, demand deposits placed with banks and other financial institutions and all highly liquid instruments purchased with a remaining maturity of three months or less as of the purchase date of such investments. The Company maintains cash on deposit, which, can exceed federally insured limits. The Company has not experienced any losses on such accounts nor believes it is exposed to any significant credit risk on cash. Restricted cash represents funds held by a bank pending resolution of a dispute with a former officer of the Company. The dispute was resolved during the three months ended March 31, 2020 and the cash is no longer restricted. |
Accounts Receivable | Accounts Receivable Accounts receivable are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations of the year in which those differences are determined, with an offsetting entry to a valuation allowance for accounts receivable. |
Deferred Costs | Deferred Costs Deferred costs consist of the costs directly related to the production and cultivation of marijuana crops. Deferred costs are relieved to cost of services as products are delivered to dispensaries. |
Property and Equipment | Property and Equipment Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period incurred. The estimated useful lives of property and equipment are: · Cultivation and manufacturing equipment 2-7 years · Buildings 30 years |
Notes and Other Receivables, net | Notes and Other Receivables, net Notes and other receivables are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations of the period in which those differences are determined, with an offsetting entry to a valuation allowance for receivables. Management assesses all receivables individually and in total, considering historical credit losses as well as existing economic conditions to determine the likelihood of future credit losses. The Company stops accruing interest on interest bearing receivables when the receivable is in default. There was a total valuation allowance as of March 31, 2020 and September 30, 2019 of $376,430. |
Impairment of Long-Lived Assets | Impairment of Long-Lived Assets We analyze long-lived assets, including property and equipment and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We review the amortization method and estimated period of useful life at least at each balance sheet date. We record the effects of any revision to operations when the change arises. We recognize impairment when the estimated undiscounted cash flow generated by those assets is less than the carrying amount of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets, which is generally calculated using discounted cash flows. |
Intangible Assets Subject to Amortization | Intangible Assets Subject to Amortization Intangible assets include trade name, customer relationships, website, a noncompete agreement and intellectual property obtained through a business acquisition (see Note 2). Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired. Intangible assets with finite lives are amortized over their estimated useful life and reported net of accumulated amortization, separately from goodwill. Amortization is calculated on the straight-line basis using the following estimated useful lives: · Trade names 10 years · Customer relationships 2 years · Noncompete agreement 4 months (settlement agreement) · Websites and other intellectual property 5 years Generally, the Company utilizes the relief from royalty method to value trade name, the with or without method for valuing the customer relationships, and the discounted cash flow method for valuing website and intellectual property. |
Goodwill and Intangible Assets Not Subject to Amortization | Goodwill and Intangible Assets Not Subject to Amortization Goodwill represents the excess of the purchase price paid for the acquisition of a business over the fair value of the net tangible and intangible assets acquired. Indefinite life intangible assets represent licenses purchased for cultivation, processing and distribution of cannabis. Goodwill and indefinite life intangibles are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The goodwill included in these consolidated condensed financial statements represents the amount of consideration paid above the amount of the individually identifiable assets acquired. In assessing potential impairment, management first considers qualitative factors to determine if an impairment of goodwill or indefinite life intangibles existed. Upon the determination of a likely impairment, management assesses the recorded goodwill or indefinite life intangibles balance with the fair value of the business or assets acquired. In addition to the annual impairment test, we are required to regularly assess whether a triggering event has occurred which would require interim testing. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on our operations. Currently, we have determined that a triggering event has not occurred that would require an interim impairment test to be performed. However, we refer you to our comment in the first section of this Note 1 as it relates to the impact of COVID-19 and certain economic uncertainties. |
Income Taxes | Income Taxes The Company accounts for income taxes under FASB ASC 740, Income Taxes The Company files income tax returns in the U.S. federal jurisdiction, and the State of Arizona. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. Generally all periods beginning on or after January 1, 2015 are open to examination by taxing authorities. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain. |
Revenue Recognition | Revenue Recognition On October 1, 2017, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and all the related amendments. 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 and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than previously required under GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. All of the Company’s revenue is associated with a customer contract that represents an obligation to perform services that are delivered at a single point in time. Any costs incurred prior to the period in which the services are performed to completion are deferred and recognized as cost of revenues in the period in which the performance obligations are completed. For the three and six months ended March 31, 2020, approximately 96% and 95%, respectively of the Company’s revenue was generated from performance obligations completed in the state of Arizona and for the three months ended March 31, 2019, all revenues were generated for performance obligations completed in the state of Arizona. The Company recognizes revenue as services are rendered. Services are considered complete 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. Under the performance contract, the Company acts as an agent for the dispensary, does not own the marijuana, cannot exchange the marijuana, prepares invoices for the dispensary and all employees that are in contact with marijuana are dispensary agents of the dispensary with which we have our contract. Given these facts and circumstances, it is the Company’s policy to record the revenue related to the contract net of the amount retained by the dispensary. Per the dispensary contract, the Company was paid 85% of the wholesale market price of the marijuana for the services rendered for the three and six months ended March 31, 2019. The contract was amended in December 2019 and beginning January 2020, the Company was paid 100% of the wholesale market price of the marijuana for the services rendered. The contract called for monthly payments in the amount of $80,000 for the three months ending March 31, 2020. Beginning April 1, 2020, the Company entered into a three year agreement with another dispensary, which calls for monthly payments of $40,000. 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 or variable consideration. |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The carrying value of the Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short term to maturity. The Company’s receivable resulting from the sale of Airware, notes receivable and notes payable were discounted to its estimated fair value. ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows: Level 1: Quoted prices in active markets for identical assets or liabilities; Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability. |
Net Loss Per Share | Net Loss Per Share Basic loss per share does not include dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. At March 31, 2020 and September 30, 2019 there were 11,132,700 and 656,112 shares underlying convertible notes payable, warrants and options, that were anti-dilutive, respectively. |
Stock-Based Compensation | Stock-Based Compensation The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation – Stock Compensation”, The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future. |
Warrants and Debt Discounts | Warrants and Debt Discounts The Company bifurcates the value of warrants issued with debt. This bifurcation results in the establishment of 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 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 following assumptions were used to estimate the warrants issued during the quarter ended March 31, 2020: Expected stock price volatility 186.00% Expected dividend yield 0.00% Risk-free interest rate 2.97% Option life 1.5-2.5 years |
Recently Issued Accounting Pronouncements | Recently Issued Accounting Pronouncements Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update improves financial reporting about leasing transactions by requiring a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. We adopted ASU 2016-02 effective October 1, 2019.The most significant change was related to the recognition of a right-of-use asset and lease liability on our consolidated condensed balance sheet for our real estate operating lease. The impact on our results of operations and cash flows is not material. See Note 10. In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805). The update clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets of businesses. The Company adopted ASU 2017-01 on January 1, 2020 which impacted how the acquisition from February 2020 (Note 2) has been reported. In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260). The update changes the classification analysis of certain equity-linked financial instruments (or embedded features) which contain down round features. The Company adopted ASU 2017-11 on January 1, 2020 which impacted how warrants relating to debt was recorded. Pending Adoption In June 2016, the FASB issued ASU 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 us 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 consolidated condensed financial statements. 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. |
Business Combination_Acquisit_2
Business Combination/Acquisitions (Tables) | 6 Months Ended |
Mar. 31, 2020 | |
Business Combinations [Abstract] | |
Identifiable intangible assets | Balance at Balance at October 1, 2019 Additions Amortization March 31, 2020 Trade names $ 161,848 $ 144,120 $ (6,000 ) $ 299,968 Customer relationships 181,250 — (72,500 ) 108,750 Licenses — 6,744,679 — 6,744,679 Websites and other intellectual property 1,144,277 — (134,620 ) 1,009,657 Noncompete agreement 352,500 — (352,500 ) — Total other intangible assets 1,839,875 6,888,799 (565,620 ) 8,163,054 Goodwill 1,116,396 — — 1,116,396 Total $ 2,956,271 $ 6,888,799 $ (565,620 ) $ 9,279,450 |
Property and Equipment, Net (Ta
Property and Equipment, Net (Tables) | 6 Months Ended |
Mar. 31, 2020 | |
Property, Plant and Equipment [Abstract] | |
Summary of property and equipment | March 31, September 30, 2020 2019 Cultivation and manufacturing equipment $ 169,069 $ 154,059 Construction in progress 4,096,577 4,060,297 Land and building 3,095,646 3,093,549 7,361,292 7,307,905 Accumulated Depreciation (203,437 ) (137,483 ) $ 7,157,855 $ 7,170,422 |
Short Term Note Payable (Tables
Short Term Note Payable (Tables) | 6 Months Ended |
Mar. 31, 2020 | |
Short Term Note Payable | |
Short term notes payable | Stockbridge/Viridis Note Debt $2,200,000 Discount 1,726,099 Amortization 75,048 Accrued interest 4,822 Stockbridge Note Notes payable $400,000 Discount 257,094 Amortization 257,094 Accrued interest 4,493 |
Long Term Debt (Tables)
Long Term Debt (Tables) | 6 Months Ended |
Mar. 31, 2020 | |
Debt Disclosure [Abstract] | |
Long term debt | Strive Note Note payable $ 1,000,000 Discount 151,561 Amortization 11,315 Accrued interest — |
Future amortization of note and related discount | Fiscal Year Accrued Interest Discount Amortization Payment Remaining 2020 $ — $ 61,629 $ — 2021 8,151 50,945 (755,658 ) 2022 3,164 27,671 (255,658 ) |
Leases (Tables)
Leases (Tables) | 6 Months Ended |
Mar. 31, 2020 | |
Notes to Financial Statements | |
Future minimum payments required under lease | Future Minimum Payments 2020 $ 58,478 2021 80,013 2022 82,114 2023 84,215 2024 78,963 383,783 less imputed interest (140,756 ) $ 243,027 |
Stockholders' Equity (Tables)
Stockholders' Equity (Tables) | 6 Months Ended |
Mar. 31, 2020 | |
Equity [Abstract] | |
Warrants outstanding | Common Shares Issuable Upon Exercise Price of Date Expiration Exercise of Warrants Warrants Issued Date Warrants issued by predecessor 175,000 $ 2.00 3/31/2015 8/31/2020 Warrants issued by predecessor 100,000 $ 1.00 7/28/2016 7/28/2021 Balance of Warrants at December 31, 2019 275,000 |
Description of Business and S_3
Description of Business and Summary of Significant Accounting Policies (Details Narrative) - USD ($) | 3 Months Ended | 6 Months Ended | ||||
Mar. 30, 2020 | Mar. 31, 2020 | Sep. 30, 2019 | Oct. 18, 2018 | Sep. 12, 2018 | Mar. 20, 2018 | |
Accounting Policies [Abstract] | ||||||
Reverse stock split | 1-for-20 | |||||
Shares outstanding at time of split, pre-split | 1,095,332,835 | |||||
Shares outstanding at time of split, post-split | 54,766,642 | |||||
Acquisition of BSSD, shares distributed | 40,355,771 | |||||
Promissory note used to make capital contribution into Strive Management | $ 1,500,000 | |||||
Valuation allowance on notes and other receivables, net | $ 376,430 | $ 376,430 | ||||
Antidilutive securities not included in computation of earnings per share | 656,112 | 11,132,700 | ||||
Assumptions used to estimate warrants issued - Expected stock price volatility | 186.00% | |||||
Assumptions used to estimate warrants issued - Expected dividend yield | 0.00% | |||||
Assumptions used to estimate warrants issued - Risk-free interest rate | 2.97% | |||||
Assumptions used to estimate warrants issued - Option life, minimum | 1 year 6 months | |||||
Assumptions used to estimate warrants issued - Option life, maximum | 2 years 6 months |
Business Combination_Acquisit_3
Business Combination/Acquisitions - Identifiable intangible assets (Details) | 6 Months Ended |
Mar. 31, 2020USD ($) | |
Trade names | |
Beginning balance | $ 161,848 |
Additions | 144,120 |
Amortization | (6,000) |
Ending balance | 299,968 |
Customer relationships | |
Beginning balance | 181,250 |
Additions | |
Amortization | (72,500) |
Ending balance | 108,750 |
Licenses | |
Beginning balance | |
Additions | 6,744,679 |
Amortization | |
Ending balance | 6,744,679 |
Websites and other intellectual property | |
Beginning balance | 1,144,277 |
Additions | |
Amortization | (134,620) |
Ending balance | 1,009,657 |
Noncompete agreement | |
Beginning balance | 352,500 |
Additions | |
Amortization | (352,500) |
Ending balance | |
Total other intangible assets | |
Beginning balance | 1,839,875 |
Additions | 6,888,799 |
Amortization | (565,620) |
Ending balance | 8,163,054 |
Goodwill | |
Beginning balance | 1,116,396 |
Additions | |
Amortization | |
Ending balance | 1,116,396 |
Total | |
Beginning balance | 2,956,271 |
Additions | 6,888,799 |
Amortization | (565,620) |
Ending balance | $ 9,279,450 |
Business Combination_Acquisit_4
Business Combination/Acquisitions (Details Narrative) - USD ($) | 6 Months Ended | |
Mar. 31, 2020 | Nov. 26, 2018 | |
Business Combinations [Abstract] | ||
Acquisition of AZDPC, total purchase price | $ 9,270,000 | |
Acquisition of AZDPC, cash | $ 1,500,000 | |
Acquisition of AZDPC, shares of restricted common stock, issued | 3,000,000 | |
Acquisition of AZDPC, shares of restricted common stock, aggregate value | $ 7,770,000 | |
Acquisition of AZDPC, shares of restricted common stock, price per share | $ 2.59 |
Property and Equipment, Net - S
Property and Equipment, Net - Summary of property and equipment (Details) - USD ($) | Mar. 31, 2020 | Sep. 30, 2019 |
Property and Equipment, Gross | $ 7,361,292 | $ 7,307,905 |
Accumulated Depreciation | (203,437) | (137,483) |
Property and Equipment, Net | 7,157,855 | 7,170,422 |
Cultivation and Manufacturing Equipment | ||
Property and Equipment, Gross | 169,069 | 154,059 |
Construction in Progress | ||
Property and Equipment, Gross | 4,096,577 | 4,060,297 |
Land and Building | ||
Property and Equipment, Gross | $ 3,095,646 | $ 3,093,549 |
Property and Equipment, Net (De
Property and Equipment, Net (Details Narrative) - USD ($) | 6 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Property, Plant and Equipment [Abstract] | ||
Depreciation expense | $ (64,220) | $ (13,200) |
Sale of Airware Assets and In_2
Sale of Airware Assets and Investment in Health Defense LLC (Details Narrative) - USD ($) | 6 Months Ended | |
Mar. 31, 2020 | Sep. 30, 2019 | |
Business Combinations [Abstract] | ||
Sale of Airware Assets, cash received at execution | $ 300,000 | |
Sale of Airware Assets, cash to be received within one year of execution | 700,000 | |
Sale of Airware Assets, cash to be received within by end of year | 300,000 | |
Unamortized discount on long-term receivable | $ 307,430 | $ 307,430 |
Additional consideration, ownership interest received | 10.00% | |
Additional consideration, ownership interest value | $ 100,000 |
Notes Receivable (Details Narra
Notes Receivable (Details Narrative) - USD ($) | 6 Months Ended | |||
Mar. 31, 2020 | Sep. 30, 2019 | May 15, 2018 | May 11, 2018 | |
Accrued interest receivable related to notes | $ 39,000 | $ 39,000 | ||
Promissory Note Agreement (1) | ||||
Promissory note, principal amount | $ 150,000 | |||
Promissory note, annual interest rate | 20.00% | |||
Promissory Note Agreement (2) | ||||
Promissory note, principal amount | $ 60,000 | |||
Promissory note, annual interest rate | 15.00% |
Short Term Note Payable - Short
Short Term Note Payable - Short term notes payable (Details) - USD ($) | Mar. 31, 2020 | Sep. 30, 2019 |
Notes payable | $ 2,336,096 | $ 2,051,714 |
Stockbridge/Viridis Note | ||
Debt | 2,200,000 | |
Discount | 1,726,099 | |
Amortization | 75,048 | |
Accrued interest | 4,822 | |
Stockbridge Note | ||
Notes payable | 400,000 | |
Discount | 257,094 | |
Amortization | 257,094 | |
Accrued interest | $ 4,493 |
Short Term Note Payable (Detail
Short Term Note Payable (Details Narrative) | 6 Months Ended |
Mar. 31, 2020USD ($) | |
Short Term Note Payable | |
Payment on Aeneas Venture Partners 3, LLC Note | $ (2,000,000) |
Unsecured Convertible Note Pa_2
Unsecured Convertible Note Payable (Details Narrative) | 6 Months Ended |
Mar. 31, 2020USD ($)$ / shares | |
Debt Disclosure [Abstract] | |
Convertible note payable assumed, principal balance | $ | $ 20,000 |
Convertible note payable assumed, interest rate | 8.00% |
Convertible note payable assumed, price per share | $ / shares | $ 0.50 |
Long Term Debt - Long term debt
Long Term Debt - Long term debt (Details) - USD ($) | Mar. 31, 2020 | Sep. 30, 2019 |
Notes payable | $ 2,336,096 | $ 2,051,714 |
Strive Note | ||
Notes payable | 1,000,000 | |
Discount | 151,561 | |
Amortization | 11,315 | |
Accrued interest |
Long Term Debt - Future amortiz
Long Term Debt - Future amortization of note and related discount (Details) - USD ($) | 9 Months Ended | 12 Months Ended | |
Sep. 30, 2020 | Sep. 30, 2022 | Sep. 30, 2021 | |
Debt Disclosure [Abstract] | |||
Accrued interest | $ 3,164 | $ 8,151 | |
Discount amortization | 61,629 | 27,671 | 50,945 |
Payment | $ (255,658) | $ (755,658) |
Long Term Debt (Details Narrati
Long Term Debt (Details Narrative) - USD ($) | 12 Months Ended | ||
Sep. 30, 2019 | Sep. 30, 2018 | Mar. 31, 2020 | |
Debt Disclosure [Abstract] | |||
Proceeds received, Viridis loan | $ 1,200,000 | $ 1,500,000 | |
Interest accrued, loan amendment (1) | $ 389,440 | ||
Interest accrued, loan amendment (2) | $ 317,816 |
Leases - Future minimum payment
Leases - Future minimum payments required under lease (Details) | Mar. 31, 2020USD ($) |
Notes to Financial Statements | |
2020 | $ 58,478 |
2021 | 80,013 |
2022 | 82,114 |
2023 | 84,215 |
2024 | 78,963 |
Subtotal | 383,783 |
Less imputed interest | (140,756) |
Total | $ 243,027 |
Leases (Details Narrative)
Leases (Details Narrative) | 6 Months Ended |
Mar. 31, 2020USD ($) | |
Notes to Financial Statements | |
Amortization recorded against right of use asset and lease liability | $ 43,346 |
Payments recorded against the lease liability | $ 25,332 |
Concentrations (Details Narrati
Concentrations (Details Narrative) | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Risks and Uncertainties [Abstract] | ||
Concentration risk of revenues from single customer | 96.00% | 100.00% |
Commitments and Contingencies (
Commitments and Contingencies (Details Narrative) | 6 Months Ended |
Mar. 31, 2020USD ($) | |
Commitments and Contingencies Disclosure [Abstract] | |
BSSD affiliate property purchase price, amounts deposited in escrow | $ 600,000 |
Contractor agreement, annual compensation amount | 120,000 |
Contractor agreement, value common stock issuable | $ 420,000 |
Related Party Transactions (Det
Related Party Transactions (Details Narrative) - USD ($) | 3 Months Ended | ||
Dec. 31, 2018 | Mar. 31, 2020 | Sep. 30, 2019 | |
Related Party Transactions [Abstract] | |||
Restricted common stock issued to Viridis, shares | 3,000,000 | ||
Restricted common stock issued to Viridis, price per share | $ 1 | ||
Restricted common stock issued to Viridis, net proceeds | $ 3,000,000 | ||
Amounts owed to Viridis for services | $ 60,000 | $ 60,000 | |
Amounts due to related parties included in accounts payable | $ 120,000 | $ 160,000 |
Stockholders' Equity - Warrants
Stockholders' Equity - Warrants outstanding (Details) | 6 Months Ended |
Mar. 31, 2020$ / sharesshares | |
Warrants issued by predecessor (1) | |
Common shares issuable upon exercise of warrants | 175,000 |
Exercise price of warrants | $ / shares | $ 2 |
Date issued | Mar. 31, 2015 |
Expiration date | Aug. 31, 2020 |
Warrants issued by predecessor (2) | |
Common shares issuable upon exercise of warrants | 100,000 |
Exercise price of warrants | $ / shares | $ 1 |
Date issued | Jul. 28, 2016 |
Expiration date | Jul. 28, 2021 |
Warrants issued by predecessor (3) | |
Common shares issuable upon exercise of warrants | 2,000,000 |
Exercise price of warrants | $ / shares | $ 1.13 |
Date issued | Sep. 30, 2020 |
Expiration date | Sep. 30, 2023 |
Warrants issued related to debt financing (1) | |
Common shares issuable upon exercise of warrants | 500,000 |
Exercise price of warrants | $ / shares | $ 0.05 |
Date issued | Feb. 14, 2020 |
Expiration date | Feb. 14, 2025 |
Warrants issued related to debt financing (2) | |
Common shares issuable upon exercise of warrants | 5,000,000 |
Exercise price of warrants | $ / shares | $ 0.75 |
Date issued | Mar. 23, 2020 |
Expiration date | Mar. 23, 2025 |
Warrants issued related to debt financing (3) | |
Common shares issuable upon exercise of warrants | 5,000,000 |
Exercise price of warrants | $ / shares | $ 0.75 |
Date issued | Mar. 23, 2020 |
Expiration date | Mar. 23, 2025 |
Balance of Warrants | |
Common shares issuable upon exercise of warrants | 12,775,000 |
Vested | 10,775,000 |
Stockholders' Equity (Details N
Stockholders' Equity (Details Narrative) - USD ($) | 6 Months Ended | 12 Months Ended | ||
Mar. 31, 2020 | Mar. 31, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | |
Common Stock | ||||
Private placements, amount | $ 5,400,003 | |||
Private placements, shares of common stock issued | 5,266,669 | |||
Common stock issued as consideration for consulting contracts, shares | 65,000 | |||
Common stock issued as consideration for consulting contracts, value | $ 351,700 | |||
Additional common stock issued to contractors for services, shares | 55,618 | |||
Additional common stock issued to contractors for services, value | $ 132,106 | |||
Restricted common stock issued to employees, shares | 26,282 | |||
Restricted common stock issued to employees, value | $ 75,000 | |||
Warrants | ||||
Warrants outstanding | 12,775,000 | |||
Stock Options | ||||
Stock options granted to board members | 22,500 | |||
Stock options outstanding | 294,991 | 294,991 |