| Summary of Significant Accounting Policies | 2. Summary of significant accounting policies Basis of preparation The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). Principals of Consolidation The accompanying consolidated
financial statements include the accounts of Stem Holdings, Inc. and its wholly-owned subsidiary, Patch International, Inc. All
material intercompany accounts, transactions, and profits have been eliminated in consolidation. Revenue Recognition The Company recognizes
rental revenue from tenants, including rental abatements, lease incentives and contractual fixed increases attributable to operating
leases, on a straight-line basis over the term of the related leases when collectability is reasonably assured. The Company makes
estimates of the collectability of its tenant receivables related to base rents, straight-line rent and other revenues. In the
current fiscal year, the Company began significant rental operations. The Company considers such things as historical bad debts,
tenant creditworthiness, current economic trends, facility operating performance, lease structure, developments relevant to a tenant’s
business, and changes in tenants’ payment patterns in its its analysis of accounts receivable and its evaluation of the adequacy
of the allowance for doubtful accounts. Specifically for straight-line rent receivables, the Company’s assessment includes
an estimation of a tenant’s ability to fulfill its rental obligations over the remaining lease term. Real Estate Acquisition
Valuation All assets acquired
and liabilities assumed in an acquisition of real estate are measured at their acquisition date fair values. The acquisition value
of land, building and improvements are included in real estate investments on the accompanying consolidated balance sheets. Acquisition
pursuit costs associated with asset acquisitions are capitalized. The Company has early adopted ASU 2017-01, which clarifies the
definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be
accounted for as businesses acquisitions. As a result of early adopting ASU 2017-01, real estate acquisitions did not meet the
definition of a business combination and were deemed asset acquisitions, and the Company therefore capitalized its acquisition
pursuit costs associated with these acquisitions. Reclassifications Certain amounts in
the Company’s consolidated financial statements for prior periods have been reclassified to conform to the current period
presentation. These reclassifications have not changed the results of operations of prior periods. Use of estimates The preparation of
these financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets, liabilities, income and expenses. Estimates and judgments used are based on management’s
experience and the assumptions used are believed to be reasonable given the circumstances that exist at the time the financial
statements are prepared. The significant estimates included in these financial statements are those associated with the assumptions
used to value options issued to consultants and the estimated rent payment deferral period at inception of its cannabis operation
subleases. Actual results may differ from these estimates. Cash and cash equivalents Cash and cash equivalents
include short-term investments with original maturities of three months or less and are recorded at cost, which approximates fair
market value given the short-term nature. Concentrations
of Credit Risk Financial instruments
that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. As of September 30,
2017, the Company had deposits in a major financial institution in excess of the FDIC insurance limit. The Company believes the
risk of loss to be minimal as it maintains its cash balances at well capitalized financial institutions. Carrying value,
recoverability and impairment of long-lived assets The Company follows
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’) 360 to evaluate
its long-lived assets. The Company’s long-lived assets, which include property and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company does
not test for impairment in the year of acquisition of properties so long as those properties are acquired from unrelated third
parties. The Company assesses
the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related
long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally
determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long- lived
assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally
estimated, the net book values of the long-lived assets are depreciated and amortized over the newly determined remaining estimated
useful lives. The Company considers
the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance
or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner
or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes
in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive
pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes.
The Company evaluates assets for potential impairment indicators at least annually and more frequently upon the occurrence of such
events. Through September
30, 2017 the Company has not experienced impairment losses on its long-lived assets. Capitalization
of Project Costs The Company’s
policy is to capitalize all costs that are directly identifiable with a specific property, would be capitalized if the Company
had already acquired the property, and when the property, or an option to acquire the property, is being actively sought after,
and either funds are available or will likely become available in order to exercise their option. All amounts shown capitalized
prior to acquisition of a property are included under the caption of Project Costs in the balance sheet. Income Taxes Income taxes are provided
for the tax effects of transactions reported in the financial statements and consist of currently due plus deferred taxes. Deferred
tax assets and liabilities are determined based on differences between financial reporting carrying amounts and the respective
tax bases of assets and liabilities, and are measured using tax rates and laws that are expected to be in effect when the differences
are expected to be recovered or settled. Valuation allowances are provided against deferred tax assets if it is more likely than
not that the deferred tax assets will not be realized. The Company follows
the guidance of FASB ASC 740-10 which relates to the Accounting for Uncertainty in Income Taxes, which seeks to reduce the diversity
in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation prescribes
a comprehensive model for financial statement recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. Fair value of financial
instruments As defined in the
authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. To estimate fair value,
the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated or generally unobservable. The authoritative
guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements)
and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy
are as follows: Level 1 — Observable
inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities. Level 2 — Other
inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or liability. Level 3 — Unobservable
inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants
would price the assets and liabilities. In instances in which
multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Earnings per share The Company presents
basic and diluted per share amounts (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit
or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the
period. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect
of dilutive potential common shares, using the treasury stock method. The Company’s calculation of diluted net loss per share
excludes potential common shares as of September 30, 2017 as the effect would be anti-dilutive (i.e. would reduce the loss per
share). As of September 30, 2017, the Company had issued 650,000 options exercisable into the common stock of the Company outstanding
(see Note 9). Advertising Costs The Company follows
the policy of charging the cost of advertising to expense as incurred. Advertising expense was $35,557 for the year ended June
30, 2017 and $0 for the period from inception through September 30, 2016. Emerging Growth
Company The Company has elected
to be an emerging growth company as defined under the Jumpstart Our Business Startups Act of 2012 (“Jobs Act”). Included
with this election, the Company has also elected to use the provisions within the Jobs Act that allow companies that go public
to continue to use the private company adoption date rules for new accounting policies. Should the Company obtain revenues in excess
of $1 billion on an annual basis, have its non-affiliated market capitalization increase to over $700 million as of the last day
of its second quarter, or raise in excess of $1 billion in public offerings of its equity or instruments directly convertible into
its equity, it will forfeit its status under the Jobs Act as an emerging growth company. Rental properties Rental properties
are carried at cost, less accumulated depreciation and amortization. Betterments, major renovations and certain costs directly
related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense as incurred.
Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 39 years.
Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives
of the assets. Property and Equipment Property and equipment
is stated at cost less accumulated depreciation and is depreciated using the straight-line method over the assets’ estimated
useful life as follows:
Buildings 20 years
Leasehold improvements Shorter of term of lease or economic life of improvement
Furniture and equipment 5 years
Signage 5 years
Software and related 5 years Normal maintenance
and repairs for equipment are charged to expense as incurred, while significant improvements are capitalized. Because as of the
date of these financial statements it was determined that the acquisition of the Mulino Farm property (see Note 11) had become
probable, the Company has treated the improvements made to the property through September 30, 2017 as if they were building improvements. Related parties Parties are considered
to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled
by, or are under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company
may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent
that one of the transacting parties might be prevented from fully pursuing its own separate interests. Recent Accounting
Guidance Financial Instruments
– Credit Losses In
June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology
that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables,
loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through
an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective
for us beginning January 1, 2021. Adoption of the standard will be applied using a modified retrospective approach through
a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard
on our consolidated financial statements, including accounting policies, processes, and systems. Leases In
February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations
by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent
among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified
as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users
of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to
recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using
a modified retrospective approach, with certain practical expedients available. The
standard will be effective for us beginning January 1, 2020. The standard will have a material impact on our consolidated
balance sheets, but will not have a material impact on our consolidated income statements. The most significant impact will be
the recognition of ROU assets and lease liabilities for operating leases. We are currently evaluating the impact of this standard
on our consolidated financial statements, including accounting policies, processes, and systems. Financial
Instruments – Recognition, Measurement, Presentation, and Disclosure In
January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. The standard will be effective for us beginning January 1, 2019. We are currently evaluating the
impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems. Revenue
from Contracts with Customers In
May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer
obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange
for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. The
guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application
(modified retrospective method). The standard will be effective for us beginning January 1,
2019. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies,
processes, and systems. |
