| 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”). The condensed financial statements included herein are unaudited. Such financial
statements, in the opinion of management, contain all adjustments necessary to present fairly the financial position and results
of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results
are not necessarily indicative of the results to be expected for the year ending September 30, 2019 or for any other period. Certain
information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission, and because of this, for further information, readers should refer to the financial statements and footnotes
included in our Form 10K for the fiscal year ended September 30, 2018 filed with the Securities and Exchange Commission on January
14, 2019. The Company believes that the disclosures are adequate to make the interim information presented not misleading. Principals
of Consolidation The
accompanying condensed consolidated financial statements include the accounts of Stem Holdings, Inc. and its wholly-owned or controlled
operating subsidiaries, Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri, LLC., Stem Group Oklahoma, Inc.
and Stem Holdings Florida, 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 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 adopted ASU 2017-01,
which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as businesses acquisitions. As a result of adopting ASU 2017-01, 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 equity instruments, valuation of its properties for impairment testing and the deferral
of rents. Actual results may differ from these estimates. Instruments
to Purchase Common Stock and Other Derivative Financial Instruments We
classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement
or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our
own stock. We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share settlement). We assess the classification of instruments
issued to purchase our common stock and any other financial instrument at each reporting date to determine whether a change in
classification between assets and liabilities is required. 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 and our
deferred rents. As of June 30, 2019, the Company had deposits in a major financial institution in excess of the FDIC insurance
limit of $250,000. As of June 30, 2019, the total amount exceeding such limit was $5,524,731(see Note 12). As
of June 30, 2019, the Company had deferrals of rent due to free rent periods of approximately $2.1 million. The Company is currently
in the process of acquiring the entities that it currently rents to and believes as of the date of these financial statements
that it will acquire those entities. Geographical
Concentrations As
of June 30, 2019, the Company primarily rents to entities engaged in the production and sale of cannabis, which is only legal
for recreational use in 11 states and DC, with lesser legalization, such as for medical use in an additional 22 states and DC,
as of the time of these financial statements. In addition, the United States Congress has passed legislation, specifically the
Agriculture Improvement Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of
hemp and associated products from Schedule 1 of the Controlled Substances Act. 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 with determinate lives. 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 assets expected future discounted cash flows or market value, if readily determinable.
If long- lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter
than originally estimated, the net book values of the long-lived assets are depreciated and amortized 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. 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 within the “Deposits and
other assets” line item 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. Beneficial
Conversion Feature The
Company issued convertible notes that have conversion prices that create an embedded beneficial conversion feature on the issuance
date. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common
stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering
the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments
were granted with the debt, on a relative fair market basis. The Company estimates the fair value of its common stock using the
most recent selling price available. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with
a corresponding amount to additional paid-in capital. The debt discount is amortized to interest expense over the life of the
note using the effective interest method. 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 June 30, 2019 as the effect would be anti-dilutive (i.e. would
reduce the loss per share). As
of June 30, 2019, the Company has 7,235,552 shares issuable upon note conversion, options and warrants exercisable into the common
stock of the Company outstanding. Advertising
Costs The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was $32,038 for the
nine months ended June 30, 2019 and $36,612 for the nine months ended June 30, 2018. 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. 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. 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. Intellectual Property Intellectual property are stated at the historical cost and amortized on a straight-line
basis over their expected useful life which varies from 3 to 10 years. An adjustment is made for any future impairment. Typical
marketing and customer-related assets include trademarks, trade names, service marks, collective marks, certification marks, customer
lists, order or production backlogs, customer contracts and the related customer relationships. The contract and technology-based
intangible assets are normally licensing and royalty agreements or patented technology and trade secrets such as confidential
formulas, processes or recipes. |
